COMMERCIAL REAL ESTATE EDITION: MODEST ACTIVITY WITH REGIONAL VARIATION

Transcription

1 BEIGE BOOK REVIEW 10/24/2018 COMMERCIAL REAL ESTATE EDITION: MODEST ACTIVITY WITH REGIONAL VARIATION Prepared by: Galen M. Raza-Self Real Estate Market Analytics PNC 300 Fifth Avenue Pittsburgh, PA (412) The of Commentary on Current Economic Conditions by Federal Reserve District (aka the Beige Book ) is released two weeks prior to the Federal Open Market Committee meeting, which convenes eight times a year to discuss economic and policy options. At the conclusion of its most recent meeting (November 8 th ), the federal funds target rate range was maintained at %. The Beige Book (released 10/24/18) contains anecdotal information about economic activity collected from throughout the Federal Reserve s 12 Districts on or before October 15 th. Its qualitative nature provides an opportunity to identify emerging trends that may be less apparent in the available economic data. Comments pertaining to commercial real estate ( CRE ) are summarized below: MARKET CONDITIONS: The majority of Districts reported modest to moderate economic growth, except New York/St. Louis (slight) and Dallas (robust). Overall, CRE activity described as modest in Philadelphia, Richmond, Minneapolis, and Kansas City. However, it varied from somewhat weaker in St. Louis, mixed in Boston and New York, flat in Chicago (at a strong level) to robust in Atlanta and San Francisco. OFFICE: Richmond leasing varied and Minneapolis vacancy/rents generally stable. INDUSTRIAL: Richmond reported increased demand. RETAIL: New York weakened. Richmond activity stable/increasing. In Dallas, online sales spurring retailers to offer in-store pick-ups/price matching. In San Francisco, mall space demand declined, e-commerce sales grew. MULTIFAMILY: New York mixed, Richmond leasing remained healthy, Chicago rents increased slightly, and Dallas occupancy/rents rose slightly. HOSPITALITY: Hurricane Florence affected areas of Richmond. Boston, Philadelphia, Atlanta, Minnesota, and Kansas City experienced growth, while Dallas was termed lackluster. CONSTRUCTION: In Boston, labor/land/raw material costs continued to climb briskly. Chicago indicated that rising labor and material costs slowing growth. NON-RESIDENTIAL: Philadelphia experienced slight growth, as large projects reached completion and next year s activity is expected to slow. After a pause, Cleveland demand increased, with growth expected to continue in near-term. Atlanta continued to indicate that its pace matched year-ago levels and a healthy pipeline. Minnesota contracted slightly. New York commented that office remained subdued, while Chicago highlighted growth in office. San Francisco was solid (especially industrial/warehouse). MULTIFAMILY: In New York, new construction tapered off somewhat and varied in Richmond. In Atlanta, the outlook remained positive (but uncertain) and Minneapolis permitting activity remained strong. LABOR: Scarcity in Atlanta and Chicago constraining growth/slowing project completions. Elsewhere, Boston construction wages continued to rise at a moderate/robust pace. Philadelphia contractor hours increased, and Richmond reported need for more construction workers. MATERIALS: Dallas continued to report high and/or rising material costs. Cleveland noted price increases among a variety of items and contractors raising prices to maintain (but not increase) margins. Atlanta expressed concern that material price uncertainty presents an ongoing challenge to bidding and fulfilling projects. As in prior periods, Chicago material manufacturers reported slow, but steady shipment increases. TRANSACTIONS: Boston stable, while Richmond posted modest increases in price/volume. Chicago reported increases for industrial properties. Minneapolis office sales trended up. LENDING: Cleveland, Richmond, and Kansas City reported increased demand, while New York was steady (with tighter credit standards/wider spreads) and Philadelphia experienced a modest decline. PNC and PNC Bank are registered service marks of The PNC Financial Services Group, Inc. ( PNC ). PNC Bank, National Association ( PNC Bank ) and certain of its affiliates, including PNC TC, LLC, an SEC-registered investment advisor wholly-owned by PNC Bank, do business as PNC Real Estate. PNC Real Estate provides commercial real estate financing and related services. Through its Tax Credit Solutions segment, PNC Real Estate provides lending services, equity investments and equity investment services relating to Low Income Housing Tax Credit ( LIHTC ), affordable housing preservation, New Markets Tax Credit ( NMTC ), and Historic Tax Credit ( HTC ) investments. PNC TC, LLC provides investment advisory services to funds sponsored by PNC Real Estate for LIHTC and affordable housing preservation investments. Registration with the SEC does not imply a certain level of skill or training. This material does not constitute an offer to sell or a solicitation of an offer to buy any investment product. This document is for general informational purposes only and is not intended as specific advice or recommendations. The information contained herein is gathered from public sources believed by PNC to be accurate and reliable at time of publication, but neither PNC nor any of its affiliates is providing any guaranty or warranty as to the accuracy, completeness or reliability of that information or of the conclusions presented in this document. Forecasts and other forward looking statements are based on current expectations and serve as an indication of what may occur. In addition, markets do change. Given the inherent uncertainties and risks associated with forecasts and forward looking statements, actual events and results may differ materially from those reflected or contemplated. Opinions expressed herein are subject to change without notice. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Any reliance upon the information provided herein is solely and exclusively at your own risk. Lending, leasing and equity products and services, as well as certain other banking products and services, require credit approval. PNC does not provide legal, tax or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement The PNC Financial Services Group, Inc. All rights reserved.

