Fed’s Beige Book: CRE Flat to Falling

Are things better when they talk about you or not? The Federal Reserve’s August edition of the Summary of Commentary on Current Economic Conditions, more frequently called the Beige Book, broke what has become of late a trend: a mention of commercial real estate in the part of the national summary section before Federal Reserve district highlights.

However, a number of the districts specifically mentioned CRE:

Boston — CRE activity was described as both “limited but stable” and “mostly stagnant in recent months.” Few leases were signed in the office market, rents flat, and vacancies up slightly from fresh subleasing. There was strengthening demand for medical office space. Some in the market expected some uptick in office leasing, mostly due to seasonal trends but also company demands that workers return to the office. Industrial activity slowed with slower demand and low vacancies. Grocery-anchored suburban shopping centers saw “decent leasing activity that outperformed expectations.” Other retail was mixed. Investment sales were down because of high borrowing costs, the result being inhibited price discovery. Sales volumes are expected to be low through at least 2023.

New York — CRE markets were mostly unchanged. Office was down some, with rent declines and modest vacancy rate increases. The New York City retail market saw steady vacancy, rents, and leasing. Construction stabilized during the summer. Office construction in upstate New York and northern New Jersey remained moderate. “Much of the District saw increased multi-family residential construction starts, but in upstate New York activity was minimal, with no construction starts and a slight decline in units under construction.”

Philadelphia — There was a “slight uptick” in CRE construction. “While the demand for new office and warehouse space has largely evaporated, ongoing bids for institutional, multifamily residential, and public infrastructure projects have extended the pipeline of new projects and sparked a ‘shred of optimism.’ The office market contracted modestly as leases rolled over into spaces with smaller footprints.”

Cleveland — Home construction is slowing because of interest rates and the cost to invest in land for development. Nonresidential activity was up a bit. Office demand continued to be weak, though there may be an upturn with more workers coming back to the office. Nonresidential construction should be stable in the next few months.

Richmond — CRE markets slowed, but retail leasing stayed strong and industrial rents continued to grow. “In the office market, companies were looking to decrease rental cost by downsizing and relocating to smaller footprints in higher quality buildings.” But office rents remained flat while landlords had to offer more incentives and concessions to potential tenants. Multifamily rents softened because of increasing supply. Some banks have pulled back on new CRE lending.

Atlanta — Home builders have increasingly relied on rate buydowns. Higher interest rates and costs have pushed down builder optimism. CRE activity slowed, including high-end multifamily units and industrial. There are growing concerns about financing, particularly for office where there are availability challenges while transaction volumes drop.

Chicago — Construction and real estate activity were relatively flat. CRE prices fell slightly, and, in most sectors, rents were down moderately. Many investors are holding back from the market because they expect prices to fall further than they have. Vacancy rates were flat.

St. Louis — Residential rental rates have been steady. Industrial and commercial construction saw some growth. Labor shortages are proving a limiting factor in some cases, with some turning down projects they can’t handle. Rising interest rates are causing sales to stall. Residential construction was up in some areas, down in others.

Minneapolis — Construction was flat. Office construction “remained moribund.” CRE activity was lower. Multifamily vacancies were up modestly in a few places. Office vacancies have stabilized some, but at high rates. Industrial vacancy levels are healthy but have increased some. 

Kansas City — Lending for CRE is expected to continue deterioration and credit standards have tightened.

Dallas — Office continues to see “sluggish rents and high vacancy rates.” Class A buildings are doing better; other categories and older properties face a “more uncertain future.” Industrial remains solid.

San Francisco — CRE activity was “mixed” in recent weeks. Office leasing continues weak leasing and vacancies are elevated.  Utah saw some stable demand for retail and industrial. Commercial construction activity was down a bit. Plans for new projects were frequently delayed or abandoned.