Commercial Real Estate Markets “Generally Steady to Stronger”

Economic Pulse
June 5, 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. All twelve Federal Reserve Districts reported that economic activity rose during the April through late-May period, with “moderate” growth characterizing activity in the Boston, New York, Richmond, Chicago, Minneapolis, Dallas and San Francisco Districts, and “modest” growth describing the five remaining regions.

Excluding finance, activity in the service sector grew across most reporting Districts, although New York and San Francisco reported mixed performance. In contrast, Boston, Kansas City and San Francisco noted particular strength among technology firms. Hiring was steady to stronger across most of the country, while consumer spending grew at a moderate pace. After months of modest loan demand, overall lending activity increased throughout the nation. Roughly two-thirds of the Districts reported rising loan demand, with particular strength noted in New York and San Francisco. Credit quality and delinquency rates generally improved, while credit standards were mostly unchanged.

Labor conditions generally improved since the previous report, even as several Districts continued to report that employers were having difficulty finding skilled workers. Despite comments from Chicago and Dallas employers, who noted an increase in the cost of health insurance, most Districts reported that wage pressures remained subdued. According to reports from the New York, Philadelphia, Richmond, Minneapolis, Kansas City, Dallas, and San Francisco Districts, to the extent that wage increases were observed, they were concentrated among highly skilled workers in information technology, engineering, professional services, and some of the skilled trades. With relatively benign wage pressures, price pressures were fairly contained, as most Districts reported that both input and finished goods prices were little changed or up only slightly since the previous report. However, high or rising prices for some agricultural commodities, construction materials, energy products, and precious metals were cited by some Districts.

With regard to commercial real estate activity, the market was described as mostly stronger since the last report. Leasing activity and vacancy rates improved in the Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas and San Francisco Districts, and were generally steady in the Boston, New York, Philadelphia and St. Louis Districts. Dallas described market conditions as robust. Non-residential construction activity was steady to stronger in most Districts over the latest reporting period, with strengthening noted in the Boston, St. Louis, and Kansas City Districts. Cleveland described pipeline activity as strong, and San Francisco highlighted a number of public and commercial high rise projects that have been announced or are underway. In contrast, Philadelphia characterized non-residential construction activity as “steady at a low level,” while Chicago described activity as mixed—with office construction weak, but industrial and some segments of retail fairly strong.

Comments on Real Estate by District


“Commercial builders and brokers indicated that demand for commercial real estate continued to improve. Absorption picked up, though contacts continued to…[note]… that the rate of improvement varies by metropolitan area, submarket, and property type. Construction activity continued to increase at a modest pace from last year; most contacts reported that their current backlog is ahead of year earlier levels…the outlook among District commercial real estate contacts remained positive with continued improvement expected over the course of the year.”


“Conditions in the First District's commercial real estate market are largely unchanged since the last report. In Boston, office leasing activity is stable. Demand for space in the Seaport District, Back Bay, and Kendall Square remains very strong, while a few buildings in the Financial District still have elevated vacancy rates. Some new apartment buildings in Boston appear to be having trouble achieving the rents and occupancy levels they had hoped for…some investors are reportedly starting to balk at Boston's high commercial real estate prices, but overall investor interest in the city remains very high. The growth pace of multifamily construction slowed in greater Boston while planned office construction increased, leaving overall construction activity roughly stable.”


“Demand for nonresidential construction expanded at a slow pace. Public construction activity was modest, but one contact noted some increase in infrastructure spending on bridges and schools. Office building remained weak. Contacts continued to note strength in industrial building and some areas of retail construction, particularly grocery stores. Demand for commercial real estate improved, as leasing of industrial buildings and office space increased.”


“Office leasing activity remained robust, and contacts noted strong growth in rents. Occupancy remained at high levels, and contacts in Houston said they are beginning to see interest from foreign investors. Demand for industrial space was strong, especially in Dallas. Outlooks for Texas commercial real estate remained positive.”

New York

“Commercial real estate markets have been mixed but generally stable during the spring. Office availability rates remained elevated in the Westchester/Fairfield market and especially in northern New Jersey, but continued to edge lower in the New York City, Long Island and Westchester/Fairfield markets; in upstate New York, they rose modestly. Industrial availability rates have continued to edge down across most of the District.”


“Nonresidential real estate contacts reported little change in the relatively low level of construction; however, some activity for surveying and inspections has fully returned to normal since the earlier winter disruptions. Some developers continue to build and lease industrial/warehouse space on a speculative basis, as demand remains strong in this market. Most other markets require signed contracts. One contact noted a small uptick in leasing activity for office space since the last Beige Book. Most contacts describe activity as slow and steady.”


“Commercial real estate activity grew moderately over the past several weeks. Rental rates were mostly stable, but some modest increases were also noted. Vacancy rates ranged from stable to slightly lower, with some pickup in absorption. A Charlotte, North Carolina Realtor said that office vacancy rates were low, while market fundamentals continued to recover and search activity increased. A commercial Realtor in Washington, D.C. reported that retail tenant allowances increased in the form of build-out dollars.”

San Francisco

“Commercial real estate activity improved, with lower vacancy rates reported in many areas. Contacts reported robust demand for large blocks of high-quality commercial space in the San Francisco Bay Area. In several regions, public infrastructure projects and a number of high-rise commercial construction projects have been announced or are under way.”