Commercial Real Estate Activity: “Generally Increased”

Economic Pulse
April 18, 2016
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Heidi Learner

Heidi Learner

Chief Economist

The Beige Book report for April, which summarizes comments received from businesses and other contacts outside the Federal Reserve, suggested that more Districts reported “moderate” or improved economic activity versus last month’s report. Notably, no District reported a decline in economic growth.

Commercial real estate activity “generally increased,” with leasing activity and higher rents noted in many Districts, including strong retail leasing activity in Chicago and industrial leasing in Dallas. Vacancy rates either moved lower or were unchanged in most Districts. In greater Boston, the office vacancy rate edged down further--to as low as 6 percent in the Cambridge area--and rents increased marginally, even as investment sales volume has fallen year-on-year, with some contacts perceiving a “levelling off” of prices. In New York, office markets were described as “mostly steady,” although the market for retail space was weak, with retail vacancy rates rising to multi-year highs. Demand for office space was healthy in Austin and Dallas-Fort Worth, but continued to weaken in Houston. Growth in the market for commercial space in San Francisco was described as “rapid”, with new construction completions failing to keep pace with demand, resulting in upward pressure on lease rates. In Philadelphia, leasing activity showed “continued modest strengthening,” characterized by higher rents and fewer concessions.

More broadly, a majority of Districts noted continued growth in lending for commercial real estate, with the exceptions of Cleveland and Dallas, where ongoing stress in the energy sector continued to weigh on the market. Some contacts noted that construction loans were becoming harder to obtain, while others describe the lending environment--particularly for loans on existing structures--as aggressive, with loans offered at very low spreads over the LIBOR rate.


New York, St. Louis, Minneapolis, and San Francisco reported moderate wage growth, while wage pressures were characterized as mild in Chicago, mostly contained in Kansas City, and stable in Atlanta. The strongest wage pressures were for occupations with elevated turnover and growing labor shortages. Contacts in the Cleveland and St. Louis Districts cited sizeable wage increases for workers in fields such as information technology services and skilled construction and manufacturing trades. In addition, some firms in Philadelphia indicated that they had raised their starting wages in order to attract higher quality workers, and Chicago noted an increase in the number of contacts who raised wages for low-skilled entry-level workers. In Boston, local construction wages were up from a year ago, especially among skilled trade workers such as carpenters (8 percent) and crane operators (6 percent).


“[Contacts noted] improvement in demand resulting in increased absorption and rent growth across property types, but cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors indicated that the pace of nonresidential construction activity had increased from one year ago, with many reporting backlogs of one to two years. Reports on multifamily construction suggested that activity remained fairly robust…although there seemed to be growing concerns around overbuilding. District commercial real estate contacts expect the pace of construction activity to increase slightly over the next quarter.”


“Reports… are mixed. Office leasing activity is…maintaining a strong pace in Boston, but remains slow in Providence and very slow in Hartford. In greater Boston, the office vacancy rate edged down further--to as low as 6 percent in the Cambridge area--and rents increased marginally…investment sales volume is down in Boston from one year ago and contacts perceive that prices are levelling off, despite the fact that one office tower in the city recently sold at a near-record price per square foot…the education, health care, hospitality, retail, and office sectors all contributed to Boston's recent construction boom; although construction in Boston's multifamily sector remains robust, its pace of growth is slowing…even given the recent increases in office construction in Boston, contacts do not foresee a glut in office space because construction activity remains low by historical standards and the new buildings are mostly pre-leased.”


“Demand for nonresidential construction was little changed, and contacts again highlighted weak demand for industrial construction. Commercial real estate activity rose moderately, with healthy gains in both the for-sale and for-lease markets and particularly strong activity in the retail segment. Commercial rents and availability of sublease space rose modestly, while commercial vacancy rates were little changed.”


“Demand for office space was healthy in Austin and Dallas-Fort Worth, but continued to weaken in Houston. Industrial leasing remained active and vacancies were tight, although one contact noted slight energy-related softening in Houston. Industrial construction was elevated in Dallas-Fort Worth.”

New York

“Commercial real estate markets have been mixed in recent weeks. Office markets across the District were mostly steady in the first quarter, though asking rents have moved up modestly in Brooklyn, Queens, and northern New Jersey. The market for retail space has weakened, with vacancy rates rising to multi-year highs in New York City, as well as in northern New Jersey and upstate New York. In contrast, the market for industrial space has strengthened: vacancy rates are at or near multi-year lows across most of the District, while rents are running 5-10 percent ahead of a year ago. Industrial and warehouse construction has picked up in northern New Jersey, but elsewhere commercial construction activity remains sluggish.”


“…ongoing modest gains in construction activity although new starts were fewer, and noted that leasing activity showed continued modest strengthening with higher rents and fewer concessions. Contractors were confident that construction activity would remain at high levels through 2018 in light of the projects currently underway and recently announced significant future projects. According to contacts, total man-hours have not eclipsed 2008 levels, but firms may be operating more efficiently since the recession.”


“Leasing activity increased moderately overall since the previous report. A commercial real estate agent in Richmond reported a robust retail leasing environment, with increased sales and solid upward movement in property prices. In contrast, a broker in Charleston, West Virginia reported a decrease in leasing and sales activity. Real estate agents continued to report a decline in office leasing activity, despite more concessions. Rental rates and vacancy rates varied across submarket and region; however more contacts reported elevated retail rates. Commercial construction grew moderately in Charlotte and Richmond and modestly in Washington, D.C. and Baltimore. A Realtor in Virginia Beach reported modest growth in the number of new retail, multi-family and mixed-use construction projects. In Columbia, South Carolina, an agent stated that retail and restaurant construction remained strong.”

San Francisco

“Demand for commercial space has been growing rapidly in some urban areas, and new construction completions have not kept pace, putting upward pressure on lease rates.”

Heidi Learner

Heidi Learner

Ms. Learner analyzes the macroeconomic and legislative environment affecting commercial real estate markets on a national and regional basis and develops real-time measures of supply and demand for commercial space.