Economic Activity Continues to Increase at a "Modest to Moderate Pace"

Economic Pulse
December 5, 2013
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The Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, revealed that the economy “continued to increase at a modest to moderate pace”—the same assessment it has made for the majority of the year. In October, eight Districts characterized growth as unchanged while four reported slowing growth. In contrast, yesterday’s report was suggestive of a more positive tone: seven districts reported moderate growth from the early-October through mid-November period, four districts noted modest growth, while one district (Boston) described continued expansion with respect to local economic activity.

Price increases were described as “minimal,” “stable” and unchanged, while hiring showed either a modest increase (in Philadelphia, Richmond, St. Louis, Minneapolis, and Dallas) or remained largely unchanged. Staffing services across Districts were more optimistic than they were three months ago, with steady growth expected through the end of the year and into 2014. (Industries reporting moderate employment growth included construction, software/ IT services, manufacturing, and healthcare; a contact in North Carolina noted an increase in server farms.) Overall wage pressures remain contained across most Districts, with modest increases reported in Boston, New York, and Dallas; California expected an increase in labor costs as the state’s minimum wage increases take hold over the next few years. Of note, many Districts reported difficulty finding qualified workers for certain permanent, high-skilled positions, with builders in the Philadelphia and Cleveland Districts citing a scarcity of high-skilled trade workers, resulting in upward pressure on wages.

Commercial real estate markets showed stable to slightly improved activity. Boston highlighted an acceleration in absorption in the Seaport District and Back Bay, with speculative office construction occurring for the first time in at least six years.

“Philadelphia, Cleveland, Richmond, Chicago, St. Louis, and Minneapolis all saw gains in industrial construction, while Boston, Chicago, and St. Louis cited a rise in hotel construction. The technology sector drove demand for commercial real estate in the San Francisco District, and Cleveland saw gains in affordable housing and shale-gas-related activity. The outlook of market participants is for continued improvement in the Philadelphia, Atlanta, Kansas City, and Dallas Districts, while contacts were cautiously optimistic in Boston and Cleveland.”

Even as yesterday’s report was based on information collected through November 22nd, some companies in Philadelphia noted a reduction in activity due to the government shutdown (which had ended by the conclusion of the survey period.) Elsewhere, contacts across many Districts continued to “voice concerns about future cost increases attributable to the Affordable Care Act and other types of regulation.” As interest rates continue their upward climb (10-year Treasury yields reached a nearly three-month high), the deadline for a budget deal nears and the debt ceiling debate is unlikely to be resolved before 2014, national headlines are likely to dominate the start of the new year, potentially eclipsing any positive news on the regional front.

Comments on Real Estate by District


“District commercial brokers noted that demand for space continued to improve modestly. Construction activity slightly increased as well, from earlier in the year. Most contractors said that activity in the third-quarter was ahead of the year-ago level. New build-to-suit projects continued to break ground across the region while landlords also updated space to make it attractive for tenants to rent. Once again, brokers indicated that most markets still favored tenants; however, rental rate increases continued to be noted in select submarkets. The outlook among District commercial real estate contacts remained positive with further improvements expected early next year.”


Contacts across the First District report that leasing fundamentals maintained a very slow pace of improvement in recent weeks, consistent with minimal-to-slow employment growth. However, in some parts of Boston--the Seaport District and Back Bay--absorption has accelerated in recent months and, for the first time since before the Great Recession, speculative office construction is starting to occur…a regional lender to commercial real estate cites the U.S. government shutdown as the cause of a sharp decline in loan inquiries, but borrowing activity at the bank has since resumed at a healthy pace. The lending environment remains highly favorable to borrowers…even too loose in relation to fundamentals, according to some contacts. Abundant investment capital continues to flow into commercial properties across the region.”


“Nonresidential construction grew modestly, with contacts noting an improvement in the outlook for industrial building and hotels. Commercial real estate activity continued to expand as retail leasing picked up, though a large fraction of deals contained relatively short-term contracts.”


“Commercial real estate respondents said tenant demand remained at a steady pace for industrial and office space. A Dallas contact said construction of office, industrial and retail space was picking up. A contact noted Houston may be close to having too much office development in the works. Overall, the outlook remained generally positive.”

New York

“Commercial real estate markets have also been mixed thus far in the fourth quarter. In Manhattan, the outer boroughs, and Long Island, office vacancy rates continue to drift down, while asking rents continue to rise--though only modestly for Class A properties. Northern New Jersey's office vacancy rate is little changed at a high level, while asking rents are flat. However, in the Westchester/Fairfield markets and across upstate New York, vacancy rates climbed to multi-year highs. Industrial markets have also been mixed, with conditions strengthening noticeably in downstate New York and northern New Jersey, but slackening across upstate New York.”


“Nonresidential real estate contacts indicated little change in the slight growth rate of construction and the modest pace of overall leasing activity. Demand remains strongest for new construction of industrial buildings, hospitals, schools, and other institutions.”


“Commercial real estate markets have remained stable throughout the District, with continued strength in multi-family construction….realtors report a slight decline in Class A office space, but availability varied greatly by submarket. A Roanoke, Virginia Realtor reported a shift to Class A space in suburban markets due to the expansion of professional services, and a Realtor from Columbia, South Carolina has seen high demand for Class A space in the central business district. Realtors throughout the district reported that office tenants were downsizing and focusing on space efficiency. A commercial Realtor in Charlotte, North Carolina reported new construction plans in the health industry and suburban office buildings. Commercial leasing remained largely unchanged since the last report, with the exception of a mild pickup in the industrial market. Brokers in central Virginia and Charlotte reported that there was an unusual level of demand for large blocks of industrial space. In addition, a Realtor from Raleigh reported an increase in industrial flex space. Overall, vacancies, sales prices, and rental rates flattened since our last report.”

San Francisco

“Technology firms continued to drive demand for commercial real estate in the San Francisco Bay Area and Seattle. High prices for commercial real estate in downtown San Francisco spurred some firms to migrate to more affordable areas of the region.”