Commercial Real Estate Outlook Described as “Optimistic”

Economic Pulse
June 3, 2015
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The June Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed that commercial real estate activity “improved in most districts, and outlooks were optimistic.” The New York District reported a strengthening industrial market and steady office and retail leasing demand; Boston also characterized demand for office space as steady (with the exception of Hartford, where demand was slow.) The Dallas District continued to see active industrial, retail, and office leasing activity, but activity in the Houston market slowed. Development and leasing activity increased across San Francisco, fueled by growth in the technology industry, while building increased in Chicago, driven by demand for industrial and office space. (New hotel and office development in downtown Chicago was mentioned as a “compelling” reason for relocation by retailers.) The Cleveland and Atlanta Districts cited increased construction backlogs, and shortages of skilled labor remained a constraint on construction activity in districts including Boston and San Francisco. Commercial real estate financing exhibited “continued strong growth” in New York, Cleveland, Chicago, and the Dallas Districts.

Economic Growth Characterization by District

Table: Economic Growth by District, June 2015

Source: Federal Reserve SpaceBold = change from prior report.

EMPLOYMENT: Employment levels were “up slightly” across districts from early April through the end of May. Hiring came from a variety of industries, with the Boston, Richmond, Atlanta, and St. Louis Districts noting employment gains in manufacturing. Reports of labor shortages spanned many districts, with an “ongoing and widespread shortage of truck drivers” noted in the New York, Cleveland, and Kansas City Districts. Firms in the Cleveland, Atlanta, Chicago, and Minneapolis Districts reported difficulty retaining employees. The New York District said a sizeable proportion of service-sector firms plan to expand employment in the months ahead.

WAGES: “Slight” wage growth was reported by most districts. A tight market for skilled construction labor in the Boston, Dallas, and San Francisco Districts pushed up wages for workers there, and staffing services firms in Boston, Dallas and New York noted rising wages. (Richmond, Kansas City, and San Francisco Districts noted higher wages in the restaurant and/or hospitality industries.) Some contacts in the IT sector in the San Francisco District reported rapid wage gains, and their counterparts in Boston noted rising wages as well. Employers in the Atlanta District were monitoring how recent minimum pay announcements from a number of employers would affect local labor markets. Contacts across various industries in the Chicago District reported a willingness to raise wages when necessary to attract and retain workers.

Below, we detail specific comments by District on commercial real estate.


“District commercial real estate brokers indicated that demand continued to improve, but they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors indicated that nonresidential construction activity increased from the year-ago level across the District and noted the strength in apartment construction persisted. On balance, most contacts reported a backlog that was greater than their year earlier level. The outlook among District commercial real estate contacts remained positive.”


“Reports from commercial real estate contacts in the First District are mixed…In Greater Boston, office leasing activity is holding steady at a solid pace and fundamentals are roughly unchanged. Also in Greater Boston, construction activity is steady at a brisk pace and the outlook calls for increased construction activity in the health care sector. Boston's office construction activity consists mostly of build-to-suit projects rather than speculative structures…According to one contact, scarcities of skilled construction labor relative to demand for such labor in the region--and associated wage increases--are starting to hinder additional construction activity.”


“Nonresidential construction activity was somewhat higher, driven by demand for industrial buildings and offices. Commercial real estate activity grew at a strong pace, particularly in urban centers and select suburbs. Contacts reported that new hotel and office developments in downtown Chicago were forcing retailers to relocate, and that in the best locations retail rents and occupancy rates were at all-time highs.”


“Commercial real estate activity was generally strong, and outlooks were cautiously optimistic. Demand for office space was fairly solid, except for in Houston where leasing activity slowed and contacts noted an uptick in the level of sublease space. A few energy firms in Fort Worth are also seeking to sublease office space. Industrial and retail leasing and construction remained active, with industrial demand in Dallas-Fort Worth shifting from large to small and mid-sized tenants.”

New York

“Commercial real estate markets across the District have been mixed, with industrial markets continuing to strengthen but office and retail markets generally steady. Office availability rates have edged down in upstate New York and northern New Jersey, though they remain quite elevated in the latter. Rates remain steady across Manhattan but have risen to multi-year highs in Westchester and Fairfield counties. The market for retail space has also been generally stable, with rents rising modestly in most areas. Industrial markets, however, have generally strengthened: industrial vacancy rates have declined across upstate New York, northern New Jersey, and New York City and are at or near multi-year lows across most of the District. Industrial rents have been rising steadily across most of the District. While industrial construction has been subdued, office construction has picked up across northern New Jersey, upstate New York and particularly in Manhattan.”


“Nonresidential real estate contacts reported that construction and leasing activity continued at a modest pace. New construction continued to be driven by projects in downtown Allentown and Philadelphia that include office, retail, and residential components. Throughout the Third District, industrial/warehouse projects and suburban office renovations remain active and 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 Philadelphia and have been spilling over into suburban areas, especially for Class A or better office space. Contacts remained optimistic for the ongoing growth of both new construction and leasing activity in 2015.”


“Commercial real estate market activity increased modestly since the previous report. Several Realtors reported that rental rates firmed up since our previous report. Vacancy rates decreased modestly in Washington D.C., Richmond, Baltimore, Charlotte, Hampton Roads, and Charleston, South Carolina….Sales of retail space improved in Virginia Beach, weakened in Baltimore, and were unchanged in Washington D.C., with most of the activity in smaller spaces…a commercial real estate contact in Baltimore said that the market there has picked up; he noted that sales of office buildings increased downtown and that the medical office sector remained strong. A broker in Hampton Roads reported that condo construction and commercial sales have increased.”

San Francisco

“Construction of multifamily residential structures grew at a brisk pace, with some contacts reporting vacancy rates below those observed at the peak preceding the recession that began in 2007. One contact noted that high prices in the multifamily market have led young buyers to consider single-family units. Commercial real estate construction and leasing activity grew overall, with growth concentrated in a few areas with vibrant technology sectors. Shortages of skilled labor remained a constraint on construction activity in some fast-growth areas. Expanded construction activity spurred additional equipment purchases by construction companies, including some aimed at enhancing productivity.”