2 MODEST ACTIVITY WITH REGIONAL VARIATION 2 The following table highlights CRE comments from each of the 12 Federal Reserve Districts (with emphasis added). Please refer to the map (page 11) for individual District geographic boundaries, as well as the location of the 12 Reserve and 24 Branch Banks. DISTRICT District 1 Boston CRE RELATED COMMENTS Economic activity in most sectors expanded at a moderate to strong pace Retailers reported robust sales increases travel and tourism enjoyed a strong summer season. Manufacturing posted moderate growth IT results flat sales to double-digit growth. Residential real estate prices continued to rise in most states Commercial real estate activity mixed across metro areas. Labor remained tight wage increases continued at a moderate pace. Price increases more widespread in a few cases, reflected the impact of tariffs. Most retained a positive outlook some perceived an increase in downside risks. Most said labor markets remained tight headcounts increased slightly wage increases accelerated somewhat but remained moderate. Retail hiring held steady manufacturing reported hiring, but increases were small hiring and retaining qualified workers remained difficult paying higher wages and salaries IT headcounts and labor turnover stable Commercial real estate construction wages continued to rise at a moderate-to-robust pace to attract scarce labor Construction costs continued to climb at a brisk pace in response to increases in the costs of construction labor, land, and raw materials Retail and Tourism Retailers reported moderate to very strong year-over-year sales increases expect sales to stay strong through year s end airline passenger traffic through Boston had increased 8 percent year-over-year. Port traffic in Boston increased as retailers accelerated imports to avoid tariffs Hotel occupancy rates on Cape Cod were up about 5 percent from last year. The Cape s restaurant industry suffered ongoing, acute labor shortages District 2 New York Commercial Real Estate activity mixed across the District. Leasing activity remained strong in the Boston area slowed somewhat in Hartford and Providence areas. A Hartford contact attributed the weaker activity to slow economic growth in Connecticut. Office vacancy rates described as very low for Boston and Providence, reflecting positive net absorption that occurred in the past six months Sales activity was described as stable. Construction activity held steady in the Boston area described as very limited in Connecticut. Borrowers for some construction projects in the Boston area request higher loan amounts in order to cover higher-than-expected construction costs. The outlook dimmed in greater Hartford remained cautiously optimistic elsewhere. Contacts continued to see downside risks in the form of rising construction costs and rising long-term interest rates. Economic activity has grown slightly labor market remained very tight wage growth remained moderate. Businesses reported increasingly widespread escalation in both input prices and selling prices prices of final goods and services steady or up modestly. Manufacturing and distribution activity continued to grow robustly growth slowed in a number of service industries. Consumer spending steady Residential and commercial real estate markets mixed banks reported some weakening in household loan demand modest pickup in delinquencies on home mortgages. labor market remained very tight Employers continued to note difficulties finding qualified workers scattered signs of softening labor demand most industries report steady to modestly rising employment finance, professional & business services, and manufacturing industries fewer contacts indicated adding workers wholesale trade, leisure & hospitality, and education & health services noted some pickup in hiring activity. Retailers reported little change in staffing levels one large chain plan to hire roughly the same number of holiday season workers as in Wage pressures remained fairly widespread businesses in most industries noted wage growth remained moderate growing proportion reported that they plan to raise wages

3 MODEST ACTIVITY WITH REGIONAL VARIATION 3 increasingly widespread hikes in input and selling prices almost all sectors anticipated further increases in the months ahead Retailers generally indicated that selling prices have been stable to up modestly. A sizable and rising proportion wholesale trade and transportation planned to hike prices in the months ahead fewer leisure & hospitality firms said they would do so. A few in manufacturing and distribution cited tariffs for driving up costs and inducing them to raise their prices. Consumer Spending Non-auto retailers generally indicated that sales were flat or up modestly. One large retail chain noted that sales were on plan and up slightly from year-earlier levels. New York City lagged the rest of the District slightly partly reflecting weaker tourism. Retailers in upstate New York reported that sales picked up somewhat Inventories characterized as being at or a bit below optimal levels Consumer confidence in the Middle Atlantic states (NY, NJ, PA) surged to a new cyclical high Services Growth slowed noticeably professional & business services continued modest growth education & health services noted a pause leisure & hospitality and information industries noted a dip Broadway theaters reported continued growth in both attendance and revenues well ahead of comparable 2017 levels education & health services, professional & business services, and information industries continued to express optimism about the near-term outlook. Leisure & hospitality expect business to be flat to up slightly. Construction and Real Estate apartment rental market mixed. Manhattan s