Commercial Real Estate Activity “Positive on Balance”

Economic Pulse
September 2, 2015
Download PDF

The September Beige Book report, the Federal Reserve’s description of current economic conditions in each of its 12 Districts, showed that commercial real estate activity was “positive on balance.” Commercial leasing activity increased in the Richmond, Atlanta and Chicago Districts, while activity was described as “steady” in the Philadelphia District, “steady or increasing” in the New York District, and “mixed” in the Boston District. Within the large cities of most Districts, however, leasing demand was described as “very strong,” particularly in Boston, New York, Philadelphia, Chicago, and Dallas proper, even as leasing demand was “weak” in Houston. On the pricing side, significant office rent increases were reported for downtown Boston and New York City while slight increases were seen in Center City Philadelphia.

Commercial construction increased in the Atlanta and San Francisco Districts, with an “active” market in the Dallas District. Construction activity was “strong-to-robust” in the New York District and “steady at a solid pace” in the Philadelphia District's urban centers. In urban Boston, office construction activity increased from levels that were seen as below-normal in relation to fundamentals. While the outlook for commercial construction was generally positive in the Boston, Atlanta, and San Francisco Districts, rising labor costs for skilled workers and tighter underwriting standards for construction loans were cited as risks.

Economic Growth Characterization by District

Table: Economic Growth by District, July 2015

Source: Federal Reserve SpaceBold = change from prior report.


The demand for workers was mixed across Districts. Boston reported little or no hiring except via its staffing sector, while Philadelphia, and Dallas cited “slight to modest” increases in employment and Atlanta, Richmond and Chicago experienced “moderate” increases in employment. In contrast, San Francisco reported an increase in IT sector hiring, while the New York labor market gained further momentum and saw “strong” growth in hiring. The Richmond, Chicago and San Francisco Districts reported labor shortages for certain skills or difficulty finding workers, especially for IT and other technical positions, while firms in the Atlanta District cited challenges retaining employees and filling vacancies.


Wages were described as “relatively stable” in most Districts, with slight to moderate increases since the last report. Even so, several Districts reported increasing wage pressures caused by labor market tightening. St. Louis reported almost three-fifths of responding firms had raised wages in the last three months. New York cited increased pressure on starting salaries, while San Francisco reported upward wage pressures for skilled workers in the IT, information security, and construction sectors. Dallas noted flat wages, but also wage pressures for some specialty skills. Notably, one contact in Boston suggested that within the next six months, labor costs could rise to levels that would “significantly curtail” construction activity relative to current plans.

Below, we detail specific comments by District on commercial real estate.


“…demand continued to improve for all property types, but [brokers] cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. The majority of commercial contractors indicated that nonresidential construction activity was up from their year-earlier levels. Reports on apartment construction continued to suggest that activity remained robust. Most contacts reported a backlog that was greater than the previous year, with activity booked six months to three years out. The outlook among District commercial real estate contacts remained positive.”


“Contacts…gave…mostly upbeat reports concerning the region's commercial real estate markets. Extending trends reported last time, office rents in Boston continue(d) to climb, office vacancy rates continue(d) to fall, and investors…pushed prices for Boston's commercial properties to near all-time highs…the pace of delivery of new office space has been slow relative to historical norms under similar market conditions, contributing to the recent surge in rents. However… there has been a modest uptick in office construction activity in Boston's Seaport and Financial districts, involving a combination of pre-leased space and unleased space…Construction of hospitals and related facilities…[continued] to expand in the Boston area. The shortage of skilled construction workers and accompanying wage pressure continue(d) to weigh on the outlook for construction activity in Boston.”


“Commercial real estate activity again increased moderately, with growth spread broadly across the retail, industrial, and office segments. Commercial rents were up slightly, while commercial vacancy rates moved down and availability of sublease space was little changed. Contacts reported particularly strong demand in urban areas, but noted that both the demand for and quality of buildings in suburban markets have shown improvements as well.”


“Commercial real estate activity generally held steady, and outlooks remained cautiously optimistic. Demand for office space was strong in Dallas-Fort Worth, while contacts in Houston noted slow leasing activity and slight increases in sublease space. Industrial and retail leasing remained solid and construction active, although one contact said there is somewhat less enthusiasm for new industrial development in Houston.”

New York

“Commercial real estate markets across the District were mixed but stronger…office availability rates declined modestly in Manhattan and northern New Jersey, and were generally steady in Long Island and across upstate New York; office asking rents have risen at a fairly brisk pace in New York City and parts of Long Island but have increased modestly across the rest of the District. Manhattan's retail leasing market has been steady since mid-year but has tightened somewhat in the outer boroughs, northern New Jersey and also across upstate New York. Commercial construction remains robust, though fewer new developments have been started in recent months.”


“Nonresidential real estate contacts reported little change to the modest pace of construction and leasing activity seen earlier. The…downtown districts remain the focus of significant new construction for office and mixed-use developments. Center City Philadelphia continues to attract new investment in commercial retail space. While Philadelphia's Class A office space continued to command strong premiums, rents for most categories increased only slightly. Contacts remained optimistic for ongoing growth of both new construction and leasing activity throughout the district into 2016.”


“Commercial real estate activity increased moderately…vacancy rates varied by submarket and region, with scattered accounts of higher rental rates. A contact in North Carolina said landlord build-out contributions had increased, and noted more demand from retail discounters…tight inventory for industrial space was said to be pushing up rental rates in the Carolinas, while a Baltimore broker reported more industrial warehouse vacancies…a contact in Charlotte, North Carolina described increased commercial activity, with more sales and new construction of office buildings. New retail construction increased in Virginia, while office construction decreased.”

San Francisco

“Contacts reported continued growth for residential and nonresidential construction and sales, with particularly rapid growth in urban technology centers. Some contacts noted an excess supply of retail space and tighter underwriting standards for new construction projects, which constrained the growth of new commercial units in their areas.”