Federal Reserve: Economy Expands While CRE Remains Stable

The U.S. economy expanded “modestly” between mid-November and early January, while commercial real estate activity remained stable, the Federal Reserve Beige Book reported.

Manufacturers in most Fed districts reported increased sales with several citing a turnaround compared to earlier in 2016. All districts reported varying degrees of employment growth and a majority described their labor markets as “tight,” the Fed said.

Commercial real estate held mostly steady, the Fed noted. 

In the New York district, “commercial real estate markets slackened and high-end housing markets weakened,” the Fed said. Office construction picked up somewhat in Manhattan but trended flat to down modestly across most of the district. 

Philadelphia-area Fed contacts reported that slow and steady incremental growth supports leasing activity, falling vacancy rates, rising rents and new construction. “Industrial and warehouse space is in greatest demand throughout the district,” the Fed said. 

The Cleveland district reported “elevated” commercial construction activity.Boston district Fed contacts maintained a cautiously optimistic outlook but cited significant uncertainty related to domestic politics. Contacts across the district said they expect capitalization rates to increase to keep pace with rising interest rates, noting that such increases imply that rents will have to increase or valuations will have to decrease. “On balance, contacts anticipated that property values will remain flat in 2017,” the Fed said.

Richmond, Va.-area survey participants reported strong industrial leasing, “with more e-commerce tenants looking for large facilities,” and the Washington, D.C., Charlotte, N.C. and Charleston, S.C. areas all saw stronger multifamily construction.

“Office leasing demand remained solid in Dallas-Fort Worth, particularly for new product or recently built space,” the Fed said. “Rents ticked up despite elevated construction.” Dallas-Fort Worth also saw “solid” industrial demand while industrial real estate moderated in Houston.

Atlanta-area Fed contacts continued to indicate improving commercial real estate demand, and the labor market remained tight with stable wages.Manufacturing activity picked up in the Minneapolis area and the manufacturing sector outlook appeared more optimistic, which boosts industrial real estate. Commercial construction held steady at high levels across sectors, the Fed said.

Demand for new commercial construction strengthened in the San Francisco area and one Fed contact noted that activity in the Sacramento area remained robust as well. “Prices for commercial real estate increased, and vacancy rates remained at historical low levels,” the Fed said.