Commercial Real Estate Outlook Remains "Fairly Favorable"

Economic Pulse
July 16, 2015
Download PDF

The July Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed that commercial real estate activity remained "fairly favorable" over the late-May to early July period. Chicago described conditions as "mostly positive." Low and declining vacancy rates characterized the Chicago and Dallas markets, while New York reported that availability rates varied by submarket and property type. Rents were noted as being "up slightly," "increasing," or "rising" in Philadelphia, Richmond, and Dallas. Philadelphia indicated that nonresidential construction activity continued at its previous pace, while Richmond, Atlanta, and Chicago noted an increased level of nonresidential construction activity. Multifamily construction was described as "strong," "elevated," "robust," and "picking up" by several Districts, including New York, Richmond, Atlanta, Dallas and San Francisco. Philadelphia was generally optimistic, Atlanta remained positive while Dallas remained cautiously optimistic.

Economic Growth Characterization by District

Table: Economic Growth by District, July 2015

Source: Federal Reserve SpaceBold = change from prior report.


Employment levels picked up since the last reporting period, with service-related firms in particular having expanded their payrolls in Boston, Philadelphia, Richmond and Dallas; New York noted increased demand for human resource professionals to recruit new employees. Reports from manufacturers were mixed, with firms in Boston and Dallas citing layoffs. Although downsizing continued in the energy sector, the pace abated in Dallas since the last report. Accounts of sustained labor market tightness spanned several Districts, with firms from several Districts describing shortages for particular types of skilled labor, predominantly in the construction industry.


Wage pressures were modest across most areas of the country, outside of some specialized skill and high-demand occupations in sectors such as information technology, transportation, and construction. Reports from San Francisco were more robust, indicating intensifying wage pressure across a broader range of industries. Chicago and San Francisco highlighted a growing sense among business contacts that recent announcements of minimum wage hikes and pay increases at a number of large retailers could prompt broader wage pressure across other industries as firms compete to remain attractive employers. Even so, inflation pressures remained largely unchanged since the last report. Reports from Boston, New York, Atlanta and Chicago indicated that retail price growth was subdued. Richmond reported that retail price growth slowed, whereas Kansas City saw an acceleration in retailers' input and selling prices. Atlanta and San Francisco highlighted the dampening effect on the cost of imported goods and commodities from the appreciating dollar and softness in commodity prices.

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


"District commercial real estate brokers indicated that demand continued to improve for all property types, but cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors indicated that nonresidential construction activity had increased from the year-ago level. Many contacts continued to report that apartment construction remained robust. Most contacts reported a backlog that was greater than the previous year. The outlook among District commercial real estate contacts remains positive."


"Contacts report that office rent growth is accelerating in greater Boston, especially in urban submarkets. One contact describes Boston's office leasing market as the strongest in 50 years. Prices for investment properties in greater Boston continue to rise and, despite accelerating rent growth, contacts remain concerned that recent sales prices embed overly optimistic rent growth assumptions…Bank lenders in greater Boston are reportedly offering very low interest rates and generous terms for commercial real estate mortgages and construction loans. A common concern among contacts in the First District is the potential impact on investment demand for commercial properties once short-term interest rates start to rise."


"Nonresidential construction activity also increased modestly, driven primarily by demand for industrial buildings. Commercial real estate activity increased moderately. Vacancies declined and the availability of sublease space ticked down."


"Commercial real estate activity generally held steady, and outlooks remained cautiously optimistic. Demand for office space was solid in Dallas-Fort Worth, while contacts in Houston noted slowing in leasing activity and further increases in the level of sublease space. Industrial leasing remained active in both metros; characterized by low vacancy, rising rents and high levels of construction. Retail demand was strong, and retail construction in Dallas-Fort Worth is at a three-year high."

New York

"Commercial real estate markets across the District have been steady overall. Office availability rates were steady in Manhattan, Long Island and across upstate New York; rates edged up in the Westchester-Fairfield market but declined in northern New Jersey, though they remain quite elevated. Asking rents for office space were little changed, except in Manhattan, where they continued to trend upwards. Retail rents in Manhattan also rose, but its retail availability rate has climbed to a multi-year high.

"Office construction rebounded sharply in the second quarter--mainly in northern New Jersey and New York City--after a sluggish first quarter…New construction starts, as well as the amount of space under construction--for both office and apartment buildings--reached their highest levels in more than a decade."


"Nonresidential real estate contacts reported little change to the modest pace of construction and leasing activity seen earlier. Downtown Allentown and Philadelphia remain the focus of significant new construction for office and mixed-use developments. While most of the new office demand stems from firms moving around the region, contacts suggest that some demand is being driven by employment growth from existing firms and from new locations by out-of-market firms. Overall, commercial rents continued to increase slightly. Contacts generally remained optimistic for the ongoing growth of both new construction and leasing activity in 2015."


"Commercial real estate activity increased modestly overall since the previous report, with a pickup in activity in the industrial sector and reports of slower growth in the office sector. Vacancy rates and rental rates varied across submarket and region…Brokers in the District of Columbia and in Maryland reported a slight increase in the demand for office space, and said that that concessions had tightened up somewhat…A Realtor in the District of Columbia reported softer commercial sales since the previous report. Commercial construction increased slightly in Richmond; Asheville, North Carolina; and in Columbia, South Carolina."

San Francisco

"Contacts reported continued growth for residential and nonresidential construction and sales, with particularly rapid growth in metropolitan areas with large technology sectors. A few contacts noted a rising influx of foreign investment in commercial real estate, which drove up property prices in some metropolitan areas. Construction of residential units continued to show good growth in some areas, primarily for multifamily and rental properties. Sale prices reportedly have been rising for all types of residential properties, with an increasing incidence of bidding wars reported. Shortages of skilled labor remained a constraint on growth in construction activity in many parts of the District. Contacts expect that continued improvement in household wealth will spur further growth in residential real estate activity during the second half of the year."