Fed’s Beige Book Shows CRE Limping, Not Thriving

The Federal Reserve released its December 2022 Beige Book on Wednesday. Overall, conditions sounded a little worse than in the November Beige Book and people speaking with the Fed said that they expected “little growth in the months ahead” on balance.

“Housing markets continued to weaken, with sales and construction declining across Districts,” the Fed reported. With that, most bankers reported weak mortgage lending, and some said that higher costs started having an impact on commercial lending. “Commercial real estate activity slowed slightly, on average, with more notable weakening in the office market.”

In Boston, the Fed said, “Outside of real estate markets, where the outlook weakened slightly, most contacts remained optimistic for their own prospects, even though some deemed a recession as likely for 2023.” Industrial slowed some as did rent growth but vacancy rates remained “very low” except in office, which had “high vacancy rates and flat rents” and prospects were weakening, where some thought that “pending lease maturations would result in added vacancies.” Refinancing only occurred out of “absolute necessity” as high interest rates “continued to curtail borrowing activity.”

New York saw better conditions. Commercial real estate markets “generally appear to have stabilized, though at weak levels” and “construction activity has remained sluggish.” Office saw mixed results, with “vacancy and availability rates [having] leveled off in New York City, edged up in northern New Jersey, but declined modestly across upstate New York. Office rents were steady to up slightly across the District; aside from New York City, office rents are near or above pre-pandemic levels.” Industrial held steady and rents were up modestly.

CRE construction was steady in the Philadelphia region, although the pipeline is less full and “higher interest rates, tighter credit, and current market uncertainty have delayed many deals, especially for land development.” Demand remains strong for industrial, warehousing, and life sciences. Multifamily is slowing and attitudes toward office are “turning increasingly dour.”

“Despite tepid demand for new construction, nonresidential construction contacts were slightly less pessimistic about demand going forward,” in Cleveland. “One general contractor was hopeful that funds from the Infrastructure Investment and Jobs Act would begin to result in more projects available for bid.”

“Overall commercial real estate activity slowed moderately this period with reduced construction as well as lower leasing activity, investment volume, and asset values” in Richmond. As companies consolidate office space, sublease inventory and vacancy rates are up. “There was decreased demand for office and retail space particularly in central business districts,” the report said. “Property owners were offering bigger concessions rather than lowering asking rents on new leases for both multifamily and retail.”

Atlanta saw lower-tier office, luxury multifamily, and owner-operator retail segments weakening. Industrial was “robust” for now but industry people were concerned about the future. Bid-ask spreads remain wide, and many were concerned that valuations will fall.

In Chicago, construction and real estate activity declined moderately since November. Multifamily construction and remodeling were stable. “Commercial real estate activity decreased moderately, with contacts reporting that obtaining financing for deals was very difficult.” Prices and rents were down.

St. Louis didn’t say much about commercial real estate but noted that CRE loans showed moderate growth.

CRE in Minneapolis was flat since November. “Vacancy rates remained favorable in multifamily and industrial sectors even with new construction, but were unfavorable in office space despite little new construction.” In residential, closed sales were markedly down from November.

Kansas City CRE subleasing increased “rapidly in recent weeks.” Space that the tech sector had occupied is increasingly available. Further subleasing is expected in the coming months, so prices there have dropped, and terms improved for tenants.

In Dallas, CRE and commercial and industrial loans “experienced an accelerated decline from the prior period.” Office space demand remained weak, sublease space availability is up, and while industrial was strong, there was concern about the new construction pipeline that will eventually increase supply.

And in San Francisco, “[c]onditions in the commercial real estate market were stable on net. Office leasing activity was weak, and vacancies remained elevated. Demand for industrial, medical, and retail space was generally strong, particularly in Nevada.”