Declining vacancies and rising rents for office space

Economic Pulse
December 4, 2014
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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 a slight pick-up in the number of regions where growth was described as “moderate,” “improving,” “solid” or “positive” versus September’s report.

Economic Growth Characterization by District
Economic Growth by District Table

Source: Federal Reserve SpaceBold = change from prior report.

EMPLOYMENT gains were widespread across Districts in October and November. Boston reported increased employment in the software and IT sectors, and New York noted that financial firms were hiring more workers. Several Districts noted an increase in temporary staffing as well as an increase in temporary-to-permanent job transitions. Hiring plans increased in New York and Chicago. Contacts in the Kansas City and Dallas Districts noted that firms were having increased difficulty retaining key workers; some Districts continued to report that firms had difficulties filling positions in IT and engineering, legal and health-care services, management, skilled manufacturing and building trades, and transportation and warehousing. There were some reports of slightly higher rates of seasonal hiring in New York and Chicago.

WAGE GAINS were characterized as “slight to moderate,” though several Districts reported upward wage pressures for certain skilled industries. New York, Chicago, and San Francisco reported that employers were adjusting compensation to win well-qualified job candidates or to retain or give raises to high-value, long-term existing employees. In addition, Atlanta noted nascent signs of wage pressures for lower-skilled jobs. Minimum wage increases were said to be a source of higher labor costs in the Boston, Cleveland, and San Francisco Districts. Boston, Chicago, and Dallas noted actual or prospective increases in health insurance costs; in contrast, San Francisco indicated that increases in health insurance premiums for the coming year were low by historical standards. Some of the higher costs associated with health care were reportedly being passed on to employees.

COMMERCIAL REAL ESTATE activity rose in most Districts. Construction of office space was relatively strong in some large urban areas, such as New York City and Philadelphia. Industrial construction was particularly strong in the Cleveland, Chicago, and Dallas Districts. Commercial real estate activity also increased in many Districts, with declining vacancies and rising rents for office space; especially strong activity was noted in the central business districts of some large urban areas. Vacancies for commercial and industrial space also dropped in several Districts.

CREDIT ACTIVITY improved on net; a few Districts noted aggressive competition on loan pricing and terms or an easing of loan standards. Boston, New York, and Richmond cited an increase in demand for commercial mortgages. Commercial and industrial lending increased in Philadelphia and St. Louis.

Comments on Real Estate by District


"District commercial real estate brokers continued to report improving demand, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors noted… that the level of nonresidential construction activity continued to increase modestly. The outlook among District commercial real estate contacts remained fairly optimistic."


"Commercial real estate market trends in the First District are mostly unchanged since the last report. According to contacts, Boston's office market continues to see declining vacancy rates and modest rent increases. Investor demand for office and multifamily properties in Greater Boston remains very robust…a regional banking contact saw a modest increase in commercial real estate loan inquiries, including an uptick in loan demand for industrial properties in the Boston area; at the same time, he reports that the flow of lending activity at his bank is below its year-ago level."


"Nonresidential construction expanded at a moderate pace, led by demand for industrial and office buildings. Commercial real estate activity increased broadly, as vacancies ticked down and rents rose. Contacts noted that sales of existing properties with tenants already in place were particularly strong. Leasing of industrial, office, and retail space increased."


"Office and industrial leasing activity was mostly unchanged from the previous report. Investor interest in commercial properties, including foreign capital investment, stayed solid. Outlooks were generally optimistic, although there was some concern about the potential effect of declining oil prices."

New York

"Commercial real estate markets have generally remained steady thus far in the fourth quarter. In Manhattan, office availability rates edged down to a six-year low, while asking rents leveled off and are up about 2 percent since the beginning of the year. Elsewhere around the New York City metropolitan region, office availability rates and asking rents were generally flat, except in northern New Jersey, where rents were up slightly…although a number of major office developments are under construction in New York City, new starts for office construction remain fairly depressed across the District. The market for industrial space has been a bit more robust: Asking rents are up from a year ago throughout the region, while availability rates have fallen to multi-year lows in and around New York City and have edged down in upstate New York. New starts for industrial construction have increased in recent months and are up from a year ago."


"Construction and leasing reported by nonresidential real estate contacts have picked up to a modest pace of growth since the previous Beige Book period. Demand continues for new industrial/warehouse projects along the I-81/I-78 corridors. Recently, several major projects have broken ground in Center City Philadelphia; contracts have been signed and skilled tradespeople have been hired. An architecture and engineering firm reported ending its best year in the firm's history and that it expects to do more hiring in 2015. Contacts continued to report incremental improvements in leasing activity in downtown and suburban Philadelphia, especially for office, residential, and retail spaces in Center City Philadelphia."


"Commercial real estate activity increased moderately in recent weeks. Brokers reported that commercial sale prices increased slightly, and that sales activity was strong in Richmond, Baltimore, and Charlotte. Multiple Virginia contacts reported an increase in retail construction. Brokers in Baltimore and Richmond said medical construction increased recently. A contact in Columbia, South Carolina reported a strong market for leasing of manufacturing plants and storage and distribution warehouses…a Richmond broker described less availability of Class A office space. There were several reports of rising retail rental rates; growth in other rental rates varied by region and submarket."

San Francisco

"Commercial real estate construction activity was solid during the reporting period, and vacancy rates decreased in most areas."