Eight times a year, the Federal Reserve System publishes the Beige Book, which looks at the conditions in the 12 Federal Reserve Districts. The last book of the year shows the full impact of the coronavirus pandemic as well as the areas where hope can be found. Overall, the pace of growth was described as "modest or moderate."
The report indicates the pace of recovery around the country is very uneven, by region as well as by economic sector. The Midwest regions in particular have slowed over the past month. The homebuilder boom is an economic bright spot driven by the elevated residential real estate market. Higher-than-average growth in manufacturing, distribution, and logistics have also kept the economy above water.
Lack of tourism hits hard
One part of the economy that has been severely depressed since the first lockdowns in March has been travel and tourism. In the First District of the Northeast, tourism and hospitality remained low in October and November. Hotel occupancy in Boston was under 30%, and conventions have been postponed for the first half of 2021.
In the Fifth District around Richmond, Virginia, hotel occupancy was low as leisure travel slowed, but one bright spot was mountain resorts as people looked for outdoor adventure. The Atlanta area saw travel and tourism have been slowly increasing, but a lack of convention and business travel means a complete recovery is still over a year away.
Because of the collapse of travel and tourism, hotel construction has also dropped dramatically in just about every market. With the increased possibility of hotel foreclosures in 2021, banks are very cautious about lending for hotel projects.
Industrial and biotech are bright lights
Across the country, office real estate and retail real estate are depressed both in terms of leases and construction. Remote work has led to more subleases in the core of many cities.
In the First District, both industrial and lab space were strong areas of commercial real estate even as office and retail remained sluggish. In the Third District around Philadelphia, commercial leasing for offices has fallen, but demand for warehouses remains strong. Industrial real estate in the Dallas area got a boost from third-party logistics and e-commerce activity. The story was similar in the Pacific Northwest, where demand for large warehouse space continues to grow.
In the Minneapolis District, a survey done in late October found that around 40% of construction firms saw revenues drop. However in Minnesota, one bright spot may be infrastructure, since the state recently passed a $1.8 billion bonding bill.
Condo supply is high in many markets
Most of the real estate market is suffering from a lack of inventory and high prices. However, one area is starting to experience a bit of oversupply: the condo market. In the Northeast, inventory dropped by double digits in all areas except Boston condos. Around the District of Columbia, multifamily vacancy rates were on the rise. In the West, multifamily properties in cities saw lower rents and higher vacancies.
Many buyers have been unwilling to buy in large buildings because of the pandemic, but this may shift after vaccines are well-distributed. For now, there are pockets of affordability in the condo markets in cities.
Suburban and rural expansion
Across many markets, homebuilders are wrestling with the high costs of lumber and labor as well as a shortage of available land. While softwood lumber prices have dropped from spikes over the summer, they still remain elevated, which is putting pressure on homebuilding. In the Dallas market, builders are raising home prices to compensate.
Maine has reported a substantial increase in out-of-state buyers moving in. In upstate New York and areas around New York City, sales have increased, but it's a different story within New York City. Effective rents are reported to be down 15% from a year ago in Manhattan and Queens and 5% in Brooklyn. Similarly in the West, homes in suburban and vacation home destinations are in high demand, and prices have escalated.
The Millionacres bottom line
The December Beige Book shows the impact of depressed economic activity around the United States. Commercial real estate has been hard hit, with hotel, retail, and office as sectors where subleases are common and vacancies are tracking upward.
Concerns about the delay for the second stimulus are weighing heavily on many businesses. The Federal Reserve will meet later in December, and this book will guide what looks like a cautious approach to the 2021 economy.