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Fed's Beige Book Signals a Mixed Bag of Economic Activity

Resilient consumer spending helped propel the US economy in recent weeks.

Good morning. Today, we're delving into the Beige Book from the Federal Reserve Bank of Philadelphia, featuring key business insights from the 12 Fed districts gathered up to January 8. Let's dive in!

πŸ“Š Fear and Greed Survey: Time is running out! Please take 3 minutes to provide your perspective on the current mood within the CRE industry and your predictions on future price trends.

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Fed's Beige Book Shows Resilient Consumer, Cooling Labor Market

Illustration of Fed's Beige Book Survey 2024

The Federal Reserve's latest Beige Book reveals a mixed bag for the U.S. economy: resilient consumer spending contrasting with a cooling labor market and heightened consumer price sensitivity. Yet, high interest rates are still impacting real estate transactions, especially in CRE.

Consumer spending: The Beige Book, a collection of economic information collected by each Federal Reserve District through Jan. 8, highlighted that consumer spending remained robust, especially during the holiday season. Notably, spending met or exceeded expectations in most districts, including New York. This consumer resilience has been a key driver in propelling the economy, particularly as other sectors, like manufacturing, show signs of weakness.

Economic activity: The report from the Fed districts indicated a general stability in economic activity, with little to no change. There's a sense of growing optimism among businesses, fueled partly by the anticipation of falling interest rates. This optimism is reflected in the positive future growth expectations expressed by branches across most districts.

Inflationary pressures: A key finding in the report is the easing of inflationary pressures. Businesses have noticed a marked increase in consumer price sensitivity, leading to narrower profit margins for retailers and less aggressive pricing strategies from suppliers. This trend points to a more cautious approach to pricing and spending from businesses and consumers.

Cooling labor market: The Beige Book highlighted signs of a cooling labor market across nearly all districts. More selective hiring, larger applicant pools, lower turnover rates, and easing wage pressures were observed. Firms in many districts anticipate further declines in wage growth over the coming year.

Real estate insights from the latest Beige Book:

  • Boston: Industrial property market faces modest risks; life sciences properties demand weakens.

  • New York: Office construction down, industrial construction up; high volumes under construction and deliveries expected in 2024 in downstate New York and northern New Jersey.

  • Cleveland: Nonresidential construction rebounds with declining interest rates and economic optimism; delayed projects resuming.

  • Richmond: Commercial real estate activity flat; retail, especially fast-casual restaurants, remains strong.

  • Atlanta: Weakening conditions in various property segments; industrial markets report excess square footage and rising vacancies; concerns over rising commercial real estate loan maturities in 2024.

  • Chicago: There is a slight increase in nonresidential construction; commercial real estate activity is stable; industrial property demand is high.

  • Minneapolis: Commercial real estate flat; industrial space vacancies rise due to speculative building; office market soft with increasing tenant concessions; retail vacancies improve slightly.

  • Kansas City: Bankers report unchanged credit standards and minimal modifications for CRE borrowers; concerns about future credit performance and borrower liquidity in CRE deals.


What they are saying: The U.S. economy is expected to grow at 2.4% in the fourth quarter, slower than before but still driven by strong consumer spending. Retail sales exceeded expectations in December, and core inflation is aligning with the Federal Reserve's target. However, the commercial real estate sector remains weak despite likely lower borrowing rates.


Time is running out to participate in the Q1 2024 Fear and Greed CRE Survey by John Burns Research and Consulting in partnership with CRE Daily.

This brief, under-4-minute survey aims to gauge investor sentiment in commercial real estate. Eligible respondents can enter to win one of thirty $10 gift cards. Your answers will remain anonymous.

✍️ Editor’s Picks

  • Rockpoint rocks: Rockpoint raised $5.1B in equity commitments, including $2.7B for its seventh real estate fund.

  • Last-minute payment: A late $3M payment was made by Nightingale Properties developer to CrowdStreet investors (with a 1% extra charge) as settlement for misappropriated funds.

  • Discounted deals: Zara billionaire Amancio Ortega capitalized on the CRE market downturn, increasing his real estate holdings with €1.1B in acquisitions.

  • Debt woes: M&T Bank sees a rise in criticized CRE debt, with 27% of loans at risk, driven by medical offices and multifamily properties.

  • Preserving history: Henrico County in VA purchased the 2,100-acre Varina Farms property, its largest land preservation investment, for $17.25M.


  • Sunbelt shift: NYC-based RXR dives into Dallas' Deep Ellum, converting a building into multifamily housing targeting Millennials and empty nesters.

  • Washington win: FPA Multifamily acquires the 300-unit Atrium on James apartments near Seattle, boosting its footprint in the Puget Sound area.

  • Beach bonanza: Equity Residential sold the 310-unit Regency Palms in Huntington Beach to A&M Properties for $68.7M.

  • Refi success: Serrano Development Group secured a $27.8M refinancing loan for the new 91-unit Edgeway apartment complex in Bellflower, CA.

  • Big timber: Equus Capital Partners purchased a 1,249-unit multifamily portfolio in Philadelphia, known as Project Big Timber, for $220M.


  • Poised for growth: Prologis (PLD), the world's largest industrial REIT, plans to increase property sales and acquisitions and expects stable valuations and rising rents in 2024.

  • Warehouse frenzy: CenterPoint Properties sold a 740KSF business park in Gurnee, IL, to EQT Exeter for $72M.

  • Construction boom: The Western U.S. has a thriving industrial construction sector, with 77.4MSF under construction, driven by Phoenix, Las Vegas, Denver, Salt Lake City, and Reno.


  • Jersey liquor laws: NJ's liquor license laws, among the most restrictive and expensive in the U.S., were changed this week, injecting almost 1,500 licenses into the market.

  • Finding flavorful niches: In Memphis, TN, with a vacancy rate of 3.5% and an availability rate of 5%, smaller food and beverage tenants are securing deals in a tight retail market.

  • Mall meltdown: The value of Westfield Centre, the largest mall in downtown San Francisco, has dropped by almost $1B, with a current appraisal of $290M.


  • Staying put: NY’s biggest tenants are choosing to renew their leases rather than move spaces, with over 60% of all deals over 100KSF last year being renewals.

  • Banking on efficiency: M&T Bank, with $200B in assets, has signed a lease for 39KSF of office space at Boston's Winthrop Center, the world's largest Passive House office building.


Cap Rates on Single-Tenant Net Lease Properties Continue to Climb

Unsurprisingly, cap rates on single-tenant net lease properties shot up even more in Q4, according to The Boulder Group. All three main groups, including industrial, office, and retail, saw higher cap rates.

Retail letdown: Retail cap rates shot up by 8 bps to reach 6.35%, as industrial cap rates rose by 4 bps to 7%. These increments were driven by delayed asset pricing adjustments to accommodate the significant surge in borrowing costs over the preceding year.

Office headache: The office sector saw a more substantial rise in cap rates, with a 14 bp increase, hitting 7.55% in Q4. The surge can be attributed to a lack of 1031 buyers, which resulted in increased property supply. The number of overall properties available rose by 11.6% from 3,662 in Q3 to 4,085 in Q4. 

Industry-wide implications: The lag in asset pricing and the increasing property supply due to the absence of 1031 buyers have contributed to these upward trends. But despite rising cap rates, the retail, industrial, and office sectors experienced growth rates of 12.7%, 9.2%, and 7.2%, respectively.


Tread carefully: The persistent climb in cap rates for single-tenant net lease properties means investors have to be more careful when assessing potential deals. Asset pricing has yet to catch up with the significant increase in borrowing costs. Additionally, the lack of 1031 buyers has contributed to increased property supply.


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