Overall CRE Activity Was Weak: Fed’s Beige Book

In its latest Beige Book on current economic conditions, the Federal Reserve reported, “Commercial real estate activity was weak, particularly for office space, although there were reports of robust demand for new data centers, industrial and manufacturing spaces, and large infrastructure projects.”

Boston: A “cautiously optimistic” general outlook didn’t extend to CRE, “which remained relatively weak—especially for the office sector—though it did not worsen any further.”

New York: CRE markets mostly held steady. New York City office vacancy rates remained near historical highs. Office markets outside of the city proper “remained more resilient.” Also, “financial strain among property owners in New York City continued to build, with upcoming loan maturities foreshadowing further increases in defaults in the coming year.”

Philadelphia: There was “modest growth” in commercial real estate lending. Non-residential markets saw leasing activity and transaction volumes to “decline slightly.” The CRE construction pipeline continued to shrink.

Cleveland: A recent “rebound” in non-residential construction continued in part due to strong manufacturing space demand. Larger projects are often in stasis due to high interest rates.

Richmond: CRE markets “improved slightly.” Office tenants looked to upgrade their space outside of central business districts. Landlords offered concessions. Property values were down. A lack of available financing constrained new construction, “especially for office and multifamily projects.”

Atlanta: CRE conditions “declined” with office at the lead. Expected delivery of “sizeable” new inventory, especially in multifamily and industrial, is expected to keep most markets challenged.

Chicago: Overall, construction and real estate activity “decreased slightly,” thought with non-residential construction somewhat up. There was still a strong pipeline for data centers, industrial, and pharmaceutical. But high building costs and tight credit made it difficult to start new projects.

St. Louis: Demand for office space in downtown areas was “sluggish.” Louisville saw two large tenants plan to vacate their downtown offices. Retail space demand in Memphis was strong. Recent increases in insurance costs led to affordability challenges. Slow lending and a lack of skilled labor have made starting new projects difficult.

Minneapolis: CRE activity was flat, with office experiencing negative absorption “due in part to soft employment in office-using sectors.” Industrial vacancies were up, but so were rent rates.

Kansas City: CRE contacts were skeptical about property valuations as they didn’t want to “catch a falling knife” in a downturn. Bank internal stress testing pointed to potential deterioration as CRE loans mature in a higher interest rate environment. New private development has “all but ceased,” especially for multifamily.

Dallas: New multifamily inventory is keeping rents there flat. Office leasing was weak with higher vacancy rates. Some potential CRE tenants were screening landlord credit before leasing up. “Outlooks were mixed, with economic uncertainty, high capital costs, and tight credit standards cited as deterrents to launching new projects or attracting investors.”

San Francisco: CRE activity was largely unchanged since the previous report. Industrial and retail demand stayed strong. “Public infrastructure spending continued to boost overall construction activity” while “private-sector commercial projects slowed on account of elevated costs and limited availability of skilled trades subcontractors, such as plumbers and electricians.”