Fed–‘CRE on a Roll’

The latest Beige Book has made generous statements about commercial real estate's market conditions.

The latest Beige Book is out, and it says that commercial real estate market conditions were “stable or improving in most Districts.” Coming from the Fed, those are fairly strong words, since the central bank typically goes out of its way to avoid hyperbole, or even interesting prose. The book also said: “Commercial vacancy rates declined in Boston, Chicago, St. Louis, and Kansas City. In Dallas, contacts reported that commercial real estate had steadied or slowed since the previous report.” It should be noted that the Beige Book, which is formally called the “Summary of Commentary on Current Economic Conditions by Federal Reserve District,” talks in terms of Federal Reserve Districts, and not only the cities that are home to the member banks of the Fed. Thus “Boston,” in this context, actually describes New England, and Chicago most of the Midwest. Still, they’re useful geographic shorthands for regional economic activity.

The Beige Book further noted that the apartment market remained strong in most districts, with rents up in New York, Chicago, and San Francisco. “Contacts in Cleveland noted an increased demand for multi-family housing,” the book said, and “contacts in Dallas noted that apartment demand remains strong” (and presumably, the Fed has contacts that know something about their districts). Also: Commercial construction increased in most districts as well, with various contacts reporting “stable to strong multi-family construction.” Chicago reported that moderate growth in CRE was driven mainly by industrial buildings, but in Boston spec construction remains limited due to high construction costs.

For-sale residential conditions were more mixed, according to the Fed, as befitting the relative sluggishness of the residential market. Home sales and prices increased in most districts; construction activity wasn’t as positive, with some districts reporting disruptions due to severe weather. Residential sales were up in Boston, Philadelphia, Richmond, St. Louis, Dallas, and San Francisco. Sales fell in Cleveland and Kansas City, and the weather flummoxed things in New York, Philadelphia, Cleveland and especially Boston. Other markets noted a lack of available lots and “flat to declining residential real estate construction.”

The Beige Book also took note of the impact energy prices are having in various parts of the country, though it’s probably too soon to say that real estate in those places has been impacted: “Oil and natural gas drilling declined in the Cleveland, Minneapolis, Kansas City, and Dallas Districts… The number of drilling rigs for oil and natural gas declined sharply in the Cleveland, Minneapolis, and Kansas City Districts.” Not only that, oil and gas producers in various districts with energy-industry concentrations anticipate cuts in capital expenditures during 2015, which could lead to slowdowns in office and industrial space absorption.