Federal Reserve: Economy, CRE Both Expand

Economic activity expanded at a “modest to moderate pace” between late June and late August while commercial real estate activity expanded slightly, the Federal Reserve Board’s Beige Book reported yesterday.

“Economic activity expanded at a modest to moderate pace across all 12 Federal Reserve districts,” the Beige Book said. “Commercial real estate activity increased slightly.”

Most data were collected before Hurricane Harvey made landfall on the Gulf Coast, the Fed noted.

New England commercial real estate markets remain somewhat mixed, the report said. In most of the region investor demand for industrial properties remained robust and banks bid “aggressively” to lend to industrial buyers. “At the same time, some banks required more equity on loans for construction of new apartments,” the Fed said.

New England Fed contacts had a cautiously optimistic outlook on balance.

Commercial real estate markets were generally steady in the New York area. Commercial construction has been flat and banks reported some tightening in commercial mortgage credit standards.

The market for office space softened a bit in upstate New York and Long Island but tightened “modestly” in New York City, the Fed said. The market for industrial space–which had been tightening–lost some momentum. Industrial rents continue to rise, running 8-10 percent above comparable 2016 levels.

In the Philadelphia district, Fed real estate contacts reported slight growth in CRE construction activity, which had been flat earlier in the summer. “Leasing activity also appeared to grow slightly at best,” the report said.

Fed contacts also reported a tightening Philadelphia office market with steady demand being met mostly by changing space utilization and shifting locations within the region’s footprint rather than by new office construction. “The rental market is shifting in favor of landlords,” the report said.

The Cleveland district commercial real estate market remained “elevated,” the Fed reported: “Building contractors reported strong backlogs, though inquiries are beginning to show signs of slowing.”

The district’s highest demand was for commercial property development, especially office buildings. Office vacancy rates are stable and asking rents are slowly rising, the Fed said. A strong increase was noted in selling prices for office properties during first-half 2017 compared to a year ago.

In the Richmond, Va., area commercial real estate leasing rose modestly in recent weeks, slowing slightly from the previous period. “Industrial leasing transactions generally declined while retail leasing and sales remained strong,” the report said. Office leasing remained limited, but a few brokers reported an increase in office building sales.

The Federal Reserve’s Atlanta-area contacts said demand continued to improve and construction increased from a year ago. “Many district commercial real estate contacts reported improvements in demand that resulted in rent growth, but they cautioned that the rate of improvement varied by metropolitan area, submarket and property type,” the report said. “The majority of commercial contractors indicated that the pace of nonresidential construction activity had increased from one year ago, but a growing share noted that activity was down slightly. Most contacts reported healthy backlogs.” 

Commercial real estate activity remained strong in the Chicago district, edging up further on balance over the reporting period. “Commercial vacancy rates declined slightly and both commercial rents and the availability of sublease space changed little,” the Fed said.

The St. Louis, Mo. district reported CRE activity improved “modestly” since the last report in June. “Contacts reported relatively strong demand for most property types, particularly office and industrial,” the report said. “However, contacts indicated a decrease in multifamily demand relative to a year ago.”

Commercial construction activity remained strong in this district. Multiple contacts reported an optimistic outlook for the rest of the year.

The Federal Reserve Bank of Minneapolis said commercial real estate grew “modestly” in July and August. “Industrial vacancy rates were at very low levels in Minneapolis-St. Paul, though rental rates were flat,” the report said. “Office vacancy rates were flat to slightly lower.”

Overall real estate activity in the Kansas City, Mo., area continued to increase at a slight pace in late July and August. “Commercial real estate activity continued to expand modestly, as absorption, completions, construction underway, sales and prices rose while vacancy rates declined,” the Fed said. “Commercial real estate activity was expected to continue to increase at a modest pace moving forward.”

In Texas, apartment leasing remained active in Austin, but rent growth has moderated and incentives are being offered at the high end in some submarkets. “Activity in Dallas-Fort Worth remained strong, although contacts expect growth to moderate,” the Fed said. “Apartment demand firmed up in Houston following earlier weakness and outlooks were positive, with contacts expecting continued gradual improvement.”

Real estate market activity continued to grow at a “robust” pace in the San Francisco district. “Overall, commercial real estate activity picked up to a moderate pace,” the Beige Book reported. “Declining foot traffic at large shopping centers continued to push up vacancy rates. Rents for commercial property edged up slightly.”