Thursday, January 14, 2021
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Cities and suburbs diverging, housing market edition.
On Wednesday morning, we covered the diverging fortunes of cities and suburbs as seen through the lens of national burger chain Shake Shack (SHAK).
And then on Wednesday afternoon, the Federal Reserve’s latest Beige Book report offered another way to see the urban/suburban economic divide. And that is through the real estate market.
“Residential real estate activity remained strong, but accounts of weak conditions in commercial real estate markets persisted,” the report’s summary read. With residential real estate serving as a relative proxy for the strength of suburban markets and commercial real estate standing in for the overall health of urban cores, we see another pillar of this uneven recovery, one that is advantaging activity that can take place outside of city centers.
And the details from some of the Fed’s 12 districts show this high-level “strong vs. weak” real estate story is much more potent than the one-sentence summary suggests.
In the Boston Fed’s district, for instance, “the home buying ‘frenzy’ continued in November, with contacts attributing strong buyer confidence to historically low mortgage rates and historically high stock market performance.” At a time when overall employment is down about 9 million from a year ago, it’s quite jarring to see “frenzy” used as a word to describe the home buying market.
But this kind of adjective does appear appropriate when squared with results out of KB Home (KBH) released Tuesday evening, which showed the home builder recorded a 42% increase in purchase contracts in the fourth quarter. This order total marked the company’s best fourth quarter since 2005. A quarter also known as the absolute peak of the U.S. housing bubble.
Meanwhile, in Boston’s commercial real estate market, the pain is only starting to be felt. “With new activity thin, rents have not yet begun to reflect the downward pressure from increased sublease space,” the report said. “The retail and hospitality markets were still very soft, especially as some areas experienced new restraints in response to COVID-19 spikes. Many contacts predicted that some retail space will be converted to industrial over the next several years.”
And this dichotomy between a persistent appetite for individuals buying homes and a lack of enthusiasm for business’ to expand their real estate footprint was repeated nationwide.
In the Cleveland Fed’s district, “One residential real estate agent noted that while the pace of transactions slowed in recent weeks, activity was still much higher than it was a year earlier.” While in the same region, “demand for retail and office space remained weak as COVID-19 cases continued to rise and corporate uncertainty persisted.”
In the Atlanta Fed’s territory, “Existing home inventory remained extremely low in many markets, continuing to place upward pressure on home prices. The pace of new home construction continued to lag behind demand...However, builders noted the ability to pass along rising costs to buyers through higher home prices.” Meanwhile, “Commercial real estate (CRE) activity continued to be impacted by the pandemic.... Recent CRE asset valuations confirmed that values have deteriorated and may be creating impediments to new lending along with tighter underwriting standards.”
In the midwest, the Chicago Fed said, “A contact in Des Moines said home construction was at its highest level in more than a decade and that the market for land was quite competitive.” And while the industrial side of the economy remains solid — as we highlighted last week — and demand for industrial space remained “robust,” the report said “interest in office and retail space decreased further.”
Similar examples are repeated nationwide.
One unfortunate standout, however, was in the New York Fed’s district, which covers New York City, upstate New York, and northern New Jersey. In this region, conditions in the real estate market are tough all around, with the struggles of New York City perhaps the clearest sign of how deeply cities continue to struggle during this recovery.
“The residential rental market has continued to weaken, led by New York City,” the Fed’s report said. “Partly reflecting increased landlord concessions, effective rents in Manhattan and Queens are reported to be down more than 20 percent from a year earlier and down 8 percent in Brooklyn. Rental vacancy rates across New York City are reported to be at multi-decade highs.”
The report added: “Commercial real estate markets have weakened further, to varying degrees, across the District. Retail and office markets have been particularly weak in New York City, with asking rents trending down and well below year-earlier levels.”