Commercial Real Estate Activity: “Flat to Strong”

Economic Pulse
March 3, 2016
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Heidi LearnerChief Economist

The Beige Book report for March, which summarizes comments received from businesses and other contacts outside the Federal Reserve, showed a notable change in tone from previous releases. While reports “continued to indicate that economic activity expanded in most Districts,” there was an increase in the number of Districts that reported mixed conditions; one District reported a modest decline in activity.

Commercial real estate activity, which was characterized as “modest to moderate” in the January report, was described as “flat to strong” this time around. In San Francisco, commercial occupancy rates rose, spurring higher lease rates and additional construction projects, while the New York District reported that availability rates and asking rents held steady for office space, but that new office construction had weakened further. Richmond office activity was described as “tepid,” while in Boston, leasing activity was “steady” even as tenants exercised “greater caution in their space demands when renewing leases.” Atlanta noted generally improving rents as well as increased absorption; the slow pace of nonresidential construction in tandem with strong commercial and industrial space demand in Chicago was creating concern about space shortages and price bubbles. Demand for office space remained strong in Austin and Dallas-Fort Worth, but continued to soften in Houston, where rent concessions were being offered.


Labor market conditions continued to strengthen since January’s report, with the majority of Districts seeing modest growth in the labor market. However, labor conditions were mixed in Atlanta and Dallas, and Atlanta, Dallas, and San Francisco noted decreased employment in the energy sector. Contacts in New York, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City reported difficulty in finding skilled workers in sectors including information technology, engineering, specialty healthcare, construction, manufacturing, and transportation employees. Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, and San Francisco reported positive wage growth among high-skilled workers, especially for occupations in the technology, high-skilled manufacturing, aerospace and defense, financial services, and professional technical sectors; however, the Kansas City, Richmond and Atlanta Districts reported flat wage growth. Staffing firms in the Boston District reported single-digit wage increases, but staffing services contacts in Dallas cited easing wage pressures, especially in Houston. Wage pressures moderated in the service sector in Richmond but continued upward pressure was cited in New York.

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


“District commercial real estate brokers reported improvement in demand resulting in increased absorption and rent growth across property types, but cautioned that the rate of improvement continued to vary by metropolitan area, submarket, and property type. Commercial contractors noted that the pace of nonresidential construction activity had increased from one year ago, with most citing a backlog greater than or equal to the previous year. Reports on multifamily construction indicated that activity remained robust. District commercial real estate contacts expect the pace of construction activity to continue to increase slightly over the next quarter.”


“Commercial leasing activity in the First District is flat or down, depending on the location. General Electric's announcement that it will move its headquarters from Fairfield CT to Boston dealt a blow to business sentiment in Connecticut and further boosted prospects for Boston's booming Seaport District. In Boston, leasing activity is steady and fundamentals remain strong; however, tenants are exercising greater caution in their space demands when renewing leases. In Boston's commercial real estate investment sales market, the number of buyers willing to pay record-high prices continues to decline and lenders appear less enthusiastic about underwriting such bids. In Hartford, leasing activity is described as anemic. Connecticut's investment sales market is active but potential buyers remain less bullish than they were three to six months ago…across the District, contacts perceive downside risks stemming from equity market volatility, given its potential to blunt both business and consumer confidence.”


“…demand for existing commercial real estate space continued to grow robustly, with only a bit of a slowdown from the average pace over the past couple of years. The market for for-lease properties was particularly healthy and was broad-based across the retail, industrial, and office segments. One contact noted that the slow pace of nonresidential construction combined with strong demand for commercial and industrial space was creating concern about space shortages. Indeed, contacts continued to raise concerns that the strong growth may be creating a price bubble.”


“Demand for office space remained strong in Austin and Dallas-Fort Worth, but continued to soften in Houston, where rent concessions were being offered. Industrial leasing was mostly active and vacancies remained tight. Outlooks were positive with the exception of the market for office space in Houston.”

New York

“Office markets have been stable across the District, with both availability rates and asking rents little changed since the beginning of the year. New office construction has weakened further; a good deal of new office space is under construction in Manhattan but little is in the works across the rest of the District. Single-family construction has generally remained sluggish, while multi-family development has been robust. In northern New Jersey, most of the recent apartment construction has been rental buildings, whereas in New York City, it has been largely condos.”


“Nonresidential real estate contacts continued to report modest growth in construction and leasing activity with no signs of a slowdown in any sector. Contacts reported that in addition to Center City Philadelphia, the suburban office market and the Lehigh Valley industrial market remain very strong. Rents are pushing upward in some markets. One contact noted that 2016 would be a very strong year for regularly required maintenance work on heavy industrial facilities. Contacts remained optimistic for continued growth of new construction, retrofitting, and leasing activity through 2016.


“…leasing activity increased moderately in the retail market since the previous report, while activity in the office and industrial markets was tepid. Rental rates and vacancy rates varied across submarket and region, with a few reports of softening in office rental rates…with respect to sales, District contacts stated that office sales activity remained sluggish and noted the continued trend of office tenants' downsizing. Real estate agents across the District reported that mixed-use developments remained attractive, drawing in specialty food stores, restaurants, and local retailers. Commercial construction grew moderately in Charlotte, Columbia, Richmond, Asheville, Roanoke and Virginia Beach.”

San Francisco

“…occupancy rates continued to rise, spurring higher lease rates and additional construction projects. In some parts of the District, foreign investment continues to flow into commercial real estate projects despite falling capitalization rates.”

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.