Does the Decline in Oil Spell Turmoil?

Economic Pulse
January 14, 2015
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The January Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed a slight decrease in the number of regions where growth was described as “moderate.” Respondents voiced some concern over sustained commercial real estate activity in 2015, even as the overall level of optimism remained high. In Boston, a respondent questioned whether growth among the city's tech start-up firms could be sustained during the current year, while in Philadelphia, contacts noted that the demand for office space primarily represented a shift in the desired type of office space, rather than growth in underlying office employment. In the Richmond District, respondents noted slower leasing activity in the office sector. In San Francisco, some investors expressed concerns that there would soon be an excess supply of multifamily units given planned construction.

“Oil” was mentioned 45 times in the current report, but note that it was not only used in describing the Dallas region. Kansas City reported that demand for oilfield services decreased and that oil drilling activity declined, with a further slowing in activity expected. While contacts in Boston attributed more positive consumer sentiment, in part, to the low cost of oil, contacts in the energy sector in Atlanta reported that the downturn in the price of oil heightened their focus on cost management for the balance of the year. Meanwhile, a Chicago respondent noted that oil-related activity could slow as soon as Q2 2015 given the typical lag between prices and production.

Economic Growth Characterization by District
Economic Growth by District Table

Source: Federal Reserve SpaceBold = change from prior report.

EMPLOYMENT/WAGES Employment expanded moderately across most sectors in December. Chicago reported that overall hiring increased, while staffing firms in Philadelphia reported continued moderate increases in hiring for both temporary and permanent positions. The Atlanta District saw job gains across most sectors. Reports of hiring in the Dallas District were slightly less widespread than in the previous reporting period, and a few energy firms in that District reported hiring freezes and layoffs. Wage pressures continued to be limited largely to workers with particular technical skills, especially in Philadelphia and Chicago. The Richmond District reported that overall wage pressures were mild during the reporting period and that average wage growth in manufacturing slowed somewhat. The Dallas District noted fewer reports of rising wage pressures than in the previous reporting period.

Comments on Real Estate by District


“Commercial real estate brokers across the District continued to report improving demand, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors noted continued strength in apartment construction and that the pace of nonresidential construction activity continued to increase modestly. The outlook among District commercial real estate contacts remains fairly optimistic.”


“Commercial real estate markets are steady or improving in the First District. According to contacts in Boston, office leasing fundamentals are unchanged since the last report and improved modestly on average compared with a year ago. Contacts continue to be impressed by the strength of demand for commercial property in Boston among foreign investors, who continue to pay prices that reflect highly optimistic expectations concerning growth in operating income. A regional lender to commercial real estate posted its best year yet in terms of loan volume, despite a very slow fourth quarter… Boston contacts expect investment sales activity to remain robust, even if short-term or long-term interest rates increase in 2015. One Boston contact wonders whether growth among the city's tech start-up firms can be sustained in 2015, noting attendant risks for office demand in the Seaport District.”


“Nonresidential construction increased, driven in large part by demand for industrial and office buildings. Commercial real estate activity expanded broadly--vacancies ticked down, rents rose, and leasing of industrial buildings, office space, and retail space all increased.”


“Apartment demand remained strong. Occupancy rates, although still high, saw a slight seasonal dip. Rent growth stayed solid in Dallas and Houston, but was starting to cool off in Austin. Outlooks were generally positive, but some contacts said they had revised down their 2015 outlook for Houston. Office leasing activity remained strong, but one contact noted a slight pull back in demand from oil and gas firms. Industrial demand was solid in Houston but slowed in Dallas. A few contacts said that investors are taking a wait-and-see approach because of the steep decline in oil prices. Outlooks were positive, but there was some concern about the elevated level of construction in the Houston office and Dallas industrial markets.”

New York

“Commercial real estate markets were mixed but, on balance, somewhat stronger in the fourth quarter. In New York City, office availability rates continue to drift down to new multi-year lows, while asking rents are running 6-8 percent higher than a year ago. Availability rates also edged down in northern New Jersey but edged up in Long Island and across upstate New York. Rents outside New York City are generally little changed from a year earlier. Office construction across the District continues to be sparse at best. Industrial markets, however, mostly improved in the fourth quarter, as industrial availability rates continued to trend down in Long Island and northern New Jersey, while asking rents rose moderately.”


“Demand continued for new industrial/warehouse projects and for projects in Center City Philadelphia and some outlying suburbs. Contacts from architecture and engineering firms reported a significant increase in bids emerging for new projects, while competition from other firms has begun to abate. The falling competition was attributed to increased demand that has begun to stretch the capacity of some firms. Contacts continued to report incremental improvements in leasing activity in downtown and suburban Philadelphia, especially for office, residential, and retail spaces in Center City and select suburban office markets. The office space demand primarily represents a shift in the desired type of office space, rather than growth of office employment. Still, contacts are optimistic for continued growth of both new construction and leasing activity in 2015.”


“Activity in commercial real estate markets increased modestly since the previous report. District Realtors reported slight increases in the amount of retail leasing activity, but slower leasing activity in the office sector. Growth in rental rates varied by region and submarket. Commercial sales increased and prices rose slightly. Sales of retail space improved in Richmond, Virginia Beach, and Washington…on the other hand, a Columbia, South Carolina broker said that the office sector has been "unreal" and noted an increase in rental rates. A Virginia condominium developer reported an increase in new construction. Additionally, a Realtor in Charlotte said that previously announced office construction projects "are coming out of the ground" and there is a lot of business relocation activity.”

San Francisco

“Multifamily residential real estate construction activity was strong in many areas of the District during the reporting period. Retail, office, industrial, or infrastructure projects also were widespread. Most contacts viewed the pace of construction as healthy. However, one contact reported that some investors are concerned that, given planned construction, there soon will be an excess supply of multifamily units in their area.”