Federal Reserve: CRE Activity ‘Flat to Expanding’

Economic activity expanded “slightly to moderately” in June while commercial real estate activity was flat to expanding in most areas, the Federal Reserve Board’s Beige Book reported yesterday.

Conditions in New England commercial real estate markets remained mostly unchanged in recent weeks, the Fed said. “Office leasing activity remained very light in Hartford (Conn.) and light-to-moderate elsewhere in the district…Investment sales demand held steady across the district, and Boston’s premier properties remain in favor among foreign investors.”

New York commercial real estate markets were “mixed but slightly softer,” the Fed said. Commercial construction picked up modestly and banks reported loan demand was steady to softer, while delinquency rates continued to decline.

“The market for [New York] office space has been steady to slightly weaker; availability rates edged up while asking rents slipped in New York City but were little changed elsewhere,” the report said. “However, the industrial market has strengthened further, with availability rates declining and asking rents up roughly 10 percent over the past year. In contrast, the market for retail space has continued to slacken, with vacancy rates rising to multi-year highs and asking rents little changed.”

In the Philadelphia area commercial real estate loans exhibited strong loan volume growth but Fed contacts reported essentially no change in construction activity. One contact noted that the construction pipeline may have started to diminish.

Cleveland-area commercial real estate activity remained strong at “elevated” levels, the report said. Contractors reported strong demand for education and healthcare-related buildings and for commercial buildings for e-commerce distribution. “In contrast, contacts noted low demand for retail space in both enclosed malls and shopping centers.” 

The Richmond, Va. area saw moderately increasing commercial real estate leasing and construction activity, the Fed said. Industrial leasing transactions and speculative construction picked up while retail leasing and sales remained strong. “Office leasing was still constrained in most locations, with some agents reporting rising demand for Class A space,” the report said. “Rental rates increased modestly in most industrial, retail and office markets.” 

Atlanta-area commercial real estate professionals reported improving demand, resulting in rent growth and increased absorption, but they cautioned that improvement varied by metropolitan area, submarket and property type. “While most reports indicated that the pace of multifamily construction matched or exceeded the year-ago level, a growing share of contacts are reporting that multifamily construction is down,” the report said. “Looking forward, the majority of district commercial construction contacts expect nonresidential construction activity to increase, while expectations for the pace of multifamily construction was mixed.”

Commercial real estate activity remained strong and even picked up slightly in the Chicago area, the Fed said, with the industrial sector leading the way. Commercial rents edged up as vacancy rates and the availability of sublease space decreased slightly.

But CRE activity remained flat in the St. Louis, Mo. area, the Fed said. Contacts reported that rising interest rates have had very little impact on commercial real estate markets.

The Minneapolis area saw “mixed” results, the Fed said. Retail vacancy was “pretty stable” while office vacancy appeared to be rising due to new space coming to market. “Despite strong construction activity, multifamily vacancy rates remained low in the region and rents were rising,” the Fed said.

Commercial real estate activity continued to expand modestly in the Kansas City area as vacancy rates declined and absorption, completions, construction underway, sales, prices and rents increased. Fed contacts said they expect to see a “modest” commercial real estate sector expansion in the coming months.

Dallas-area apartment demand improved and occupancy edged higher in the second quarter following a generally slow first quarter, the Fed said. “Office demand in Dallas-Fort Worth remained solid and rent pressure persisted, although rental rates at the very high end have been relatively flat,” the Beige Book said. “One contact expressed some concern about the elevated level of office construction in the metroplex.”

In San Francisco real estate market activity picked up to a “robust” pace, the Fed said. Commercial construction activity was solid and Fed contacts reported increasing investment aimed at remodeling and repurposing large retail spaces for health care and entertainment services. Financing conditions for commercial projects tightened slightly.