vacancy rate declined to lowest level in a decade, reflecting a noticeable expansion in landlord concessions. Effective rents trended down across New York City due to these increased concessions. Commercial real estate markets mixed but mostly steady. Office availability rates edged up in New York City, Long Island, and across much of upstate New York rents were little changed. In northern New Jersey availability rates edged down rents were flat. Retail weakened across most of the District, with rents drifting down in New York City, Fairfield County, and across much of upstate New York industrial markets continued to strengthen rents up 5-8 percent from a year earlier availability rates mostly steady or declining. New multi-family construction tapered off somewhat across the District a substantial volume currently under construction particularly in New York City. New office construction remains subdued. New industrial construction remained sluggish across upstate New York strengthened in the New York City area. District 3 Philadelphia Banking and Finance Small to medium-sized banks reported steady demand for commercial mortgages tighter credit standards for commercial mortgages spreads widened for commercial mortgages Aggregate business activity continued at a modest pace labor market remains tight continues to constrain hiring at a modest pace apply upward wage pressures at a moderate rate. Price pressures remained modest a smaller percentage of firms reporting increases in prices paid and received for their own goods Nonfinancial services maintained a moderate pace of growth manufacturers resumed a moderate pace after slowing last period. Most consumer sectors continued at a modest pace. Construction sectors noted slight growth residential real estate sales remained constrained by low inventories; commercial leasing maintained modest growth. The growth outlook over the next six months remained positive over half of all firms anticipating increases in general activity key industrial supply firms noted concern that future demand may fall because of excessive inventory buildups by their customers. Employment continued to grow at a modest pace Over 40 percent manufacturing firms reported an increase...over 25 percent of the nonmanufacturing firms reported net increases the percentage of firms that reported decreases in average hours worked was lower Several firms noted that their job levels would be higher if they could find and retain employees. One firm difficulty launching a third shift because of a lack of workers; another will add cobots (or collaborative robots) to increase throughput

4 MODEST ACTIVITY WITH REGIONAL VARIATION 4 On balance, wage growth continued at a moderate pace. Nearly half of the nonmanufacturing contacts reported increases in wage and benefit costs. Most large firms reported modest, steady wage hikes, while some smaller firms appear to be catching up with wage hikes in excess of 3 percent. Staffing firms reported that resistance to raising starting wages softened further among their clients after years of holding wages steady. Price increases remained modest for most firms One firm noted significant pushback to its announced price hikes from a major retail customer. Other firms reported difficulty meeting the prices of foreign competitors not exposed to tariffs on the primary input commodities of their products. Looking ahead six months, manufacturing firms continued to anticipate higher prices just over half expecting increases in prices paid and slightly under half expecting increases in prices received for their own goods. Consumer Spending Nonauto retailers reported strong back-to-school sales generally credited the growing economy and strong consumer confidence strong sales also benefited by comparison to weak sales in 2017 tourism continued to report modest growth very strong demand in the Poconos region despite bad weather and slightly higher gas prices Financial Services modest declines in commercial real estate lending District 4 Cleveland Real Estate and Construction rents remained strong in the slowly growing nonresidential real estate market, especially offices and industrial warehouses demand for industrial space continues to outstrip supply in southern New Jersey and the Lehigh Valley in Trenton, NJ, and Carlisle, PA, the local labor markets are struggling to supply sufficient labor to meet demand. Commercial contractors noted an uptick in labor hours but large projects are winding down, and nonresidential construction activity is expected to wane over the next year. Business activity grew modestly customer demand was stable hiring continued at about the same moderate pace ongoing shortages of quantity and quality of available labor firms increased wages modestly to reduce worker turnover. Upward pressure on input costs was strong, notably for metals, construction materials, and fuel. Final selling prices increased as manufacturers, builders, and transportation firms raised prices to cover increased input costs. Manufacturing capacity utilization rose with strong demand. Freight demand plateaued at a high level firms increasingly feeling the pinch from limited trucking capacity. Retail demand, excluding autos, was flat. Nonresidential construction activity picked back up after a lull hiring activity broad-based momentum similar to recent survey periods business conditions favorable and stable supporting overall demand for workers worker shortages across many sectors. One retailer losing warehouse workers faster than it can replace them. One trucking contact had 10 empty trucks because inability to find enough drivers with Class A commercial driver s licenses. Some manufacturers reported increases in overtime hours worked overall gains in staff levels were