National economic activity expanded at modest pace

Reports from the 12 Federal Reserve Districts suggest that national economic activity continued to expand during the reporting period of mid-November through late December, with most Districts reporting a “modest” or “moderate” pace of growth. In contrast, the Kansas City District reported only slight growth in December. However, most of their contacts, along with those of several other Districts, expect somewhat faster growth over the coming months. The Dallas District indicated that growth slowed slightly during the reporting period and that several contacts expressed concern about the effect of lower oil prices on the District economy. Consumer spending increased in most Districts, with generally modest year-over-year gains in retail sales. Auto sales showed moderate to strong growth. Travel and tourism picked up during the reporting period. The pace of growth of demand for nonfinancial services varied widely across Districts and across sectors but appeared to be moderate on balance. Manufacturing activity expanded in most Districts. Single-family residential real estate sales and construction were largely flat on balance across the Districts, while commercial real estate activity expanded. Demand for business and consumer credit grew. Credit quality improved a bit further overall. Agricultural conditions were mixed. Overall demand for energy-related products and services weakened somewhat, while the output of energy-related products increased.

Commercial real estate

Commercial real estate activity expanded in most Districts. The Philadelphia District reported a modest pace of growth for commercial real estate leasing activity, and Boston reported improving conditions in commercial real estate markets overall. Commercial real estate activity in the Chicago and Kansas City Districts expanded at a moderate pace. The Dallas District noted that office leasing activity remained strong, but one contact noted a slight pullback in demand from oil and gas firms. Demand for apartments in the Dallas District also remained strong. New York City’s co-op and condo market showed continued strength in the final quarter of 2014; apartment sales volume was down from the exceptionally high levels of the prior year but still fairly brisk, while selling prices were up moderately. Commercial construction activity increased in most Districts. Activity grew modestly in the Philadelphia District and a bit faster in the Atlanta and Chicago Districts. Atlanta cited the multifamily residential segment as a source of growth, while Chicago credited demand for industrial and office buildings. Commercial builders in the Cleveland District reported a moderate to robust increase for projects in the pipeline. Dallas reported that overall commercial construction was strong. San Francisco reported that multifamily residential construction was strong in many areas of that District and that retail, office, industrial or infrastructure projects were widespread across that District.

Eleventh District — Dallas

The Eleventh District economy expanded at a slightly slower pace over the past six weeks than in the previous report. Manufacturing activity continued to increase. Retailers and automobile dealers saw steady or higher sales. Growth in loan demand picked up, and demand for nonfinancial services was stable or improved. Home sales grew, and apartment and office leasing activity remained strong. Demand for oilfield services declined modestly, while agriculture conditions improved a little. Upward price and wage pressures moderated slightly. Employment in most industries held steady, but there were some layoffs. There was more uncertainty and generally less optimism in outlooks than in the prior report, with contacts across several industries expressing concern about the impact of lower oil prices on the District economy.

Construction and real estate

Home sales grew at a steady to slightly slower pace since the last report, and sales were generally even with last year’s levels. Builders were slowly building up their inventory of speculative homes, but some contacts said that their appetite for land has declined. Home prices continued to edge upwards, and several respondents reported pushback from buyers on pricing. Outlooks were cautiously optimistic. Apartment demand remained strong. Occupancy rates, although still high, saw a slight seasonal dip. Rent growth stayed solid in Dallas and Houston, but was starting to cool off in Austin. Outlooks were generally positive, but some contacts said they had revised down their 2015 outlook for Houston.

Office leasing activity remained strong, but one contact noted a slight pull back in demand from oil and gas firms. Industrial demand was solid in Houston but slowed in Dallas. A few contacts said that investors are taking a wait-and-see approach because of the steep decline in oil prices. Outlooks were positive, but there was some concern about the elevated level of construction in the Houston office and Dallas industrial markets.

Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.