The Federal Reserve Bank in Washington DC

WASHINGTON, DC—Construction and real estate activity continued to expand, according to the latest release of the Federal Reserve's so-called Beige Book. The Fed, in fact, found that most of the economy's sectors saw growth in most of the 12 Districts for the period of late February and March. Also, labor market conditions continued to strengthen and business spending generally expanded across most Districts, it said.

It wrote:

Multi-family construction remained strong in most Districts. Chicago, Cleveland, and St. Louis also noted some improvement in demand for single-family home construction, and a contact in San Francisco reported backlogs of more than six months for new single-family units. Commercial real estate activity generally increased, with leasing activity and rents rising in many Districts: particularly strong leasing was noted in retailing in Chicago and in the industrial sector in Dallas.

Without a doubt, the Beige Book is an interesting metric that captures recent economic activity in many different sectors, including commercial real estate. It serves admirably well as a 30,000-foot view of what is happening in the general industry. It also provides interesting insights and anecdotes about what is happening in a particular market. But, trying to spot whether a certain trend is emerging – such as whether the current commercial real estate cycle has peaked – that can be difficult. Certainly in this latest report, there were only a few sentences here and there that suggested the cycle be coming to an end, which we have put in bold face.

As for the rest, the Beige Book offers up its usual stew of minute, market-to-market observations

Regional highlights from the report include:

Boston

Investment sales volume is down in Boston from one year ago and contacts perceive that prices are leveling off, despite the fact that one office tower in the city recently sold at a near-record price per square foot. Contacts in Portland and Hartford report that bidding has become less aggressive in recent months.

New York/New Jersey

The market for retail space has weakened in New York City, northern New Jersey and upstate New York with vacancy rates rising to multi-year highs. Meanwhile, the market for industrial space has strengthened with vacancy rates are at or near multi-year lows. Rents are running 5-10 percent ahead of a year ago.

Philadelphia

The Greater Philadelphia area reported ongoing modest gains in construction activity but that new starts were fewer. Contractors were confident that construction activity would remain at high levels through 2018 and recently announced significant future projects. The total man-hours have not eclipsed 2008 levels, but firms may be operating more efficiently since the recession.

Cleveland

Cleveland's nonresidential contractors reported that the unusually mild winter resulted in higher revenues than expected and that construction project pipelines are strong and backlogs continue to build. Several builders expressed concern about their capacity to take on additional projects. Demand is broad based, though it is weighted toward higher education- and healthcare-related projects. Over the past couple of months, many general contractors were able to increase their billing rates with little pushback. These higher rates enabled them to cover rising labor and development costs and to build margins.

Virginia/West Virginia

A commercial real estate agent in Richmond reported a robust retail leasing environment, with increased sales and solid upward movement in property prices. In contrast, a broker in Charleston, West Virginia reported a decrease in leasing and sales activity. Real estate agents continued to report a decline in office leasing activity, despite more concessions. Rental rates and vacancy rates varied across submarket and region; however more contacts reported elevated retail rates. Commercial construction grew moderately in Charlotte and Richmond. A Realtor in Virginia Beach reported modest growth in the number of new retail, multi-family and mixed-use construction projects.

Atlanta/East Coast

In Atlanta, commercial real estate brokers reported increased absorption and rent growth across property types, but cautioned that this varied by metropolitan area, submarket, and property type. Commercial contractors indicated that the pace of nonresidential construction activity had increased from one year ago, with many reporting backlogs of one to two years. Reports on multifamily construction suggested that activity remained fairly robust, although there seemed to be growing concerns around overbuilding. CRE contacts expect the pace of construction activity to increase slightly over the next quarter. In Columbia, South Carolina, an agent stated that retail and restaurant construction remained strong.

Chicago/ Midwest

In Chicago, demand for nonresidential construction was little changed, and contacts again highlighted weak demand for industrial construction. Commercial real estate activity rose moderately, with healthy gains in both the for-sale and for-lease markets and particularly strong activity in the retail segment. Commercial rents and availability of sublease space rose modestly, while commercial vacancy rates were little changed. In Sioux Falls, vacancy rates for industrial, office, and retail space were flat or falling since the last report; however, apartment vacancies have risen. In Oklahoma, Commercial real estate activity increased modestly as sales, construction underway, completions, and absorption were up over year-ago levels and vacancy rates declined. The commercial real estate sector was expected to continue to strengthen at a modest pace over the coming months.

St. Louis

In St. Louis, commercial real estate activity continued to strengthen throughout most of the District. In most of the regions, vacancy rates have dropped and asking rents have increased. Commercial construction activity strengthened moderately. About 80% of construction industry contacts in St. Louis reported that the number of construction projects has increased in the past 12 months and expect the number of projects to increase in the next 12 months. Business contacts reported that the strength in construction remains in multifamily proprieties and build-to-suit construction for other property types.

Minneapolis-St. Paul

In Minneapolis-St. Paul, vacancy rates remained low, and several sales of apartment complexes saw notable price appreciation.

Texas

Demand for office space was healthy in Austin and Dallas-Fort Worth, but continued to weaken in Houston. Industrial leasing remained active and vacancies were tight, although one contact noted slight energy-related softening in Houston. Industrial construction was elevated in Dallas-Fort Worth.

San Francisco

In San Francisco, construction of residential units picked up, particularly in technology hubs. Construction materials remained in ample supply, but some areas reported that permits for new residential construction have not kept pace with increased demand, in part reflecting constraints from labor shortages. Demand for commercial space has been growing rapidly in some urban areas, and new construction completions have not kept pace, putting upward pressure on lease rates.

Instant Insights /

Fed's Beige Book Says Too Much, Too Little About CRE

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