CRE Activity Showing Signs of Stability Per the Fed’s Beige Book

On Wednesday, the Federal Reserve published its February 2023 Beige Book. The good news is that the situation hasn’t gotten much worse. Which might not seem like much of a consolation, but given the direction things have been going—more rate hikes seem imminent as a result of Fed Chair Jerome Powell’s congressional testimony.

According to the most recent Beige Book, the economy gained some impetus in the first quarter. This can be attributed to stable manufacturing activity and growth in retail sales, according to a report from Oxford Economics. The consequences for monetary policy, however, are minor because it also suggests that wage pressures and consumer price inflation will continue to moderate.The national outlook for commercial real estate activity was solid, with some growth in the industrial market but persistent stagnation in the office market.

According to the Federal Reserve Bank of Boston, the commercial real estate market in the First District has remained largely stable since the beginning of 2023. The industry still experiences low vacancy and high lease demand, although it has recently leveled off. Food and drink are in reasonably high demand. Large-format retailers and department stores have more open positions. Most contacts anticipated a decline in future commercial real estate activity, with the industrial market outperforming other sectors.

Markets in New York were “little changed” at the beginning of 2023. Office availability and vacancies increased significantly in northern New Jersey and New York. Although vacancy rates and retail rents are both marginally down, development has stabilized to some extent.Market players in commercial real estate continued to report stable current construction activity but observed more weakening of the pipeline as more projects were delayed, canceled, or redesigned, according to a report from Philadelphia. 

The demand for non-residential buildings in Cleveland slowed, and new projects are frequently self-funded. Real estate developers also blamed decreased demand on consumers’ growing worry over high interest rates and the status of the economy in general.

The CRE activity in Richmond remained constant from the December data. Rent costs have moderated in several sectors, and overall commercial real estate activity has slowed moderately this period due to lessened construction, leasing activity, investment volume, and asset values.Lower-tier office, multifamily, and some retail CRE development in Atlanta decreased. As more firms compelled employees to return to the office, the negative trend in the office sector slowed further; yet, elevated levels of sublease space remained a barrier to market recovery.

Between December and February in Chicago, not much changed. One contact highlighted substantial interest in retail space that had previously been held by large box tenants as evidence that the need for high-quality space was still strong. Overall, prices and rentals increased a little bit, while vacancies and the number of spaces available for subleasing also increased a little bit.Conditions in St. Louis were inconsistent, with low office demand but high industrial demand. Retail has improved, and for the first time since the pandemic began, several projects are “back in demand”. But a lot of projects are on hold as investors wait out the uncertainties surrounding rate increases.
Minneapolis remained steady since the last report, similar to some other areas, with offices struggling as vacancy rates increased as some significant tenants downsized. Industrial activity also remained robust in this area.The situation for multifamily developers in Kansas City worsened from already poor levels. In addition to interest rates, another issue is the unpredictability of the rents that operators can demand.

In Dallas, apartment leasing is “sluggish,” while occupancy and rental rates have stayed stable. Although many people are worried about the building pipeline, with rising capital costs and stricter underwriting, office demand is “lackluster” and industrial demand is still strong.

In San Francisco, CRE activity remained basically constant. With low rates and many vacancies, office demand is still poor, and according to a survey from Nevada, companies showed more interest in acquiring commercial facilities than renting them.

The February jobs data on Friday and the CPI figures on Tuesday are the next challenges.