“Stable or Expanding” Commercial Real Estate Conditions

Economic Pulse
April 15, 2015
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The April Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed that commercial real estate activity “remained stable or expanded” across many Districts. Boston, New York, Philadelphia, Chicago, Minneapolis, Dallas, and San Francisco all saw gains in industrial and office building construction. Strength in multi-family construction was noted in Boston, Richmond, Atlanta, Minneapolis, and Dallas, while demand for commercial property in Boston specifically referenced strong foreign institutional investor appetite, which may serve to explain the “slight uptick in speculative activity” in the region. Commercial real estate loan demand was “strong” in Atlanta and Dallas, while contacts in Philadelphia and Kansas City described CRE lending as “stable.” Cleveland mentioned that successful developers experienced easier access to credit compared to prior years.

Economic Growth Characterization by District

Economic Growth by District Table, April 2015

Source: Federal Reserve SpaceBold = change from prior report.

EMPLOYMENT / WAGES: "Labor market conditions remained stable or continued to show modest improvement. Increases in hiring or employment levels were reported in the New York, Richmond, Atlanta, Chicago, St. Louis, and Dallas Districts; in Boston, only stronger-performing firms increased headcount significantly. Layoffs in the manufacturing and energy sectors were reported in multiple Districts including Atlanta and Dallas, largely related to the decline in gas and oil prices and the resultant decrease in upstream demand from iron ore mining and steel manufacturing. Firms in Chicago, Richmond, Atlanta, St. Louis, Kansas City, and Dallas all reported having difficulty finding skilled workers, especially in professional and business services and the IT sectors. The Richmond, Atlanta, and St. Louis Districts specifically noted an increasing incidence of voluntary turnover of employees. By sector, a pickup in demand for high-tech services such as cyber security and web development was reported by contacts in Richmond, Dallas, and San Francisco. Healthcare-related services experienced accelerating growth in Boston and Richmond. Dallas law firms noted more work in mergers and acquisitions, bankruptcies, and litigation, while in Boston, government agencies started awarding more contracts to private-sector consulting firms, albeit with less assured funding.

Modest or moderate wage pressures were reported in New York, Richmond, St. Louis, Kansas City, and San Francisco, while wage pressures in Atlanta were muted. Chicago noted more pronounced wage pressures for skilled workers, but also said that there were more reports of wage increases for unskilled workers than in the previous reporting period. Contacts in San Francisco noted some seepage of wage pressures that had been limited to higher-end jobs in urban areas into middle-tier jobs and smaller towns.

Comments on Real Estate by District


"Commercial contractors indicated that nonresidential construction had increased from the year-ago level across the District and noted that the strength in apartment construction persisted. Most contacts reported a backlog that was greater than their year earlier level. The outlook among District commercial real estate contacts remains optimistic."


"Commercial real estate fundamentals continue to improve across most New England markets... one contact reports that office rents in Greater Boston are up an average of 7.9 percent over the year on the strength of high-demand submarkets such as Cambridge and the Seaport District. Strong sales activity for commercial properties in Boston continues to be fuelled by foreign institutional investors, many of which are increasing their allocations to real estate. Office construction increased modestly in the Boston area and includes a small, but increasing, amount of speculative activity. Multifamily construction is still increasing in metropolitan Boston but one contact says new completions may peak in 2015; construction in the hospitality and health care sectors is expected to increase in the coming year. One respondent reports that a scarcity of skilled construction workers is a nationwide problem that contributed to an increase in construction wages in excess of 20 percent in Greater Boston since 2010.."


"Nonresidential construction activity ticked up, driven in large part by demand for industrial buildings. Low interest rates supported a modest expansion in commercial real estate activity. Leasing of industrial buildings, office space, and retail space all increased and rents rose."


"Commercial real estate activity generally held steady since the previous report, and outlooks were cautiously optimistic in the near term. Demand for office space remained fairly solid, with the exception of Houston where contacts noted slower net absorption and an increase in the level of sublease space on the market. Industrial and retail demand remained stable or increased slightly. Commercial real estate loan growth in Austin and Dallas remained robust, but weakened somewhat in San Antonio."

New York

"Commercial real estate markets across the District have been mixed, with some slackening in office markets but continued tightening in industrial markets. During the first quarter of the year, office availability rates rose in the Manhattan, Long Island, and Westchester-Fairfield markets; however, rates edged down across upstate New York and were unchanged (at a high level) in northern New Jersey. Office rents are flat to up modestly. New office construction has been robust in New York City but moribund across the rest of the District. Industrial availability rates, in contrast, have continued to trend down across most of the District, and rents have risen moderately; Long Island availability rate stabilized at a low level, with rents up 8 percent from a year ago."


"Commercial real estate loans... grew little, if at all... nonresidential real estate contacts reported little change to the modest pace of construction and leasing activity. New construction continued to be dominated by projects in downtown Allentown and Philadelphia that include office, retail, and residential components. Throughout the Third District, industrial/warehouse projects, public infrastructure, and suburban office renovations remain active and in demand. Design and renovations to improve energy-efficiency are also in demand. Contacts attributed a little continued rent pressure on office space to some emerging employment growth. Demand and rent pressures are greatest in downtown and suburban Philadelphia, especially for Class A or better office space. Center City Philadelphia residential and retail markets, as well as several select suburban office markets, also continued to be active. Contacts remained optimistic for the ongoing growth of both new construction and leasing activity in 2015."


"Commercial real estate activity increased moderately since our previous Beige Book. Retail leasing rose in Virginia, primarily driven by demand for restaurant space, value fashion stores, and food stores. A Maryland contact reported that retail space in grocery-anchored locations has commanded higher rents. Demand in the District has picked up for health care space, executive offices, and residential real estate offices. In Maryland, stronger demand was largely driven by government contractors. According to a Realtor in Virginia, vacancy rates for retail space declined while office vacancy rates increased slightly as tenants formerly in large spaces moved to smaller spaces. Another Virginia Realtor said that limited new commercial space had come online, keeping vacancies stable to slightly lower... throughout the District, there was new construction of multi-family residential buildings, hotels, and medical centers. A South Carolina contact cited concerns of some overheating in 1-4 unit multi-family development. A Virginia Realtor said that new apartment supply continues to be absorbed, with new projects continuing in Norfolk and Richmond."

San Francisco

"Commercial real estate vacancy rates declined, and rents increased, driven in part by strong demand from the technology and healthcare sectors... demand for commercial real estate and business loans increased."