limited by high worker turnover. wage trends comparable to recent survey periods many contacts reporting wage increases slightly above inflation increased competition requiring firms to boost wages to retain workers a number speculated raises not likely sufficient to stem turnover One retailer gave a 9 percent raise to new and current staff in the hope that the higher wage will reduce turnover. One construction contact taking a more targeted approach 10 percent to 15 percent raises case-by-case basis; firm-wide, wages were raised by only about 2 percent professional services using bonuses and non-wage components to increase compensation. Upward pressure on nonlabor input prices was strong Construction contacts reported increases in prices for LED lighting, concrete, steel, lumber, and copper. The majority of contacts attributed at least some of these increases to import tariffs Only one construction contact noted diversion of materials for hurricane relief may have had an additional impact on prices. A few remarked that the amount of time suppliers held their prices constant had diminished noticeably

5 MODEST ACTIVITY WITH REGIONAL VARIATION 5 Final selling prices rose with about the same momentum construction firms were less aggressive in raising their prices raising prices enough to maintain margins one builder holding prices and offering more incentives and giveaways. Nearly two-thirds of manufacturing contacts raised their prices fifth consecutive reporting period more than half reported raising their prices. Service sector industries reported relatively more modest price increases as firms attempted to cover rising worker compensation costs. Consumer Spending Retail demand flat breaking nearly year-long trend of improving demand. Expectations near-term were mixed nondurable goods expect demand to pick back up in advance of the holiday season sales within the Fourth District in line with national sales profit margins generally unchanged inventory levels good. Manufacturing Manufacturing demand remained strong Industrial equipment reported strong demand from construction equipment Several increased capacity utilization to keep up with strong demand long lead times and tariffrelated gaps in supply chains caused mismatches in inventories. Contacts reported increased capital expenditures to keep up with customer demand and fill supply chain gaps left by suppliers capacity constraints. Real Estate and Construction Nonresidential builders reported a pickup in demand after a lull Demand driven by private spending Builders note backlogs are still high strength in the broader economy they expect growth to continue in the near term. Nonresidential construction prices rising as builders pass through increasing materials costs, especially for metals, but builders are not increasing their margins. Financial Services...increased activity in commercial real estate District 5 Richmond Nonfinancial Services firms reported stronger demand transportation demand plateaued at a high level limited freight capacity continues to hamstring growth growing discontent along the food supply chain about the limited availability of trucks to transport their goods firms planning to pass rising transportation costs through economy expanded at a moderate rate manufacturing expanded moderately rising materials costs and some hurricane-related disruptions were reported. Imports increased exports declined some ports sustained property damage due to Hurricane Florence. Trucking activity remained robust despite highway and service center closures in hurricane-affected areas. Tourism and business travel fell due to Hurricane Florence Farm animals were killed and crops were damaged by Hurricane Florence Residential and commercial real estate activity picked up modestly loan demand picked up demand for nonfinancial services rose at a moderate pace. Labor demand strengthened job openings increased wage increases remained temperate prices continued to grow at a moderate rate. demand for labor strengthened moderately employment agencies reported a pick-up in new job openings employers continued to report very tight labor markets and difficulties finding qualified workers firms reported a need for more construction workers, engineers, IT professionals, accounting and finance professionals, plant workers, mechanics, and truckers. Wage increases remained modest. prices continued to grow moderately manufacturer s selling prices grew at a moderate rate input prices rose at a slightly faster rate price increases for packaging materials, paper, steel, aluminum, resin, and concrete Service sector firms reported moderate price growth in prices paid and prices received. Shipping costs continued to increase Ports and Transportation ports saw mixed conditions Some suffered losses from Hurricane Florence closures, property damage, and storm preparation costs. Overall, imports remained strong exports decreased modestly contacts attributed some decline to tariffs on American goods imports remained strong because orders were placed in anticipation of tariff increases

