Peter Boockvar

As the Beige Book has so much anecdotal information and I don’t want to inundate you with too much, I’m going to hone in on the comments on the very interest rate sensitive commercial real estate sector as that is not just really important for the landlords but also for the banks that lend money to them. We know of course that those with floating rate debt and/or have loans coming due are the most exposed to the new rate regime we’re in. Also, depending on what area of real estate one is in matters for sure with office weak, industrial good and multi family mixed, among others.

Boston:

“The industrial market continued to see low vacancy rates and high leasing demand, but nonetheless rents have levelled off recently. Though the office market remained weak—a Hartford contact described the market as “abysmal”—another contact noted a slight increase in leasing interest for larger spaces in downtown Boston, and leasing was stable in Providence. In the retail market, food and beverage establishments experienced relatively strong leasing demand, while vacancies continued to pile up for department stores and big-box retail.”

“The only significant construction activity pertained to industrial properties. Most contacts expected commercial real estate activity to weaken moving forward, with the industrial market outperforming other sectors. The office class was predicted to weaken further, mainly as the result of pending lease maturations and the likelihood of high-profile loan defaults, and downward pressure on rents was expected.”

NY:

“Commercial real estate markets were little changed in early 2023. Office vacancy and availability rates edged up in New York City and northern New Jersey and were steady across upstate New York. Office rents were flat across the District. Retail vacancy and availability rates held steady, though retail rents fell slightly. Vacancy and availability rates edged up from low levels in the industrial market and rents trended up modestly.”

“Construction contacts reported some stabilization in business conditions but remained pessimistic about the near-term outlook. New office construction starts remained at low levels in most of the District, though there was some pickup in northern New Jersey. New industrial construction starts were up in and around New York City but were little changed elsewhere. Multi-family residential starts remained weak across the District.”

Philly:

“Market participants in commercial real estate continued to report steady current construction activity but noted additional softening of the pipeline as more projects are delayed, canceled, or redesigned. Leasing activity continued to slow modestly. While demand for warehousing and life sciences space remained strong, concerns about other commercial real estate prompted at least one large law firm to gear up for handling distressed properties.”

Cleveland:

“Nonresidential construction contacts reported that demand softened further because of high interest rates for commercial projects. One general contractor noted that the projects that are moving forward have often been self-funded. Real estate developers also cited weaker demand as customers have become increasingly concerned about high interest rates and general economic uncertainty. Contacts said that these same factors would lead to further softening in demand in coming months.”

Richmond:

“Commercial real estate activity remained unchanged since the last period. However, rent costs were moderating in certain sectors. Leasing rates for multifamily were starting to decrease, particularly for mid-priced units; high end apartment rents were unchanged. Retail leasing was strong this period especially for service and food businesses. New retail centers continued to be built and most were pre-leased, leading to lower vacancy rates. The industrial market continued to be strong with higher rental rates and good absorption levels. The supply of Class A space tightened, particularly in suburban markets. Commercial contractors noted that a general shortage of key components, including labor, remained a significant factor. Overall, commercial buyers remained hesitant to commit due to market uncertainty.”

Atlanta:
“Commercial real estate (CRE) contacts reported slowing market conditions in lower-tier office, multifamily, and certain segments of retail. The downward trend in the office sector eased further as more employers required staff to return to the office; however, heightened levels of sublease space remained an impediment to market recovery. Concerns regarding declining CRE values accelerated. Contacts reported increases in operating expenses and slowing or negative net operating income and rent growth. Additionally, firms continued to report instances of declining asset prices and buyers seeking greater concessions.”

Chicago:

“Nonresidential construction was unchanged over the reporting period, with contacts noting solid demand from health care and the public sector but weaker demand for distribution center construction. High interest rates and input costs continued to hold back activity, while lead times remained long for critical products such as HVAC and power generation equipment. Commercial real estate activity was little changed over the reporting period. Demand for high quality space remained solid, with one contact highlighting strong interest in retail space previously occupied by big box tenants. Overall, prices and rents decreased modestly, while vacancies and the availability of sublease space were up moderately.”

St. Louis:

“The commercial real estate sector has been mixed. Office demand remains low, but industrial demand remains high despite increased rents. Retail real estate has improved since the previous report, and one contact reported retail projects are back in demand for the first time since before the pandemic. Construction demand has slowed, with contacts reporting that many projects are on hold as investors wait out market uncertainty about rate hikes.”

Minneapolis:

“A Montana architecture firm said that large corporate clients have delayed project starts. Other contacts reported a smaller pipeline of future projects. A contractor in Minneapolis-St. Paul said, ‘Interest rate hikes have put a considerable damper on new construction projects.…Projects aren’t penciling out.’”

“Commercial real estate was flat since the last report. Office space continued to struggle overall despite a slow but ongoing return of workers to downtown offices. But overall vacancy rates grew as some large tenants downsized and space available for sublease increased. Industrial property remained strong, though higher financing costs reportedly had some developers reevaluating speculative projects.”

KC:

“Developers of multifamily housing indicated further deterioration of conditions from already depressed levels. Rising interest rates continue to be a challenge to financing multifamily housing projects, but contacts also highlighted recent volatility in rental rates as an additional headwind. Uncertainty about projected rent growth is reportedly very high, further hindering financing activities for new projects.”

Dallas:

“Demand for office space remained lackluster. Activity in the industrial market continued to be solid, but contacts were concerned about the elevated construction pipeline. The higher cost of capital, tighter lending standards, and economic uncertainty has made it difficult to price deals, diminishing investment sales activity.”

SF:
“Multifamily housing demand remained steady, though contacts reported that asking rents or the rate of rent increases declined. One contact in Oregon noted strong demand for larger rental units as renters shared spaces to keep shelter costs down.”

“Activity in the commercial real estate market was little changed on net. Demand for office space showed continued weakness with low rents and high vacancies. A contact in Oregon reported slowing demand for warehouse and industrial space, though other contacts reported continued strength in these sectors. One contact in Nevada observed that businesses expressed interest in purchasing commercial spaces, rather than renting them.”