Federal Reserve Sees Multiple CRE Markets Softening

According to a recent Federal Reserve report, there’s still growth in overall economic activity, but reports on real estate in 11 of its 12 districts suggest that things are broadly cooling under the pressure of ongoing price increases and higher interest and mortgage rates.

At the beginning of the month, the Federal Reserve published its Beige Book, in which it “gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources.”

The overall news of the economy still sounds good. “All twelve Federal Reserve Districts have reported continued economic growth since the prior Beige Book period, with a majority indicating slight or modest growth; four Districts indicated moderate growth,” the report states. “Four Districts explicitly noted that the pace of growth had slowed since the prior period.” 

Some of what will concern commercial real estate comes from inference, with variations by area. For example, retail and restaurants have seen softening with inflation. In Boston there was flat to moderate growth for retailers but restaurant profits fell on steep increases in costs. New York retailers were adding staff, though recently non-auto retailers saw a sales dip. Atlanta experienced moderated retail sales and Dallas experienced a dip. In San Francisco, however, retail sales increased as they did in Chicago and Richmond. 

Similarly, markets varied in office, where Boston had “[h]igher-end and suburban office spaces enjoyed improved leasing demand, but activity remained limited for downtown and older office buildings, and uncertainty concerning return-to-work plans lingered.” According to information from the San Francisco Fed, developers are re-evaluating commercial projects “due to higher interest rates” and uncertainly over future demand for office space. And yet office leasing in Dallas improved, though “underwriting standards for multifamily deals were gradually tightening.”

“Lower-tier office demand was identified as cooling somewhat,” in Atlanta, as “[e]mployers’ return-to-office stances appeared to be mitigating some of the downward trend in the office sector; however, heightened levels of sublease space remained an impediment to recovery.”

Industrial activity overall, while remaining “strong,” slowed further since the last round as big players sought less space than they did at the height of the pandemic. That brings to mind reports of Amazon seeking to dump excess warehouse space—a total of perhaps 10 million square feet—at locations including New York, New Jersey, Southern California, and Atlanta.