Economic Activity Expanded But CRE Softened, Fed Says

The economic news from the Federal Reserve’s May 2024 Beige Book is a mixed bundle and, as has been the case, the overall atmosphere is doing better than commercial real estate.

“National economic activity continued to expand from early April to mid-May; however, conditions varied across industries and Districts,” they wrote. “Most Districts reported slight or modest growth, while two noted no change in activity. … Conditions in the commercial real estate sector softened amid supply concerns, tight credit conditions, and elevated borrowing costs.”

Here are some details from each of the 12 Fed districts:

Boston: CRE activity “decreased slightly” since April. Industrial leasing “softened modestly overall but declined sharply in Connecticut.” Industrial leases rose but at a slower pace than in recent months. Retail saw stable activity and rents. Investment sales were “mostly frozen” because of interest rates. Banks kept extending underperforming office loans, hoping that interest rate declines might allow refinancing, “but contacts remained concerned that a significant uptick in foreclosures was inevitable, especially in the class B market.”

New York: CRE markets “weakened further,” with “significant increases” in Northern New Jersey industrial vacancy rates between tenants exiting leases and new space deliveries. Manhattan offices were up some after a “notable worsening” in Q1. High-end office buildings see strong demand; there’s declining demand for lower-quality properties. “Rent concessions for office leases are at historic highs.” Upstate New York and New York City suburban office markets have been “more resilient.” CRE sales are at new low levels. Construction activity is falling.

Philadelphia: “District banks reported strong growth in commercial real estate lending and home mortgages” and yet in “nonresidential markets, leasing activity and transaction volumes continued a slight decline.” Office is subdued, and in “nonresidential markets, leasing activity and transaction volumes continued a slight decline.”

Cleveland: There was “moderate increase” in CRE construction activity. “Construction firms experienced an uptick in activity for public projects, and another contact saw more demand related to green energy projects, though some other developers said higher interest rates still dampened demand.

Richmond: CRE activity was up slightly, with retail leasing up and new inventory “quickly absorbed,” keeping vacancies low. Office leasing was up slightly for Class A but down for B and C. Leaning and absorption were strong for multifamily. Few construction projects were getting greenlit “as interest rates made it hard for deals to be financially viable amid continued high prices of material and labor.”

Atlanta: CRE conditions were “mixed.” Office and multifamily “continued to slow” with multifamily and industrial “oversupply” from new construction delivery weighing on market conditions. Vacancy rates were up, and rising insurance costs interfered with activity, especially in coastal markets. Loan underwriting remained tight.

Chicago: There was a slight decrease in CRE activity. “Contacts noted that greater equity commitments were required to close large deals,” they wrote. “Property values continued to trend lower, and rents were mostly unchanged. Vacancy rates moved higher.”

St. Louis: CRE leasing slowed from the previous report and construction was “stagnant.” Developers stayed on the sidelines with the prospects of continued high interest rates. Transportation, federal, and lodging projects kept construction demand high.

Minneapolis: “Flat” and “soft” were the two overall descriptors. “Office vacancy in Minneapolis-St. Paul stabilized, but loan renewals were reportedly seeing discounted property appraisals and high loan-to-value ratios,” they wrote. Industrial vacancy rates rose some. Because new construction “stopped in its tracks,” multifamily benefited.

Kansas City: Some moderately good news was that after several quarters of decline, multiple CRE markets “stabilized … albeit at low levels.” That said, increasing vacancy rates pushed rents down. Sales were up moderately with “slight increases” in transaction prices. “Contacts reported only modest increases in private equity funding being deployed but generally indicated that substantial amounts of equity remained on the sidelines,” they said. “Bank lending and lending from insurance companies to the CRE sector reportedly declined recently.”

Dallas: Conditions were largely flat from the last report. Multifamily leasing growth was moderate with increased supply putting downward pressure on rents and occupancy. Office leasing was “subdued” and concentrated mostly in Class A. Industrial demand was up “moderately,” with increases in vacancy keeping rents stable.

San Francisco: CRE was largely flat. Retail demand was up, leading “to lower vacancies and higher rents.” New CRE construction was “stable” and builders continued through a “backlog of existing projects.”