The May Beige Book from the Federal Reserve has revealed a troubling sign: “economic activity has declined slightly since the previous report,” due to “elevated levels of economic and policy uncertainty.”
Half a dozen of the Fed’s districts saw slight to moderate declines in activity; three saw no change; and three reported slight growth.
“All in, the Fed's regional survey doesn’t clarify whether the economy or inflation will be hit harder by tariffs, just that both will take a blow,” Sal Guatieri, a senior economist at BMO Economics, wrote in a note.
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Oxford Economics called the report “a picture of an economy buckling under a cloud of uncertainty.” The Beige Book report added that “all districts said that tariffs were putting upward pressure on prices, with some describing price increases as ‘strong, significant, or substantial.’”
“On balance, the outlook is slightly pessimistic as businesses are in a ‘wait and see’ mode, mirroring the Fed’s posture,” wrote Jeffrey Roach, chief economist for LPL Financial. “As a result, growth in the coming months will likely be muted.”
The national summary didn’t contain specific remarks about commercial real estate, but the regions did.
In Boston, CRE activity was largely flat, although the city and Providence office leasing expanded modestly. Industrial leasing slowed in Hartford. In general, contracts are taking longer to close and foreign investors were “skittish.”
The New York region saw slightly improved markets. Office vacancies kept declining, and rents picked up, but the supply of higher-quality office space is getting scarce. Northern New Jersey’s industrial market leveled off after some earlier weakness.
In Philadelphia, there was a slight decline in CRE lending but slight growth in nonresidential CRE leasing activity and transaction volumes. Logistics and warehousing saw an uptick in deals, led by smaller warehouses.
Richmond saw CRE flatten overall. Companies have been hesitating to make investments. The biggest hit went to industrial. According to one South Carolina contact, “Industrial deals have dropped with pens in hand, companies freeze because they can’t figure out the rules of this tariff game.”
Atlanta saw steady CRE conditions “on balance.” Office vacancy rates fell slightly and sales prices were up. Industrial inventory was up, which drove up vacancies, already elevated because of tariffs. New multifamily development slowed moderately because of higher construction costs.
Chicago CRE activity was unchanged. Industrial space demand “remained robust." While there was also demand for retail space, it depended significantly on the locations. Gaps between buyer and seller valuations were often significant.
In the St. Louis region, CRE activity was mixed. Some contractors were pushing to finish construction because of rising costs. Others weren’t starting projects because of this obstacle and uncertainty.
Minneapolis CRE was flat. Office vacancy rates remained high, while leasing was picking up and larger tenants downsized space needs. Industrial and retail vacancies were low because of low new development. Multifamily vacancies are expected to drop, also because of low new construction starts.
St. Louis concentrated on residential homes and said nothing about CRE development.
Dallas CRE activity was steady, with multifamily leasing strong. Rent growth remains “lackluster” because of elevated supply. Industrial demand was solid, but leasing activity was falling off because of tariff uncertainty. Lenders had concerns about loan performance.
In San Francisco, CRE markets softened a little. Demand for leases fell in the face of uncertainty about trade policy and economic conditions. New property construction remained slow.
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