Commercial Real Estate Activity: “Modest to Moderate”

Economic Pulse
January 11, 2016

The first Beige Book report of the year, which summarizes comments received from businesses and other contacts outside the Federal Reserve, showed that commercial activity "generally improved" in most Districts, with rental rates that "rose somewhat" from the late-November 2015 period.

Commercial real estate activity was characterized as modest to moderate. While Boston and New York indicated little change generally, New York indicated that retail leasing activity remained "slack." Rental rates rose in more than half of the reporting Districts, and vacancy rates were mixed. The Dallas District noted high levels of industrial construction in Dallas-Fort Worth. Contacts in the Atlanta District expect construction activity to increase slightly, while contacts in the Philadelphia, St. Louis, Minneapolis, and Richmond Districts expect overall commercial real estate activity to continue to strengthen "at least" modestly.

Economic Growth Characterization by District


Labor markets continued to improve, with Richmond reporting "moderate" employment increases, while Philadelphia, Chicago, and Dallas reported "slight to modest" job growth. New York and Atlanta contacts reported more hiring than layoffs, while the employment picture from Boston was "mixed," despite the fact that firms had plans to add more employees in the future. Labor markets were described as "tight or tightening" in New York, Atlanta and Minneapolis. Staffing firms in New York, Philadelphia, Richmond and Minneapolis cited positive signs of strong labor demand. In contrast, hiring metrics were reported as "flat or mixed" from staffing agencies in Chicago and Dallas.


Overall, wage pressures remained relatively subdued. Just two Districts—New York and San Francisco—indicated some acceleration in upward wage pressures. Seven Districts mentioned greater wage pressures for skilled workers in a variety of industries, including construction, manufacturing, financial, professional, technology, and health-care sectors. However, wage pressures among low-skilled positions were almost as pervasive, with six Districts citing pressure stemming from state minimum wage increases and from labor shortages or turnover among entry-level positions in banking, retail and hospitality.


"District commercial real estate brokers continued to report rising demand that resulted in increased absorption and higher rents 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, with all reporting a backlog greater than or equal to the previous year. Reports on apartment construction suggested 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 demand remains robust in Boston and Portland and weak in Hartford. Leasing activity slowed modestly in the past month in Providence, where a contact perceives greater caution among business owners…in Boston's investment sales market, contacts note that there are fewer bids per property on average than six months ago, but pricing remains robust. In both Boston and Portland, contacts note that the availability of large blocks of contiguous office space has become quite limited, a condition which--coupled with recent rent growth in both markets--is expected to lead to more office construction moving forward. Extending recent trends, new office projects in greater Boston are typically at least partly pre-leased rather than purely speculative…the outlook remains optimistic for Boston's commercial real estate market, including leasing and investment sales, but contacts also note risks stemming from political and economic uncertainty at both the national and global level."


"Demand for nonresidential construction rose modestly. A number of contacts reported growth in the office segment, while one noted that demand for automotive manufacturing construction remained high. Although commercial real estate activity slowed some, it remained strong and broad-based across the retail, industrial, and office segments. In Chicago, a contacted indicated that the supply of commercial space continued to tighten because construction of new buildings had been slow and older, smaller buildings are being converted into residential space or hotels. Commercial rents increased slightly, while commercial vacancy rates and the availability of sublease space decreased a bit."


"Demand for office space was strong in Austin and Dallas-Fort Worth, but continued to soften in Houston. Industrial leasing mostly remained active and vacancies were tight. Contacts noted high levels of industrial construction in Dallas-Fort Worth."

New York

"Commercial real estate markets across the District were mostly steady. Office availability rates were little changed across most of the District, while asking rents rose modestly. Retail leasing remains slack, with vacancy rates steady at high levels in and around New York City, as well as in upstate New York. Commercial construction activity has picked up somewhat but remains at a subdued level."


"Nonresidential real estate contacts continued to report modest growth in construction and leasing activity. Contacts representing architects, engineers, and developers continued to report the strongest activity in Center City Philadelphia and other smaller urban cores. Contacts attributed some of the increasing demand to employers choosing to relocate jobs to the urban cores to attract younger workers. One contact noted that pent-up demand for prime Center City office space has pushed rents up to levels not seen since 2007. One contact noted that multifamily residential construction is heating up in some suburban areas, as well as in downtowns--often as part of mixed-use properties. Contacts remained optimistic for continued growth of both new construction and leasing activity through 2016."


"Commercial real estate activity increased moderately District-wide, and construction reportedly grew modestly in Charleston, South Carolina, Washington, D.C., Charlotte, and the Virginia Beach area. Rental rates rose slightly, while vacancy rates varied by submarket and region. A broker in Charleston, South Carolina reported a strong commercial real estate market, with speculative industrial building and higher rental rates in the office market due to limited supply. Brokers in Washington, D.C., Baltimore, and Richmond continued to report steady to strong leasing activity, with faster growth in sales since the previous report. A Washington, D.C. real estate contact stated that office vacancies were high in the suburbs, and the new office construction pipeline was slow. He also said that most leasing activity remained in the 10,000 square feet range, continuing the trend toward smaller office space."

San Francisco

"…lease rates for existing units have increased, pushing sales prices higher across the District. Yet, new commercial construction remains concentrated in a few hot markets, such as the San Francisco Bay Area and Seattle. Contacts noted continued shortages of labor and materials and construction delays in those areas, with one reporting that commercial contractors had stopped accepting new construction projects in the final months of the year."