Fed Beige Book Finds Modest Economic Improvement; Commercial Real Estate Weak

The Federal Reserve found economic conditions throughout the nation continuing to improve, albeit at a "modest" pace, according to the Beige Book report unveiled one day after Fed Chairman Ben Bernanke publicly tried to alleviate market concerns of a slowing of the rebound. However, there were few positive changes of note in the commercial real estate and financial industry segments.

Though U.S. businesses appeared to be spending more during the latest reporting period (mid-April to late May), commercial real estate activity remained generally weak but at least stable in many areas. Office, industrial and retail vacancies continue to increase in most districts, though areas including New York, Philadelphia, Dallas and San Francisco helped increase leasing activity through cutting rental rates. Most are not expecting any boom period in commercial construction any time soon.

Meanwhile, two-thirds of the Fed's 12 districts reported that commercial and industrial lending by banks remained weak on lessened credit demand and tougher standards for borrowing, in areas such as commercial real estate more than others.

District 1 -- Boston

Leasing rates throughout New England are at least flat or noticeably improved unlike much of the nation. However, sources said tenants who are aware of high vacancy rates and newfound bargaining power often are trying to strike significant deals. Debt default rates for commercial properties "remain significant," but there appears to be a lot of activity and new capital in the region. As such, the outlook is mixed and cautious.

District 2 -- New York

Commercial real estate activity appeared steadier than in previous months. Demand is being driven largely from legal firms as well as some business services companies. Even so, vacancies continued to increase. Additionally, credit terms tightened yet again during the most recent period even though delinquency rates, including where business credit is concerned, were stable.

District 3 -- Philadelphia

Fed contacts at regional banks noted business borrowing has increased. In addition, commercial real estate activity has either remained stable or increased, in part because of publicly funded projects, depending on the submarket. Commercial construction contractors, agents and suppliers, however, envision "no signs" of significant improvement for the industry sector in the near term.

District 4 -- Cleveland

Those in commercial construction optimistically anticipate a small, mostly seasonal, increase in activity during the second half of 2010. Some automotive parts suppliers were encouraged by the ongoing increase in car sales through mid-May. Still, the overall market for business lending remained soft, and tight credit standards aren't expected to abate soon.

District 5 -- Richmond

Overall credit quality in the region was unchanged, save some reports of an uptick in 30-day delinquencies. New commercial construction, however, was "generally nonexistent." One contractor started a new project in the suburbs, believing businesses there are looking to move away from costly urban locations.

District 6 -- Atlanta

Commercial construction was well below the pace found in spring 2009 both from lack of demand and limited access to financing. Credit in the region, however, is readily available to borrowers that meet stringent requirements.

District 7 -- Chicago

Business loan demand firmed in this market more than almost any other in the nation, and credit conditions largely improved. Commercial activity is up for highway, education and health care projects. The condominium market continued to take a beating though.

District 8 -- St. Louis

Commercial real estate still has a long way to go in the district because the entire real estate downturn started in this region much later than the rest of the nation. As such, the district still is going through some correction pains, and a rebound isn't expected until well into 2011. On the positive side, business lending has increased, and credit standards have stopped tightening.

District 9 -- Minneapolis

Commercial construction is characterized as quite weak, and conditions could deteriorate further as spending on infrastructure construction is on the downswing. There is some hope in parts of Minnesota and Wisconsin for a bump in industrial construction.

District 10 -- Kansas City

Demand for commercial real estate construction loans actually increased in the district, and credit quality among businesses appeared to improve in recent weeks. Commercial real estate remained weak though discounting has slowed the rate of vacancy increases. Optimism abounds for a spike in leasing activity in the coming months.

District 11 -- Dallas

Signs of firming were reported for commercial real estate. Leases and property sales both increased amid price discounting. And there has been a return in some cases of bidding wars over prime commercial properties. Additionally, commercial lending activity appears to on the upswing despite ongoing tough credit standards.

District 12 -- San Francisco

Conditions continue to deteriorate in the district, as does loan demand from businesses. Those businesses that are looking for credit and products are doing so largely to replace outdated equipment and software that are crucial to their efficiency.

Brian Shappell, NACM staff writer

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