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Federal Reserves Outlook Remains Positive For Commercial Real Estate

Overall National Economic Activity

Economic activity expanded at a slight-to-moderate pace in March and early April. While most Districts reported that growth continued at a similar pace as the previous report, a few Districts reported some strengthening. There was little change in the outlook among contacts in reporting Districts, with those expecting slight-to-modest growth in the months ahead. Reports on consumer spending were mixed but suggested sluggish sales for both general retailers and auto dealers. Reports on tourism were generally more upbeat. Reports on loan demand were mixed, but indicated steady growth. Reports on manufacturing activity were favorable, although contacts in many Districts noted trade-related uncertainty. Most Districts reported stronger home sales, although some Districts noted low demand for higher-priced homes. Among reporting Districts, agricultural conditions remained weak, with contacts expressing concerns over the impact of current and future rainfall and flooding.

Commercial Real Estate

Bostin: Commercial real estate contacts in the First District offered mixed reports. In Hartford the office leasing market was described as sluggish, with activity limited to short-term renewals. Providence has seen rising vacancies in the class A office market recently, which is expected to blunt or halt the growth of office rents there. The Boston office market was characterized as historically strong, with robust leasing activity dominated by the life sciences and high-tech sectors. Very low vacancy rates in Boston have boosted speculative office construction in recent months, but significant amounts of new space will not come on line for several years. Construction activity in Connecticut was still largely limited to the multifamily housing market. Demand for industrial property, for lease and for purchase, remained very strong in greater Boston and continued to moderate in Connecticut. In Rhode Island, industrial property values and rents increased noticeably in the past year amid strong demand and tight supply, although the volume of sales transactions was restricted by low inventories. Investment sales markets were described as stable around the region, and demand for commercial real estate mortgages remained high in greater Boston and southern New Hampshire.

The outlook remained pessimistic for Connecticut, where a contact expected conditions to remain flat or slow further in 2019. The outlook for Providence was for stable, modest activity in the near-term and a possible slowdown in 2020. Boston contacts were cautiously optimistic that the good times would continue, although one expressed increasing nervousness about the potential vulnerability of the commercial real estate market to a bust in the high-tech sector.

New York: Commercial real estate markets have been steady to slightly firmer in the latest reporting period. Office availability rates and asking rents have been steady overall. The market for retail space has been mixed, with rents edging down across the New York City area but rising modestly across most of upstate New York. Retail vacancy rates have been mostly flat. Industrial markets, on the other hand, have continued to strengthen: rents have continued to climb at a moderate rate, while availability rates have held steady at fairly low levels.

Philadelphia: On balance, commercial real estate construction and leasing activity continued to edge down slightly from relatively high levels. Contractors noted that activity was about the same, but the backlog is smaller, and design firms are less busy. Demand remained strong for industrial and warehouse space; however, absorption has become difficult in smaller markets with an insufficient supply of labor.

Cleveland: Construction activity in the District increased moderately over the period, while real estate activity remained stable. In the current period, growth in nonresidential construction has rebounded to the moderate pace seen before the typical winter slowdown in the prior survey period. Education, warehousing, and industrial projects especially picked up over the period. Nonresidential backlogs increased. Homebuilders pointed to lower mortgage rates, urgency caused by increasing home prices, and the spring selling season as spurring improved demand. Contacts reported that lower-priced homes outsold more expensive homes. Real estate agents reported stable sales. Nonresidential builders expect demand to remain strong, but homebuilders are more uncertain about 2019 overall and are therefore holding off on hiring and capital expenditures.

Richmond: Commercial real estate leasing rose modestly in recent weeks. Brokers reported strong demand for industrial space and office leasing was reportedly flat to increasing modestly in some markets; however, retail leasing slowed across markets. Vacancy rates increased slightly for some office and retail markets. Meanwhile, rental rates were reportedly stable to increasing modestly. Commercial sales rose modestly, according to a few brokers, with warehouse and industrial building sites representing the majority of transactions. Commercial construction increased modestly in some regions. Multifamily leasing remained healthy in most markets, while multifamily construction remained steady.

Atlanta: Overall economic growth continued to positively influence and propel commercial real estate fundamentals in most District markets and property sectors. Multifamily occupancies remained tight, and overall rents grew at a more robust pace compared with a year ago. Industrial sector dynamics remained robust, while office fundamentals accelerated. Contacts noted that moderating interest rates may encourage some commercial buyers back into the market.

Chicago: Construction and real estate activity increased slightly on balance over the reporting period. Nonresidential construction increased slightly on top of a strong level, and contacts in some parts of the District reported rising backlogs. Commercial real estate activity was little changed. Rents and the availability of sublease space were flat, though vacancies edged up.

St. Louis: Commercial real estate activity was mixed. Contacts reported a healthy market for office space in Memphis. Contacts in Memphis and Little Rock reported robust demand for multifamily units. Demand for retail space decreased modestly across the District.

Commercial construction activity declined slightly. Contacts in Memphis and Little Rock noted healthy levels of activity, but mostly in the form of renovations rather than new projects. Contacts reported that shortages of labor, combined with inclement weather, have limited new construction.

Minneapolis: Commercial real estate grew modestly since the last report. In Minneapolis-St. Paul, multifamily permitting slowed down in the first quarter, but new-unit deliveries this year were expected to remain strong and vacancy rates tight. New office construction in the region has fallen, but a significant amount of renovated space was scheduled to re-enter the market this year. Industrial vacancy rates remained low. In Sioux Falls, multifamily development has slowed and vacancy rates have risen to about 10 percent. Retail vacancy was high in the city’s busiest retail corridor, but activity was reported to be stronger in other, outlying areas of the region. Residential real estate in the District was lower compared with the same period a year ago. February home sales were mixed compared with a year ago, rising modestly across Minnesota, but falling in many other markets. However, preliminary March data suggested home sales fell in Billings, Sioux Falls, and Minneapolis-St. Paul. Sources expected a rebound in home sales in the near term.

Kansas City: Commercial real estate activity edged up since the previous survey period as sales, absorption, construction underway, completions, and prices rose while vacancies fell. Respondents in the commercial real estate sector projected an acceleration in activity moving forward.

San Fransisco: In the commercial real estate market, contacts reported robust activity. Across the District, contacts generally noted that construction activity continued to follow a strong trend. Contacts noted that rents for industrial spaces increased moderately. In California, a contact observed that building activity slowed somewhat after the completion of several large projects.

Federal Reserve Bank Dallas

Moderate expansion continued in the Eleventh District economy. Manufacturing output increased. Retail sales were flat, and growth in the nonfinancial services sector softened. Loan volumes expanded led by growth in commercial real estate lending, and home sales rose, further boosting optimism in outlooks. Soil moisture was mostly adequate, though rains delayed crop planting in some areas. Activity in the energy sector expanded. Employment rose moderately, despite a tight labor market. Wage growth remained elevated, while price growth was mixed. Outlooks stayed positive or improved in most sectors with the exception of nonfinancial services.

Dallas Commercial Real Estate and Construction

Industrial leasing was solid in Austin and Dallas-Fort Worth but slowed in Houston in the first quarter. Solid job growth and limited new supply is supporting absorption in the Houston office market, although overall conditions remain soft. Office leasing slowed in Dallas-Fort Worth in the first quarter.

This data is sourced from the April 17, 2019, Federal Reserve Beige Book.

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