Commercial real estate activity “expanded” over the last month

Economic Pulse
March 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 from January through early February. Eight regions characterized improvement in activity “as modest to moderate,” a slightly less optimistic assessment from January’s report in which nine Districts indicated the local economy was “expanding at a moderate pace.”

The report was based on information collected before February 24th, which meant that most Districts felt some impact from unusually severe winter weather. New York and Philadelphia attributed the slight decline in their overall activity to weather; more generally, most Districts ascribed weaker retail sales growth and softer auto sales to colder temperatures and greater-than-normal precipitation. (The word “snow” appeared 24 times in the report.)

On the employment front, despite a pickup in hiring in some sectors across New York, Cleveland, Atlanta, and St. Louis, overall employment growth for these Districts remained sluggish. Inflation pressures remained largely unchanged across most Districts, although contacts in Atlanta and Kansas City pointed to higher construction materials prices as a source of rising costs. Most Districts noted that wage pressures were largely steady since the last report; however, a few Districts cited higher wages in some highly skilled jobs in industries such as information technology, transportation, and construction. Cleveland, Kansas City, and San Francisco indicated that businesses expected wage growth to increase from the recent mild pace as the year progresses, while contacts in Chicago and Cleveland mentioned higher healthcare premiums as one reason for the increase in non-wage labor costs.

While reports on residential housing markets were somewhat mixed, many Districts, including New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco indicated that commercial real estate activity had increased and that conditions continued to improve since the previous report. The outlook for nonresidential construction was fairly optimistic across most regions. Boston contacts noted “uneven” office demand within the city, with strength in the Seaport District, increasing demand in some suburban areas, and comparative weakness—including downward pressure on rents—in the Financial District. In New York, leasing activity was characterized as “very brisk,” but the availability of several new spaces in both Downtown and Midtown Manhattan left the overall availability rate little changed, even as asking rents for office space continued to rise, and were up 6 to 9 percent from a year earlier. In Washington D.C. and Northern Virginia, brokers noted more concessions, in the form of tenant improvements.

District reports of loan demand and volume were mixed. Boston reported commercial real estate loans were highly competitive and demand was solid, while Richmond businesses looked for shorter-term commercial real estate loans in order to benefit from the lower interest rates that those loans offered. Chicago and Kansas City reported steady growth in commercial real estate loans, and demand for such loans improved marginally in Dallas. Small to medium-sized banks in New York reported no change in commercial real estate loan demand.

We detail specific comments on commercial leasing blow.


“…demand for commercial real estate continued to improve. Absorption was picking up, althoughcontacts cautioned that the rate of improvement still varied by metropolitan area, submarket, andproperty type. Construction activity continued to increase at a modest pace from last year; mostcontacts reported that their backlog was ahead of year earlier levels…the outlook among District commercial real estate contacts remained positive with further improvements expected over the course of the year.”


“Commercial real estate activity was mixed…but contacts report that leasing fundamentals were largely stable in recent weeks…in Boston, office demand continues to be uneven within the city…investment sales activity slowed in the region in the aftermath of a year-end surge in transactions. At the same time, contacts indicate that investment demand for commercial real estate remains strong across the region, and especially strong in Boston…the bank lending environment for commercial real estate remains highly competitive, with solid loan demand across numerous sectors…recent trends in construction activity persist, with slow growth in the institutional sector, a declining pipeline of multifamily structures, and an increase in planned mixed-use developments and speculative office construction in parts of Boston.”


“Nonresidential construction grew slowly, with one contact noting that industrial building activity had paused in recent weeks. Commercial real estate activity ticked up, as vacancies declined and rents rose. Niche, high-income properties remain a source of strength for the sector, particularly for restaurants and office buildings.”


“Office and industrial leasing activity was strong. Sales activity remained at high levels and contacts expect it to increase this year, noting a more friendly lending environment. Outlooks were positive and commercial development is expected to continue to rise this year.”

New York

“Commercial real estate markets were stable to slightly stronger in early 2014. In New York City,office leasing activity was characterized as very brisk; but this was accompanied by several new spaces becoming available in both Downtown and Midtown Manhattan, leaving the overall availability rate little changed…elsewhere around the District both office availability rates and rents were little changed in early 2014. In general, the market for prime (Class A) space has under performed the rest of the office market.”


“Nonresidential real estate contacts indicated some weather disruptions have delayed ongoing construction activity...leasing activity was quiet—as businesses were often shuttered—but is expected to resume its modest pace next period...two more major buildings were announced for Center City Philadelphia since the last Beige Book: a 59-story major office tower and a 32-story residential tower. Added to the two 47-story office/residential towers already slated for ground breaking in 2014, these four projects have caused most contacts to become increasingly optimistic for stronger growth as the year progresses.”


“Other than in Washington, D.C., non-residential construction was softer . Commercial leasing ranged from unchanged to slightly stronger, with inquiries mainly for small spaces…reports on vacancy rates varied across location and submarket. Lease rates were unchanged and sale prices rose mildly. Realtors reported either no change or a slight increase in demand for Class A office space.”

San Francisco

“Occupancy rates for commercial real estate trended up in some areas, and increasing permit activity and sales of empty lots suggest that commercial construction may pick up further. In other areas, contacts noted that existing available square footage, especially in retail-oriented properties, has stifled new construction. Public infrastructure projects, as well as a large number of high-rise commercial construction projects, have been announced or are under way in Honolulu,Seattle, Los Angeles, and the San Francisco Bay Area.”