The Federal Reserve’s Beige Book Affirms Strength of Multifamily and Industrial CRE Sectors
July 14, 2022 | James Sprow | Blue Vault
Two themes emerge from yesterday’s Beige Book release. First, there are regional differences in the strength of commercial real estate markets, although the Federal Reserve districts do not necessarily track well the Sun Belt states as a region. Secondly, multifamily and industrial sectors appear strong with sustained demand despite rising costs of construction and rising rents.
From the Federal Reserve’s Beige Book July 13, 2022
Overall Economic Activity
Economic activity expanded at a modest pace, on balance, since mid-May; however, several Districts reported growing signs of a slowdown in demand, and contacts in five Districts noted concerns over an increased risk of a recession. Most Districts reported that consumer spending moderated as higher food and gas prices diminished households’ discretionary income. Due to continued low inventory levels, new auto sales remained sluggish across most Districts. Hospitality and tourism contacts cited healthy leisure travel activity with some noting an uptick in business and group travel. Manufacturing activity was mixed, and many Districts reported that supply chain disruptions and labor shortages continued to hamper production. Non-financial services firms experienced stable to slightly higher demand, and some firms reported that revenues exceeded expectations. Housing demand weakened noticeably as growing concerns about affordability contributed to non-seasonal declines in sales, resulting in a slight increase in inventory and more moderate price appreciation. Commercial real estate conditions slowed.
Federal Reserve Bank of Boston
Two contacts noted a significant slowdown in commercial property sales volume, and one noted a moderate decline in nonresidential construction, developments that reflected rising interest rates and sky-high building costs. The outlook turned decidedly more pessimistic, as contacts expected further declines in investment sales and construction moving forward.
Federal Reserve Bank of New York
Construction activity has been mixed but picked up somewhat overall. Nonresidential construction starts have remained exceptionally low, whereas multifamily residential construction starts have increased across most of the District, with the notable exception of Manhattan—though even there a sizable volume of construction is still in progress.
Federal Reserve Bank of Philadelphia
On balance, construction activity and leasing activity for commercial real estate continued to hold steady. The markets for industrial/warehouse space, multifamily housing, and institutional projects remained strong.
Federal Reserve Bank of Cleveland
Going forward, contacts anticipated housing demand would slow further as rising interest rates and high inflation push more buyers out of the market.
Demand for nonresidential construction and real estate also slowed amid heightened uncertainty about the economic outlook and increasing construction costs and interest rates. One real estate agent noted that growth and expansions for many of his firm’s customers halted at the beginning of June. Contacts anticipated that current headwinds would persist and further dampen demand into the near future.
Federal Reserve Bank of Richmond
New commercial construction was hampered by a lack of availability of some materials as well as a shortage of skilled workers. Respondents noted that rising interest rates slowed sales activity with the exception of stabilized properties, especially industrial and multifamily, which continued to sell at high prices due to strong leasing demand and increasing rental rates.
Federal Reserve Bank of Atlanta
District commercial real estate (CRE) contacts reported strong demand in the multifamily and industrial segments. However, concerns regarding a slowdown in the industrial market grew over the reporting period.
Some CRE contacts reported elevated concerns regarding potential declines in CRE values. Contacts noted increased instances of buyers seeking concessions, shrinking pools of buyers, and declining prices in some property sectors.
Federal Reserve Bank of Chicago
Construction and real estate activity decreased slightly on balance over the reporting period. There was a small decline in residential construction. While demand for multi-family space stayed healthy, some existing projects were paused because of cost pressures.
Demand for new industrial space, particularly for warehousing, remained robust.
Federal Reserve Bank of St. Louis
The rental market continues to be extremely competitive. Rents in all District MSAs saw strong growth in recent months. Many discouraged would-be home buyers seem to be turning to rentals to avoid high mortgage rates and home prices. One contact reported some rental markets seeing prospective renters coming in above asking rents.
Federal Reserve Bank of Minneapolis
Real estate contacts reported slower deal activity, except for industrial real estate, which remained strong. To compensate for higher financing costs, leveraged buyers were pulling back from deals or reducing offers.
Residential real estate activity was moderately lower. New listings in June flattened and pending sales fell, largely attributed to higher mortgage rates. Price discounts were reportedly rising but have not yet impacted median prices meaningfully.
Federal Reserve Bank of Kansas City
Demand for multifamily housing construction remained elevated. However, financing conditions for new projects tightened recently, leading to fewer projects being initiated in recent weeks. Still, backlogs for multifamily housing development projects remain large by historical standards.
Federal Reserve Bank of Dallas
The multifamily market remained tight, with occupancy and rent growth staying elevated.
Activity in the industrial sector remained robust. On the investment side, transaction volumes have softened given higher interest rates and increased uncertainty in the economic outlook.
Federal Reserve Bank of San Francisco
Activity in the commercial real estate market was balanced overall. Demand for retail space weakened throughout most of the District, while demand for industrial and warehouse space remained robust. Contacts noted that commercial real estate permits and construction slowed down somewhat, and one contact in the Pacific Northwest said that ongoing labor and material shortages delayed construction projects.
Source: Board of Governors of the Federal Reserve System, Beige Book – July 13, 2022; The Fed – Beige Book – July 13, 2022 (federalreserve.gov)
