The Fed’s Beige Book Brings News for CRE

Although there has been a welcome decrease in commodity prices, interest rates are here to stay.

Commercial real estate experts won’t be overjoyed by the Federal Reserve’s September Beige Book, also known as the “Summary of Commentary on Current Economic Conditions by the Federal Reserve District.” However, the good news offers optimism for some reprieve in construction, while the bad news is already known.

First, the obvious bad: don’t expect an early end to interest rate hikes since “price levels remained substantially elevated,” which indicates that inflation is still occurring. 
In spite of the fact that nine of the Fed’s 12 districts “reported some degree of moderation in their rate of increase,” indicating that at least the rate at which inflation was increasing had slowed, the report stated that “substantial price increases were reported across all districts, particularly for food, rent, utilities, and hospitality services.” That’s a crucial indicator that prices will finally stabilize. But it appears that is still a ways off.

“The Fed still has an inflation concern and is determined to front-load rate hikes as aggressively as possible,” says Jeffrey Roach, chief economist at LPL Financial.”If next week’s inflation report surprises positively, the chances of a 75-basis point boost later this month may grow.”
The Fed also pointed out that certain aspects of real estate still face difficulties. It was noted in the study that, “despite some reports of strong leasing activity, residential real estate conditions weakened noticeably as home sales fell in all twelve districts and residential construction remained constrained by input shortages. Commercial real estate activity softened, particularly demand for office space. “Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates.”
The districts that specifically mentioned real estate included Boston, where the outlook deteriorated; Richmond, where activity was flat to slightly down, Atlanta, where there was a mix of commercial and residential real estate activity, Chicago, where construction and real estate declined slightly, and San Francisco, where residential activity slowed.

There were also some encouraging developments in the crucial field of materials. The report stated that lower fuel prices and a decline in overall demand helped to relieve cost constraints, particularly those related to freight transportation rates. However, manufacturing and construction input costs remained high. However, most contacts outside of the Federal Reserve system believed price pressures would last at least through the end of the year. “Several districts reported some tapering in prices for steel, lumber, and copper.”

The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.

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