Fed's Beige Book: CRE Activity Remains Steady

The Federal Reserve released its February 202 Beige Book on Wednesday. The good news is … things haven’t gotten horrible. Which may not seem a big comfort, but the way things have been seemed to head — with Fed Chair Jerome Powell’s congressional testimony making more rate hikes seem likely — catch whatever upside there might be.

“The latest Beige Book suggests that the economy regained some momentum in the first quarter, driven by solid-to-strong growth in retail sales and a stabilization in manufacturing activity,” wrote Oxford Economics in an emailed note. “At the same time, however, it hints at a continued moderation in both wage pressures and consumer price inflation, so the implications for monetary policy are minimal.”

For CRE, the national outlook put it into one sentence: “Commercial real estate activity was steady, with some growth in the industrial market but ongoing weakness in the office market.”

For the Federal Reserve Bank of Boston, “The commercial real estate market in the First District has been relatively stable since the beginning of 2023.” Industrial still sees low vacancy and high leasing demand, although it has of late leveled off. Office was “abysmal” in Hartford, but slightly increasing in Boston and stable in Providence. Food and beverage have relatively strong demand. Department stores and big box retail see higher vacancies. “Most contacts expected commercial real estate activity to weaken moving forward, with the industrial market outperforming other sectors.”

For New York, markets were “little changed” in early 2023. Office vacancy and availability were up a big in New York and northern New Jersey. Retail rents fell slightly but vacancy and there’s some stabilization in construction.

“Market participants in commercial real estate continued to report steady current construction activity but noted additional softening of the pipeline as more projects are delayed, canceled, or redesigned,” in Philadelphia.

Cleveland saw nonresidential construction demand soften and projects moving forward are often self-funded. “Real estate developers also cited weaker demand as customers have become increasingly concerned about high interest rates and general economic uncertainty.”

Richmond CRE activity was unchanged from the December report. The conditions then: “Overall commercial real estate activity slowed moderately this period with reduced construction as well as lower leasing activity, investment volume, and asset values.” Rent costs have moderated in some sectors.

CRE activity slowed in Atlanta for lower-tier office, multifamily, and some parts of retail. “The downward trend in the office sector eased further as more employers required staff to return to the office; however, heightened levels of sublease space remained an impediment to market recovery.”

There was little change from December through February in Chicago. “Demand for high quality space remained solid, with one contact highlighting strong interest in retail space previously occupied by big box tenants. Overall, prices and rents decreased modestly, while vacancies and the availability of sublease space were up moderately.”

For St. Louis, conditions were mixed, with demand for office low but high for industrial. Retail has improved and some projects are “back in demand” for the first time since the pandemic started. But many projects are on hold while investors wait out the uncertainty of rate hikes.

Like some other regions, Minneapolis was flat since the last report, with office struggling as vacancy rates grew as some large tenants downsized. Here, too, industrial remained strong.

Multifamily developers saw conditions deteriorate from already depressed levels in Kansas City. Not only are interest rates a problem, but so is volatility in rents operators can command.

Apartment leasing is “sluggish” in Dallas and occupancy and rents remained flat. Office demand is “lackluster.” Industrial remains solid even though many are concerned about the construction pipeline, with higher capital costs and more stringent underwriting.

CRE activity was largely unchanged in San Francisco. Office demand remains weak “with low rents and high vacancies” and someone in Nevada reporting that “businesses expressed interest in purchasing commercial spaces, rather than renting them.”

Next hurdles: the February jobs report on Friday and the CPI figures next Tuesday.