CRE Is Weakening According to the Fed Beige Book

Contents of the Federal Reserve’s July Beige Book seem like they could have been recycled from other months, except maybe a little worse.

In general, there was a “moderate pace of growth” in seven of the 12 districts. The other five noted flat or declining activity — an increase of three over last month’s report, so slightly worse. Wages and prices rose moderately, and employment was widely flat or up slightly. Some districts said manufacturing employment had declined because of slowdowns in new orders. Labor turnover was lower, reducing the need to find new employees.

As for commercial real estate lending, most banks reported only slight changes, if any.

Boston: CRE activity was flat with “stable industrial leasing, steady increases in the retail sector, and seasonably slow office activity.” Contacts expected higher foreclosures and the outlook for office properties weakened. Industrial vacancy rates were “extremely low,” with rents stabilized well above 2019 rates. Bank lending to CRE remained weak, although CMBS and information companies provided funding.

New York: CRE markets weakened further as demand softened. NYC office vacancy rates increased. Many tenants are putting space up for sublease rather than waiting for leases to expire. Some legal and financial companies are signing more office space, but tech is shedding a lot of space. Industrial cooled “with price-sensitive tenants seeking lower-quality space.” Rents in Northern New Jersey are moving down.

Philadelphia: Office leasing activity and transaction volumes began to pick up “as people are now selling at realistic values.” Workers are increasing their in-office time. Companies considering lease renewals want smaller spaces. “The problem is largely constrained to the local Philadelphia market, where one Center City building recently sold for a third of its pre-pandemic price.”

Cleveland: Non-residential construction declined moderately over the last two months because of higher financing costs. One contact said large infrastructure projects were in a “holding pattern.” Other builders saw stable, strong demand.

Richmond: CRE activity picked up slightly. Retail leasing was up, keeping vacancy rates low. In office, leasing for Class-A was up. That for Class-B and C declined, with many tenants upgrading from B to A. The vacancy gaps between classes were up. Multifamily leasing and absorption were up. However, higher interest rates and local government policies made project approvals more challenging.

Atlanta: CRE activity was mixed. Office and multifamily saw slowing activity, rising vacancy rates, and flat-to-declining rent growth. Foreclosure activity was on the rise. Industrial starts slowed. “Appraisal accuracy remained challenging, influencing transaction levels,” a condition that hasn’t been raised in other areas. Loan maturities have caused general concern. And some CRE loans saw delinquency levels over pre-pandemic ones.

Chicago: Non-residential construction and sale prices were unchanged. According to several contacts of the bank, the industry has adjusted to higher interest rates. Prices were flat and office tenants were downsizing but updating spaces. Some restaurants closed because of a lack of help. There was lower demand for CRE loans.

St. Louis: CRE conditions are mixed. Office leasing is depressed, with one report saying that on renewal, square footage was down 20% to 30%. Industrial has been down, year over year but leasing activity is now up slightly. Retail is strong with low availability. In multifamily, supply increased and demand was strong.

Minneapolis: CRE activity was flat to slightly down. Industrial vacancy was slightly higher. Office owners had a “glut of space” and refinancing challenges. A lack of new construction has benefited owners of retail and multifamily, which controlled vacancy rates.

Kansas City: CRE lenders saw a “slight rise” in covenant breaches but were sure they could work through the “few problem loans.” Vacancy rates rose across property types “but with stark differences across their reported drivers.” New industrial and multifamily inventory were above the 10-year average. Office space demand remained “subdued” and office leasing declines drove higher vacancies.

Dallas: CRE was largely unchanged from the previous month. Apartment leasing was up but increased supply pushed down on occupancy rates and rents. Office leasing was sluggish again. Retail and industry demand grew “moderately” and rents were stable or slightly up. Outlooks are cautious. Bankers expect more credit tightening for CRE loans.

San Francisco: Activity was mixed. Demand for offices kept decreasing; for industrial, it was solid. High financing and material costs, downward pressure on valuations, and some remaining supply chain problems “hampered construction.” Multifamily completions increased vacancy rates, especially in high-end markets. Business lending, especially for CRE, remained “muted.”