“Mild to Moderate Pace” for Commercial Leasing Activity

Economic Pulse
April 25, 2014
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The Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, revealed that economic activity continued to expand across most regions and sectors. Based on comments received from businesses and other external contacts from late-February through the first week in April, the report cited only two regions (Cleveland and St. Louis) as having experienced a decline in economic activity; March’s release, in contrast, noted a softening in growth across three Districts.

Not surprisingly, many Districts attributed a portion of the expansion in activity to the improvement in weather: “Consumer spending increased in most Districts, as weather conditions improved and foot traffic returned,” while “manufacturing improved in most Districts [as] several Districts reported that the impact of winter weather was less severe than earlier this year.”

On the labor front, conditions were “mixed but generally positive.” Six Districts (New York, Cleveland, Richmond, Chicago, Kansas City, and Dallas) reported difficulty finding skilled workers, even as wage pressures were “contained or minimal” in most Districts. (Dallas was a notable exception, as several reports of upward wage pressures were cited.) More specifically, New York, Richmond, and Chicago mentioned tightness within the market for Information Technology (IT) hiring, while Atlanta noted a need for truckers and a Dallas food manufacturer found skilled labor in short supply. Interestingly, both Philadelphia and Atlanta said that firms planned to make capital expenditures to boost efficiency before they would hire, although yesterday’s Durable Goods Orders report suggests that non-defense ex-aircraft shipments of capital goods—a proxy for business spending—has yet to accelerate on a national basis (Chart 1).

Overall commercial mortgage lending grew in the New York, Philadelphia, Atlanta and San Francisco Districts, while delinquency rates declined in New York. Commercial construction also strengthened (with the exception of Cleveland) while commercial leasing activity generally advanced at a modest pace across most Districts. Industrial markets showed signs of tightening in downstate New York and northern New Jersey, while office and industrial activity remained “robust” in Dallas, with one contact noting particularly strong demand for office space in the Dallas metropolitan area.

Comments on Commercial Real Estate by District


“…demand for commercial real estate continued to improve. Absorption picked up, although contacts indicated that the rate of improvement still varied by metropolitan area, submarket, and property type. Construction activity continued to increase at a modest pace from last year…commercial contractors indicated that apartment construction remains fairly strong; however, some shared concerns that construction activity may be getting overheated in a few markets...the outlook among District commercial real estate contacts remained positive with continued improvement expected over the course of the year.”


“…brisk demand for and tight supply of office space in portions of the city, including the Seaport District and Back Bay, have pushed asking rents up in those locations in recent months…contacts note that rents remain flat in portions of the Financial District and in a number of suburban locations, and that rising maintenance costs mean that net rents are growing more slowly than asking rents. Speculative office construction remains limited, although respondents say that the pipeline of planned office construction for greater Boston is growing. Contacts continue to express concerns that prices being paid by investors for commercial properties in Boston, along with lending terms…embody highly optimistic assumptions concerning future rent growth on the properties. Demand for Boston properties has been particularly strong among foreign investors and domestic pension funds.”


“Demand for nonresidential construction grew at a moderate pace, with several contacts noting that industrial building activity had picked up substantially. In addition, contacts expected an increase in public construction resulting from the impact of harsh winter weather on infrastructure. Commercial real estate activity continued to expand, as vacancies ticked down and rents rose. Growth was concentrated in central business districts with high-end office space.”


“Office and industrial leasing remained robust, with one contact noting particularly strong demand for office space in Dallas. Rents continued to trend upward and occupancy levels remained high for office space. Contacts in Houston reported high levels of office development. Overall, the outlook remained generally positive and respondents expect demand to stay strong this year.”

New York

“Commercial real estate markets were generally stable to somewhat stronger through the end of the first quarter. In New York City, office availability rates were little changed, as brisk leasing activity allowed several newly available spaces to be absorbed; however, asking rents continued to rise and were up roughly 8% from a year earlier. Office availability rates were… little changed in northern New Jersey but up modestly across upstate New York…industrial markets were generally steady across upstate New York but showed signs of tightening in downstate New York and northern New Jersey.”


“Nonresidential real estate contacts indicated slight increases—representing a resumption of nearly normal activity following disruptions from the more severe weather of the prior period. Ongoing commercial construction resumed a low level of activity but is expected to ramp up this summer, as several major projects are expected to break ground. Leasing activity also rebounded slightly with the greatest activity (and lowest vacancy rates) for offices in the Philadelphia central business district and the Lehigh Valley. Despite the ongoing slow job growth of firms that fill office space, most contacts remain optimistic for stronger growth as the year progresses.”


“Commercial construction contacts reported strong retail demand and softness in office and industrial building…commercial leasing activity intensified for retail and industrial space, while demand for office spaces softened. Vacancy rates were unchanged on net, however. Rental rates varied across submarket, with some increases in the retail segment...broker reports on supply of Class A office space varied.”

San Francisco

“Robust leasing activity in large urban areas drove up rental rates for both residential and commercial properties. Vacancy rates for commercial and industrial space were either stable or down in many areas…in areas such as the San Francisco Bay Area, Southern California, Honolulu, and Seattle, public infrastructure projects and a number of high-rise commercial construction projects have been announced or are underway.”