Commercial Construction Strengthened Modestly in Most Districts

Economic Pulse
December 2, 2015
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The December Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed that commercial construction activity “strengthened modestly” in most Districts. Commercial leasing activity was reported to have increased in the Districts of Atlanta, Boston, Chicago, Dallas, Richmond and San Francisco, but was unchanged in the New York District.

On the labor front, employers in several districts reported difficulty finding skilled craftsmen and general laborers in the construction industry, with Atlanta and San Francisco among those Districts that said that difficulties were spreading to lower skilled and entry-level positions, too.

Economic Growth Characterization by District


Labor markets continued to tighten modestly, on balance, since the previous Beige Book. The Atlanta and Dallas Districts reported a slight pickup in hiring while the remaining Districts characterized their increase as modest to moderate. Many Districts indicated that increased hiring was driven by temporary and entry-level positions that were being fulfilled by staffing firms. The exception was the Chicago District, where staffing agencies said activity had slowed. Difficulties finding skilled workers persisted, but varied by location and occupation. The Atlanta and San Francisco Districts said that difficulties were spreading to lower skilled and entry-level positions. Several Districts reported difficulty finding skilled craftsmen and general laborers in the construction industry. The Dallas and San Francisco Districts noted that labor shortages may have constrained building activity in some areas.


Wage pressures were generally stable to increasing. Most Districts said that wage pressures increased only for skilled occupations and for workers that were in short supply, although a few Districts saw broader pressure. Atlanta reported signs of emerging pressure to raise starting wages, even among low-skilled jobs. The Atlanta and San Francisco Districts said some companies were revising incentives and benefit programs to retain and attract talent. Chicago, on the other hand, reported some firms cutting benefit packages to contain labor costs. A few Districts mentioned issues related to the minimum wage. For example, contacts in the Boston District cited increased labor costs for restaurants due to changes in minimum wages, and the Chicago District said recent initiatives were putting upward wage pressures on low paying jobs. Finally, the Dallas District reported that some hospitality contacts increased starting pay as a preemptive measure for future minimum wage increases.

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


“District commercial real estate brokers indicated improvements in demand that resulted in increased absorption and rent growth across property types, but they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Most commercial contractors indicated that nonresidential construction activity was slightly up from one year ago, regardless of market, with all reporting a backlog greater than or equal to the previous year. Reports on apartment construction continued to suggest that activity remained robust. The outlook among District commercial real estate contacts remains positive, with most expecting the pace of construction activity to increase slightly over the next quarter.”


“…office leasing activity remains strong in Boston and light in Hartford. In Providence, office leasing tapered off somewhat in recent weeks from the robust pace observed in late summer and early fall, while in Portland leasing activity increased slightly in both the office and industrial sectors.

Investor demand for commercial property in greater Boston is still perceived as very strong, but one contact reports a modest slowdown in sales volume and another notes that recent sales prices are down slightly from the very high levels seen earlier in the fall. These contacts attribute the decline in sales prices to the recent increase in 10-year Treasury rates and the recent decline in sales volume to a somewhat tighter funding environment. However, the tight funding environment is seen as mostly an artifact of year-end factors—for example, many funds have already met their requirements for commercial real estate investment for the year—and therefore funding supply is expected to bounce back in early 2016…office construction activity increased modestly in greater Boston, with new projects under way in both downtown and suburban locations…the outlook for greater Boston remains optimistic for office leasing demand and further increases in office construction activity are expected.”


“Commercial real estate activity continued to increase moderately. Growth was again widely distributed across the retail, industrial, and office segments, and contacts noted increasing demand for both for-sale and for-lease properties. Commercial rents increased slightly, while commercial vacancy rates and the availability of sublease space continued to decline.”


“Demand for office space was strong in Dallas-Fort Worth, with record net absorption so far this year. Activity in Houston held steady for class B and C office space but softened for class A space. Industrial leasing and construction remained active, although construction started to taper off in Houston.”

New York

“Commercial real estate markets across the District were mostly steady. Office availability rates are up slightly, but still fairly low, on Long Island, down slightly in Westchester and Fairfield counties, and little changed across the rest of the District. Office asking rents are up moderately in New York City and parts of northern New Jersey, down slightly across upstate New York, and generally flat elsewhere. The market for industrial space, on the other hand, has continued to tighten, with availability rates declining further and rents running about 5-6 percent ahead of comparable 2014 levels. Commercial construction activity has remained steady, with relatively few new projects breaking ground in recent months.”


“Nonresidential real estate contacts reported little change to the modest pace of growth in construction and leasing activity seen earlier. Contacts representing architects, engineers, and contractors reported continued growth in demand for services and greater profitability on projects won. Little to no inflation was reported in construction costs. Generally, brokers described rents rising and concessions falling for office space as service sector activity picks up. One contact reported that industrial rents were near all-time highs as supply has not kept pace with demand. Contacts remained optimistic for ongoing growth of both new construction and leasing activity throughout the District into 2016.”


“Commercial real estate activity increased moderately. Rental rates rose slightly, while vacancy rates varied by submarket and region…retail leasing activity and land sales were very strong. The industrial market was active with increased interest in the Columbia and Charleston areas, while office leasing was slow. A Baltimore broker reported strong demand for grocery space, with continued new construction. A contact in Raleigh commented that larger medical and office space users were undertaking new construction and expanding existing spaces. Real estate activity increased in Richmond, with higher rental rates for new construction. Commercial real estate remained sluggish in Charleston, West Virginia. Commercial construction increased in Richmond, Charlotte and Charleston, South Carolina and was unchanged in other locations.”

San Francisco

“Shortages of qualified labor and selected construction materials reportedly have held down the pace of construction in some areas. Housing prices continued to rise significantly across much of the District. Activity in the commercial real estate sector continued to expand. Contacts in the Seattle and Salt Lake City areas reported strong growth in commercial market activity, with a contact from the latter area noting that growth has been spurred in part by the relocation of California firms.”