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Interest rates are staying but there’s some welcome easing of commodity prices.
The Federal Reserve’s September Beige Book—more formally known as the “Summary of Commentary on Current Economic Conditions by Federal Reserve District”—is not going to make commercial real estate professionals jump for joy. But the bad news is already known and the good provides hope for some relief in construction.
First, the obvious bad, that inflation is still proceeding, as “price levels remained highly elevated.” That means don’t hope for an early cessation of interest rate hikes.
“Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services,” the report said, although 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. That’s an important sign of eventually prices coming back under control. But that is still apparently some way off.
“The Fed still has an inflation problem and is committed to front-loading rate hikes as aggressively as possible,” Jeffrey Roach, Chief Economist for LPL Financial, said in an emailed statement. “The likelihood of a 75-basis point hike later this month could increase if next week’s inflation report surprises to the upside.”
Also, the Fed noted that parts of real estate continue to face challenges. “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,” the report said. “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.”
Among the districts that specifically mentioned real estate, Boston saw the outlook worsen, in Richmond activity was flat to moderately down, Atlanta had mixed commercial real estate activity, construction and real estate declined modestly in Chicago, and residential activity eased in San Francisco.
There was also some positive news in an important area: materials. “While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates,” the report noted. “Several Districts reported some tapering in prices for steel, lumber, and copper.” But most contacts outside of the Federal Reserve system though price pressures would continue at least through the end of the year.
Source: Fed’s Beige Book Is a Mix of News for CRE