How Dollar Strength Can Affect Industrial CRE

Article originally posted on Globe St. on April 24, 2024

Reshoring manufacturing has become a trend since the pandemic, as reported by outlets like CNBC, and it all comes down to supply chains. But those in industrial CRE who could benefit from it are learning that keeping up with foreign exchange issues and the current strength of the dollar can be as important as monitoring interest rates.

During the pandemic, supply chains broke. Anyone in property development might remember how expensive building materials became because of scarcity. Experts had been warning of this for years. The distances from sources to factories created challenges, like time delays for deliveries and increased transportation costs. Too much concentration of suppliers meant no immediate options if something big went wrong.

But understanding manufacturing and the global flow of goods means having a grasp of foreign exchange and how the relative dominance of a given currency can affect who can afford to make products, based on their location.

“The end of the U.S. oil trade deficit reduced the nation’s overall balance-of-payments deficit by enough to desensitize the dollar market to the still sizable goods trade deficit,” writes Steven Blitz, managing director of global macro and chief U.S. economist at GlobalData.TS Lombard. “This is, today, particularly problematic for the U.S. capital goods industry (excluding hi-tech) – the very industry that U.S. government policy is attempting to revitalize, by way of Trump’s corporate tax changes, sustained and threatened tariffs, and government subsidies.”

Many industries are highly sensitive to the strength of the dollar. The stronger the currency is, the more it costs customers in other parts of the world to pay for goods and the less U.S. firms pay for imported products. The weaker the currency, the more expensive imports are and the more affordable U.S. goods become.

Blitz notes that current monetary policy strengthens the dollar. One example would be higher domestic interest rates, which provide higher returns on investment. So, foreign investors have to invest in dollar assets to make money in the U.S., and the demand for the currency strengthens it.

“The dollar’s run in the past several weeks, along with rising real yields, was infused by the “QT cocktail” — a smaller Fed balance sheet, a sharp rise in the TGA account as tax payments transfer money from intermediaries to Treasury, and a drop in commercial bank holdings of UST,” Blitz writes.

So long as the dollar remains strong and above a “fair value,” as Blitz notes, companies that might otherwise re-shore manufacturing may not be able to because they don’t want to lose business due to being unnecessarily overpriced.

At the same time, if the stronger dollar encourages the importation of goods, that’s more materials that need warehousing, so a different segment of industrial in the form of logistics might benefit.

And this is why following foreign exchange markets becomes important for industrial CRE.