The Euro has been losing major ground against the dollar this year — but one industry expert says that could translate into outsized investment in US commercial real estate assets by European sources.
The war in Ukraine has both directly and indirectly impacted the Euro’s value: “to put it simply, having a war in the neighborhood is destabilizing,” says Marcus & Millichap’s John Chang. That alone “put some shade” on the European economic outlook, compounded by an impending energy crisis on the Continent. Russian oil exports to Europe are down by 35% and their natural gas deliveries have also fallen by 70%.
“Many also fear that the energy shortage will cause gas prices to surge, in turn compounding the already significant inflation headwinds Europe faces,” Chang says. Eurozone inflation has surpassed the US, with CPI growth climbing above 9% — and at the same time, the European Central Bank has been “slow to respond” with interest rate increases, Chang says, with the current overnight rate clocking in at 0.75%.
“Europe is clearly risking a serious inflation problem by not pushing their overnight interest rate up. and that’s the crux of the reason the Euro’s value has fallen,” Chang says. “Europe faces economic stress from a variety of sources, and at the same time their inflation rate is elevated and the risk of stagflation in Europe is increasingly serious. As a result, capital is moving out of the Europe and into the US dollar and dollar-denominated assets like US real estate.”
Chang says that over the past two decades, when the value of the Euro has fallen European investors have sunk an average of $12.6 billion per year into US CRE assets, compared to $10 billion per year when the value of the Euro was climbing. On average, Europeans place about 15% more capital in US CRE when the Euro is falling than they do when it is performing well, he says.
“If historical trends hold true, more capital may begin to flow from Europe to the US following the tumble in the Euro over the last year…there are a lot of forces in pay that move capital all over the world. and although the US economy may be facing headwinds, it could be a favorable destination for investors in foreign countries,” Chang says.