Fed’s Beige Book Says CRE Activity Down with Office a Particular Weak Spot

The May Beige Book from the Federal Reserve says that overall economic activity was little changed overall in April and early in May, the same state as the previous report. Four districts saw “small increases” in activity, six said no change, and two had “slight to moderate declines.” Consumer spending was higher in most districts, especially in leisure and hospitality. Manufacturing was flat, supply chain continued to improve, but commercial real estate decreased overall, with the office sector particularly weak. Commercial construction also declined.

In Boston, CRE saw moderate decline since April. Rents leveled off in industrial and leasing slowed due to a lack of space. Office deal flow slowed both in urban and suburban markets. Retail was mixed, “with grocery-anchored and big-box retail spaces performing the best and the worst, respectively.” Across types, “investment sales slowed to a trickle” and expectations were set for further declines in retail and office.

Residential sales were strong in New York, even now upstate with bidding wars and multiple offers more common. “Office vacancy rates were steady at elevated levels across the District and rents were mostly flat.” New York City’s retail market weakened as rents tended down and vacancy rates, up.

Contacts in Philadelphia saw leasing activity falling and the pipeline for future construction fell moderately.

“Nonresidential construction and real estate activity softened on balance,” said Cleveland. “One general contractor noted that clients have started to ‘put the brakes’ on projects because of high interest rates and general economic uncertainty. Several commercial real estate brokers also noted that elevated interest rates were negatively impacting leasing activity.”

Richmond was a counterexample to the overall tenor, with residential sales “off to a good start” and sales prices still stable. Builders are “offering strong incentives to close deals.” Retail, medical, and industrial/flex space leasing were “robust.”

Atlanta’s CRE conditions were “mixed.” Industrial was good but office, multifamily, and some parts of retail slowed. Increased expenses like property insurance became more of a concern. “Most CRE contacts noted increasing uncertainty and declining property values as a significant industry headwind.”

There was modest decline in construction and real estate in Chicago, including in CRE. High interest rates were a key concern and prices and rents were down. Those in multifamily said projects were moving ahead.

Commercial slowed in St. Louis with concern about “shadow vacancies,” where office still under lease aren’t being used due to remote work, raising worries that leases won’t be concerned. “A majority of construction and commercial real estate contacts reported sales falling short of expectations.”

Non-residential construction was flat since April in Minneapolis, with softening in industrial and commercial construction. “However, increases in project cancellations were seen across the industry, the result of high input prices, higher financing costs, and general uncertainty about the economy.” Volatility of material costs had smaller construction firms unwilling to take on longer-term projects.

Kansas City also reported rising costs as a problem, like increased financing pricing as well as lower LTV ratios, making refinancing difficult. “Some office property managers indicated assessing tenet quality became more difficult because the large companies that are historically stable renters have become more footloose, asking for shorter lease terms, or are reducing their demand for space altogether.”

In Dallas, apartment rents were flat, retail was little changed, and some said evictions seems to be on the rise. Office faced higher vacancies and subdued demand. Outlooks were mixed, “with concern about the uptick in office commercial mortgage-backed securities delinquency and loans coming up for renewal this year.”

Finally, San Francisco reported further weakening in commercial real estate. “In the face of changing workplace needs, leasing activity for downtown office space remained weak, and new office construction stalled.” Retail and industrial demand were stable. Plans for new projects stalled, “which has led to more competitive construction bids.”