Regional Fed District Banks Comment on Commercial Real Estate

Economic Pulse
January 15, 2014
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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 economic activity continued to expand across most regions and sectors from late November through the end of 2013. Nine Districts indicated the local economy was “expanding at a moderate pace”—an upgraded assessment from the prior report, where seven districts had reported “moderate” growth and four districts had noted “modest” growth.

The report was based on information collected through January 6th, which meant that Districts were able to observe activity during the all-important holiday shopping season. Three-quarters of the Districts indicated that retail activity had increased since the last Beige Book report, with only St. Louis, Kansas City and the Richmond Districts bucking the improving trend.

On the employment front, two-thirds of Districts noted increases in hiring. (In particular, the Richmond District cited "numerous reports of strong labor demand.") Demand for staffing services increased in the New York, Cleveland, Richmond, Chicago, and Dallas Districts to serve the internet technology and engineering sectors. While almost half the Districts reported that prices were stable, most other Districts noted small increases in prices—a slight, but notable change from the last report where overall wage pressures “remain[ed] contained across most Districts.” Upward movements in wages, described as “small to moderate” were cited by 8 of the 12 Districts and will bear careful watching: average hourly earnings on a year-over-year basis, up 2.1% in December 2013, have fallen for the last two months, but are well above the 1.5% average annual pace of increase seen in 2012 and the 2.0% average annual increase observed in 2011.

With regard to commercial real estate, while reports “contained much good news” according to the Federal Reserve, performance within some Districts was “uneven across locations and property types.” Commercial leasing activity increased in the Atlanta, Chicago, St. Louis, Minneapolis, San Francisco Districts, as well as in New York City and Long Island, but held “roughly steady” in the Boston, Philadelphia, Richmond, Kansas City, and Dallas Districts.

Office and other commercial vacancy rates were mixed across and within metropolitan areas and across property types. The report noted that commercial rents “increased at least modestly on average” in the Boston, Chicago, Kansas City, and Dallas Districts and “held steady” in the New York and Richmond Districts. Even so, where reported, information concerning the commercial real estate outlook was largely positive. Contacts in the Boston, Atlanta, and Kansas City Districts were optimistic that commercial real estate fundamentals “would continue to improve at least slowly in 2014,” while respondents from the Philadelphia, Cleveland, Minneapolis, and Dallas Districts held a “positive” view for commercial construction activity in the year ahead.

Excepting the New York and Dallas Districts (which gave no information on recent construction) all other Districts reported increases in commercial construction activity in recent weeks. Brisk sales activity was noted in the Boston, Chicago, and Minneapolis Districts; rising prices were apparent in those same Districts as well as in the Richmond and Kansas City Districts.

We detail specific comments on commercial leasing below, noting the use of “stable,” “held steady,” and “mixed.”


"District brokers noted that demand for commercial real estate continued to improve, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Construction activity continued to increase at a modest pace from earlier in the year... new build-to-suit projects continued to break ground across the region and landlords continued to update and reconfigure existing space to make it ready for tenants. The outlook among District commercial real estate contacts remained positive with further improvements expected early in 2014."


"Commercial real estate leasing activity... held roughly steady on average in December, while investment sales activity and construction remained robust or strengthened significantly... in the Boston area, the Seaport District maintained a steady, "impressive" leasing pace, and office leasing activity picked up in some suburban areas. In Boston's Financial District, however, the vacancy rate remains in the mid-teens, allowing modest rent increases that are, according to one contact, probably only large enough to cover rising costs... investment sales activity saw a year-end burst of activity in Boston, with strong contributions from foreign investors, pushing capitalization rates and loan spreads to historically low levels and reigniting concerns that prices are too high relative to reasonable expectations of rent growth... the outlook among contacts for 2014 is generally optimistic... downside risks include the upcoming costs to businesses of compliance with the ACA and the trend toward office downsizing on a space-per-person basis."


"Demand for nonresidential construction remained modest, but picked up some from the previous reporting period. Commercial real estate activity also improved, with vacancies declining and rents increasing. Contacts noted especially strong growth in high-end retail and investments in income generating properties."


"Office and industrial leasing activity remained stable, according to contacts. Investment activity slowed, however, and rising rents and high occupancy levels may be keeping some building owners from selling. Outlooks remained positive, and one respondent expects a large increase in commercial construction activity in 2014."

New York

"Commercial real estate markets were mixed at year end. In Manhattan, the outer boroughs, and Long Island, office availability rates were steady to down slightly in the fourth quarter, ending 2013 at multi-year lows; Midtown Manhattan registered particularly brisk leasing activity in the 4th quarter. In Northern New Jersey... office availability rates were little changed at or near multi-year highs. Asking rents for office space were generally steady across the District and little changed from a year earlier. Industrial markets weakened slightly in the fourth quarter of 2013."


"Nonresidential real estate contacts indicated little change in the slight growth rate of construction and the modest pace of overall leasing activity during this seasonally slow period of the year. New construction of industrial warehouse buildings remains in strong demand, as does new construction of institutional buildings. The summer/fall of 2014 is slated to bring groundbreakings for two major 47-story construction projects: an office/residential tower in University City Philadelphia anchored by... a specialty chemical firm and a hotel/condominium tower for Center City Philadelphia. Based on these and other projects, most contacts reported good results for their respective firms in 2013 and expectations for stronger growth in 2014."


"Commercial construction increased, with a contact reporting new projects underway for college campus housing and small medical centers in Maryland and the District of building continues to be depressed. Commercial leasing was mixed since our last report. Most Realtors reported little change in demand for Class A office space, although a Virginia Beach broker reported relatively high North Carolina, a Realtor has received steady inquiries for industrial distribution space. Realtors indicated a slight increase in commercial sale prices, and little change in lease rates.”

San Francisco

"...commercial real estate activity improved....public infrastructure projects as well as a large number of high-rise commercial construction projects have been announced or are under way in Honolulu, Los Angeles, and the San Francisco Bay Area."