“Stable to Improving” Commercial Real Estate Conditions

Economic Pulse
March 4, 2015
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The March Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed a slight increase in the number of regions where growth was described as "moderate,” even as one District cited a slowing of activity overall (Richmond). Respondents noted stable or improving commercial real estate conditions, with lower vacancy rates in Boston and Chicago. Contacts in Chicago reported moderate growth in commercial real estate, driven mainly by industrial buildings, while respondents in Boston noted limited speculative construction, restrained by high construction costs.

"Oil" was mentioned even more times in today’s report than in the report from January, and was specifically cited as a cause behind slowing activity in the Dallas District, where "contacts said some energy firms [were] seeking to sublet office space in Houston." The report also noted that institutional equity for new development had "nearly dried up in Houston," with a few projects that were "put on hold or cancelled."

Economic Growth Characterization by District

Economic Growth by District Table

Source: Federal Reserve SpaceBold = change from prior report.

EMPLOYMENT "remained stable or continued to grow" across most sectors, with strong labor demand and "challenges filling a variety of skilled positions" mentioned as common themes. Philadelphia reported positive employment trends, with "the majority of hires due to economic growth" rather than replacement. Businesses in the New York District continued to increase employment, even as contacts in the Boston and Cleveland Districts reported little change in hiring. Contacts in the gas and oil sectors in the Cleveland, Atlanta, Minneapolis, Kansas City, and Dallas Districts all reported downsizing or layoffs.

WAGES pressures were characterized as moderate across most Districts, but some contacts reported increased wages [that were needed] to attract "skilled workers for difficult-to-fill positions." In particular, service sector firms in the New York District noted increasingly widespread reports of wage hikes. Contacts in the Cleveland, Richmond, and Kansas City Districts noted increased wage pressure due to the difficulty in attracting and retaining truck drivers. A staffing firm in the Chicago District reported some companies were also willing to raise rates for unskilled workers to reduce turnover, and contacts in the Atlanta District noted increasing entry-level wages.

Comments on Real Estate by District


"Commercial real estate brokers around the District continued to report improving demand, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors indicated that nonresidential construction activity had increased from the year-ago level across the District and noted the strength in apartment construction has persisted. Most contacts reported a backlog that was greater than their year earlier level. The outlook among District commercial real estate contacts remained positive."


"One contact reports that some office landlords in downtown Hartford are posting higher asking rents for the first time in years… [Boston] office rents are seeing significant growth in top neighborhoods as vacancy rates continue to edge down thanks to business expansion and lack of new supply. Despite the tight office market in greater Boston, speculative office construction remains very limited, according to contacts, because construction costs are too high in relation to expected rents; still, build-to-suit office construction continues at a modest pace… The outlook is mostly optimistic across the District, although Hartford and Providence contacts expect slower improvement in commercial real estate fundamentals than do contacts in Boston and Portland. Respondents note a couple of downside risks to commercial real estate investment, including recent property tax increases in Boston and, for some, costs of compliance with the Dodd-Frank Act."


"Nonresidential construction grew moderately, driven primarily by demand for industrial buildings. Commercial real estate activity expanded broadly--vacancies declined, rents rose, and leasing of industrial buildings, office space, and retail space all increased."


"Commercial real estate activity held steady or slowed since the previous report, and outlooks were cautiously optimistic. Overall office leasing activity remained fairly solid; however, contacts said some energy firms are seeking to sublet office space in Houston. Institutional equity for new development has nearly dried up in Houston, and a few projects have been put on hold or cancelled."

New York

"Office markets have been generally stable, while industrial markets have continued to strengthen. Manhattan's office availability rate rose nearly a full percentage point since year end, mainly reflecting new projects coming on line, while rents continued to climb and were up 4 percent from early-2014 levels. Elsewhere across the District, however, office availability rates were little changed--at a fairly low level of 11 percent in Long Island and just under 13 percent across upstate New York, but at an elevated level of near 18 percent in northern New Jersey and Westchester-Fairfield counties. Industrial availability rates continue to edge down across the District and are at or near multi-year lows in Long Island, as well as Westchester and Fairfield counties…commercial construction has remained fairly listless overall, though office construction has picked up in Manhattan and northern New Jersey while industrial construction has picked up somewhat across upstate New York."


"Construction and leasing continued at a modest pace, according to onresidential real estate contacts. New construction continued to be dominated by industrial/warehouse projects, urban apartment dwellings, and public infrastructure, including sand reclamation projects along the Jersey shore. Contacts reported that continuing incremental improvements in leasing activity in downtown and suburban Philadelphia is leading to some upward push on rents, especially for Class A or better office space. Center City residential and retail markets also continued to be active, as well as several select suburban office markets. Contacts remained optimistic for the ongoing growth of both new construction and leasing activity in 2015."


"Activity in commercial real estate markets increased at a modest pace. Realtors in Maryland, North Carolina, South Carolina, and Virginia reported a moderate increase in retail leasing, especially for smaller spaces and grocery stores. Office space leasing was unchanged according to contacts in North Carolina and Virginia. However office leasing picked up Charleston, West Virginia, and a real estate contact in the Wilmington, North Carolina area said that class A and class B office space was being absorbed at a faster pace... a South Carolina Realtor reported that the office sector slowed slightly in Charleston due to lack of available space and the industrial market is growing even though much of the inventory is functionally obsolete. Office and industrial vacancy rates declined in other areas of South Carolina, but were unchanged elsewhere. Several contacts throughout the District reported new construction projects, especially for supermarkets, groceries and grocery-anchored shopping centers, medical centers, and apartment buildings."

San Francisco

"Commercial rents in the San Francisco Bay Area continued to rise even in the face of significant new construction, and rents for restaurant space in the Los Angeles area crept up. In other areas, commercial rents remained stable."