The Fed: Housing Stall Boon for Commercial

Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, outlined the connection during his keynote talk at yesterday's 6th Annual Real Estate Symposium at the Hilton Lincoln Centre. The Dallas Fed leader said that, on one hand, slower housing sales and starts mean fewer homeowners will be refinancing to get home equity, which has been "fueling a consumption boom and directing savings from investment." On the other hand, durable goods orders are on the rise, suggesting that businesses are beginning to increase capital investment in their plant capacity.

"The stirring of business investment has helped spark a revival in commercial real estate construction to accommodate the many firms aiming to expand their workplaces," Fisher said. "We may be seeing the start of a great rotation away from household spending to investment and to more healthy and balanced growth."

Fisher pointed out that Texas' economic strength is evidenced in local and state multifamily markets. "So far this year, apartment demand is keeping up with supply, meaning vacancy rates are around 10% in most Texas markets," he said.

The Dallas office market is making a strong comeback although it still has an average vacancy rate of 23%. In contrast, Fort Worth's office market is just 6% vacant. Fisher said the stats are misleading because demand for large office spaces is huge throughout the area, driving construction in the Dallas CBD, Uptown and Far North submarkets.

But, Fisher warned there are some blips in the generally rosy perspective. In the retail arena, vacancies are hovering 10% while demand for space is declining. Additionally, the reduction in cap rates nationally is hitting locally. "We've seen the effect of this here in Dallas with the cancellation of some high-profile building or conversion plans," he said, "and I expect there will be more."