Rising vacancy rates and falling rents continue to be the main culprits behind the struggling commercial real estate sector, the Federal Reserve Board reported in its just-released Beige Book.
Since the Fed's last report in December, loan demand continued to decline or remained weak in most Fed districts, while credit quality deterioration persisted. The Fed districts are Boston, New York, Philadelphia, Cleveland, Richmond, Va., Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
New York, Philadelphia, Kansas City, and San Francisco reported further weakening in demand for commercial and industrial space, the Fed reported. Boston received mixed reports on sales and leasing activity from commercial real estate contacts in the district, and Minneapolis reported some increases in sales of commercial buildings. Richmond reported that sales of nonresidential properties remained slow, but that leasing of office and retail space had picked up.
Several districts reported that landlords were focused on tenant retention and that slack demand was allowing tenants to negotiate lease extensions at low rents and with favorable allowances. San Francisco reported that lower rents appeared to be supporting an upturn in leasing in some parts of that district, although vacancy rates continued to rise. Nonresidential construction activity was generally weak in all districts, although St. Louis reported some gains in construction of education facilities and Cleveland reported a recent increase in nonresidential contracting.