Fed Beige Book: CRE Construction and Sales Slow Amid Rising Costs and Rates

The Federal Reserve released its October Beige Book about current high-level economic conditions, broken down by the 12 Federal Reserve districts.

“The Beige Book is intended to characterize the change in economic conditions since the last report,” it says. The results show that while change may be inevitable, when it comes to commercial real estate, it’s not inevitably good.

For CRE, here’s how the Fed stated the national current outlook for CRE: “Commercial real estate slowed in both construction and sales amid supply shortages and elevated construction and borrowing costs, and there were scattered reports of declining property prices. Industrial leasing remained robust, while office demand was tepid. Bankers in most reporting Districts cited declines in loan volumes, partly a result of shrinking residential real estate lending.” And then, outlooks in the face of weaking demand “grew more pessimistic.” Following are some specific regional observations.

Boston reported that CRE activity “slowed moderately.” Office took the major hit with low rents and high vacancies, depressed by work-from-home. Industrial saw single-digit vacancy rates with high rents, but multiple contacts see acquisition and leasing contracts falling through. Retail is still a tenant’s market. Owners and operators across multiple property types are boosting renovation budgets. Those in the industry there expect property valuations to fall, “possibly steeply.”

The New York Fed reported “slightly weaker overall” CRE markets although mostly flat. Office rents rose modestly but industrial weakened, with higher vacancy and rents leveling off. Conditions are “deteriorating” and contacts in the industry shared “widespread pessimism” about the near-term outlook.

Philadelphia CRE held steady. Industrial and institutional were strong and rents in multifamily and warehouses were “little changed.” Price growth continued slowing and input prices are a challenge for construction.

Richmond’s new CRE construction continued to suffer from supply chain problems and difficult in obtaining workers.

In Atlanta, CRE was mixed. “Multifamily and industrial market conditions were stable, though some contacts voiced concerns that negative sentiment associated with a potential economic slow-down curbed some activity over the reporting period,” the report said. There’s a shrinking pool of buyers and those active seek greater concessions; there is also a widening bid-ask spread.

For Chicago, activity was down modestly due to weaker office and retail demand. Industrial demand remains robust. Prices were down and rents decreased while vacancy rates and sublease availability were up, all “modestly.”

In the St. Louis region, construction is slow, although supply chain issues and lead times improved a bit. Vacancies are high in office and retail. The type of office still in demand is small floorspace suburban. There are reports of companies selling entire home subdivisions at discount prices out of worry about future demand. Residential and industrial rental rates are slowing.

Minneapolis region CRE “grew slightly,” with “healthy” demand in multifamily and industrial. Retail vacancy rates are better due to consumer demand for products and services. Companies looking to lease new office space look for concessions.

Kansas City noted that residential real estate is an area where “worker layoffs were evident and labor demand was declining” and single-family construction declined, though multifamily housing construction and transactions grew. Bankers noticed weakness in demand for CRE loans and expected deterioration of credit quality.

Dallas also noticed a weak housing market, with expected deterioration in sales and starts. Year-over-year multifamily rent was up but leasing moderated. Office is uncertain, industrial remained solid, and higher capital costs were causing investors to stay on the sidelines.

San Francisco saw flat CRE, with multifamily demand still strong. “Construction of industrial and warehouse facilities remained strong, especially in the Mountain West,” the report said. Office demand was weak, with vacancies rising. And demand for public facilities like airports and prisons were on the rise.