NATNews Blog > September 2015 > ​Fed Reports Commercial and Residential Real Estate Continue Expansion

    ​Fed Reports Commercial and Residential Real Estate Continue Expansion

    9/3/2015 8:16:05 AM
    Reports from the 12 Federal Reserve Districts indicate economic activity continued expanding across most regions and sectors during the reporting period from July to mid-August, according to the Fed’s Sept. 2 Beige Book release. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book. Respondents in most sectors across Districts expected growth to continue at its recent pace, but the Kansas City report cited more mixed expectations.
     
    District reports on manufacturing activity were mostly positive, although among these, the Cleveland, St. Louis, Minneapolis, and Dallas Districts painted a somewhat mixed picture across manufacturing sectors. Only the New York and Kansas City Districts cited declines in manufacturing.
     
    Retail contacts in a majority of Districts reported that their sales and revenues continued to expand. By contrast, the Cleveland and Minneapolis Districts cited flat consumer activity since the last report, Atlanta was mixed, and Dallas reported decreased sales year-over-year. Most Districts reported increased auto sales. Among Districts with information on tourism, activity was strong in most reports.
     
    Demand for nonfinancial services, including staffing, generally expanded over the reporting period. Districts mentioning the transportation sector mostly noted activity increases. Districts reporting on the banking sector mostly tallied increases in both business and consumer loan volumes. Credit quality was reported to be improving in most Districts, while credit standards were generally said to be unchanged.
     
    Reports on residential and commercial real estate markets across the Districts were mostly positive. Existing home sales and residential leasing widely improved, with home prices moving up in most areas. Commercial real estate activity also rose in most Districts; commercial construction activity ranged from strong in the Cleveland and Minneapolis Districts to up only slightly in Chicago, while commercial leasing was reported to have increased across the board.
     
    Agricultural conditions were mixed across Districts. Farm contacts indicated that anticipated yields were up for corn and soybeans, but conditions deteriorated in the St. Louis and Kansas City Districts; drought was an ongoing concern in the San Francisco District and was also a factor in parts of the Atlanta and Minneapolis Districts. Districts reporting on the energy sector indicated that conditions were stable to declining; coal production was down in the Richmond and St. Louis Districts, while oil-related activity declined in the Cleveland, Atlanta, and Dallas Districts.
     
    Most Districts reported modest to moderate growth in labor demand, although Boston, Cleveland, and Dallas cited only slight increases in hiring. This tightening of labor markets was said to be pushing wages up slightly in selected industries or occupations, especially in the New York, Cleveland, St. Louis, and San Francisco Districts. Across all Districts, input and selling prices were reported to be stable or up only slightly.
     
    Real Estate and Construction
    Residential real estate activity improved across the 12 Districts, with home sales and home prices increasing in every District, while construction activity was more mixed.
     
    Richmond and Kansas City indicated that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Cleveland, Richmond, and San Francisco noted that demand was more robust for multifamily homes.
     
    Construction activity was reportedly increasing in most Districts, but was moderate or flat in the Boston, Philadelphia, Richmond, Minneapolis, and Dallas Districts. Contacts in the Cleveland District attributed increases in construction activity to expectations of a rise in interest rates, the improving labor market, and rising consumer confidence. However, Cleveland also cited supply-side constraints and difficulty obtaining construction financing. Similarly, Boston noted difficulty in obtaining new construction permits. San Francisco reported that construction activity slowed in some areas due to tighter borrowing conditions and shortages of skilled labor and available land.
     
    Contacts in many Districts attributed increases in home prices to robust demand and declining inventory. Inventories continued to decline or stay flat, with the exception of the Kansas City District, where they rose slightly. Boston, New York, and Richmond specifically commented on low inventory leading to bidding wars among buyers. Cleveland builders cited rising construction and land development costs as upward price drivers. New York and Dallas both indicated that prices have climbed for low- to medium-priced homes but price pressures are softer for higher-priced properties. Rental markets remained strong nationwide. Overall, the residential outlook was positive, with the majority of Districts expecting this increased activity to continue.
     
    District reports on commercial real estate were positive on balance. Commercial construction activity increased in the Cleveland, Atlanta, St. Louis, and San Francisco Districts. Commercial construction was described as active in the Dallas District, strong-to-robust in the New York and Minneapolis Districts, and steady at a solid pace in the Philadelphia District's urban centers. In urban Boston, office construction activity increased from levels that were seen as below-normal in relation to fundamentals, and elsewhere in the Boston District commercial construction activity was mixed. The outlook for commercial construction was generally positive in the Boston, Cleveland, Atlanta, and San Francisco Districts, but risks to growth in construction activity include rising labor costs for skilled workers (noted by Boston and Cleveland contacts), and tighter underwriting standards for construction loans (noted by San Francisco).
     
    Banking and Finance
    Reports on banking activity were mostly positive during the reporting period. Overall loan demand increased in most reporting Districts.
     
    Commercial and industrial loan demand improved in Philadelphia, Cleveland, and St. Louis, though it was categorized as steady in Kansas City and Dallas and mixed in Richmond. Commercial real estate lenders in Chicago continued to be concerned that valuations were too high; leading some to put limits on the size of loans they make for financing new purchases. On the consumer lending side, demand for credit was up in most Districts.
     
    Growth in demand for consumer loans was reported to be moderate in Dallas and stable in Cleveland. Several Districts, including Philadelphia, Atlanta, and Chicago, noted strong increases in demand for auto loans, though demand for such loans was flat in St. Louis. Demand for mortgages increased in several Districts, including Cleveland, Richmond, Atlanta, Chicago, and St. Louis. Although mortgage lending ticked up in Dallas, growth remained muted due to a limited supply of housing.
     
    Credit conditions remained stable or improved across Districts. Delinquency rates declined across all loan categories in the New York, St. Louis, and San Francisco Districts. Credit standards were largely unchanged, with a few exceptions in the Richmond and St. Louis Districts who noted tightening standards. Contacts in Boston, Atlanta, and Chicago, reported competition among lenders for loans. Bankers in New York, Cleveland, and San Francisco reported narrow net interest margins.
     
    Employment and Wages
    Most Districts reported slight or modest growth in employment since the previous Beige Book. Boston reported little or no hiring except via its staffing sector, while Philadelphia, Cleveland, St. Louis, Minneapolis, and Dallas cited slight to modest increases in employment. Atlanta, Richmond and Chicago experienced moderate increases in employment, and San Francisco reported an increase in IT sector hiring. The New York labor market reportedly gained further momentum and saw strong growth in hiring. The Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco Districts reported labor shortages for certain skills or difficulty finding workers, especially for IT and other technical positions. Firms in the Atlanta District cited challenges retaining employees and filling vacancies.
     
    Wages were relatively stable in most Districts, with slight to moderate increases since the last report. However, several Districts reported increasing wage pressures caused by labor market tightening.