6 MODEST ACTIVITY WITH REGIONAL VARIATION 6 Trucking activity remained robust Demand stayed strong companies continued to turn down business because of a lack of drivers Retail, Travel, and Tourism tourism mixed Hurricane Florence discouraged people visiting parts of the District. In Charleston hotel occupancy fell significantly many hotels and restaurants closed as employees evacuated the area. In Asheville hotels faced high levels of cancellations and local attractions lost business because of the hurricane tourism in areas not affected by Florence was healthy a West Virginia resort reported strong business growth and high bookings for the coming months. retailers reported modest activity Many stores saw sales growth and expected it to continue through the end of the year retailers also expressed concerns about rising costs, some attributed to the recent tariffs, and their inability to pass the cost increase through to customers. Real Estate and Construction Commercial real estate leasing rose modestly brokers reported increased demand for restaurant, grocery, and industrial space retail activity was stable to increasing. Office leasing varied across the District. A North Carolina broker stated that urban office space is in high demand, leading to new construction and conversions vacancy rates decreased slightly across all sub-markets limited inventory pushed rental rates up slightly brokers reported modest increases in prices and sales. Multifamily leasing remained healthy, although reports on construction activity varied across the District. District 6 Atlanta Banking and Finance real estate loan demand strengthened moderately economic activity expanded at a moderate pace most expect the pace to continue through the last quarter of the year labor market remained tight wage pressures increased. Firms continued to note increasing nonlabor costs a growing number reported the ability to pass along those increases. Retailers cited slightly higher sales Tourism activity exceeded expectations residential real estate market activity expanded at a modest pace commercial real estate activity was robust. Manufacturing activity was solid purchasing managers noting increased new orders and production Bankers cited activity was healthy business contacts reported increasing staffing levels, firms continued to cite that tightening labor markets, particularly among low-skill/ hourly jobs restraining business activity. Constraints to growth especially acute in construction, transportation, and manufacturing...some food services turning down new business, reducing shifts occasional fast food store closures contacts continued to note that technological advances had reduced the number of workers needed. A growing number of firms experienced an uptick in merit increases several reported average merit raises in the 3 to 3.5 percent range. Many continued to mention rising labor costs were a challenge, leading some firms to expand their geographical search for workers, relocate operations to lower cost labor markets, outsource work domestically and/or abroad, or wait it out by not filling certain positions. Consumer Spending and Tourism retailers slight increase in sales tourist related retail sales stronger than expected Tourism and hospitality reported higher than expected activity Hotel occupancy and average daily rates were higher than expected in tourist destination cities in Florida, Georgia, and Louisiana Construction and Real Estate Many commercial real estate contacts noted continued strong demand majority of commercial contractors indicated the pace of nonresidential construction at least matched the year-ago level. Most reported a healthy pipeline Industrial backlogs steady rather than growing retail activity stable concern that material price uncertainty presents an ongoing challenge to bidding and fulfilling projects. The outlook for nonresidential and multifamily construction remained positive though uncertain majority anticipating activity to match or exceed the current level. Transportation

7 MODEST ACTIVITY WITH REGIONAL VARIATION 7 activity little changed District ports continued to report considerable growth in freight railroads noted year-over-year increases in total traffic Freight forwarders reported significant capital investments in facilities, aircrafts, and fleets no significant disruptions in freight as a result of changes in trade policy. District 7 Chicago economic activity slowed to a modest pace expected to continue pace next 6 to 12 months. Manufacturing production and employment grew moderately, consumer and business spending increased modestly construction and real estate activity flat. Wages and prices rose modestly financial conditions little changed. Greater-than-usual precipitation slowed harvest reduced quantity and quality Employment growth continued at a moderate pace expected gains to slow to a modest rate over the next 6 to 12 months. Hiring focused on production, sales, and professional and technical workers. As they have for some time, contacts indicated that the labor market was tight difficulty filling positions at all skill levels. Residential and commercial construction contacts lack of workers slowing completion of projects: One reported a delay of 6 weeks because they couldn t find an elevator installer. Most indicated increased tariffs had not affected employment levels. Wage growth remained modest increases most likely for managerial, professional technical administrative manufacturing reported raising wages for entry-level production workers. Many reported rising benefits costs number of firms reporting increases declined rose modestly expected to continue at that rate over the next 6 to 12 months. Retail prices increased slightly expected consumers to see the impact of US tariffs on imports by early Producer prices again rose moderately, reflecting pass-through of higher labor, materials, energy, and freight costs. Consumer Spending increased modestly Nonauto retail sales rose moderately gains in furniture, appliances, hardware, electronics, apparel, hardware, lawn and garden, and hobby sectors slight declines in grocery and jewelry western Michigan reported rising hotel occupancy rates and airport traffic respondents pleased with back-to-school sales and expected good holiday season results Business Spending increased modestly Retail inventories generally at comfortable levels retailers expecting good holiday sales building up inventories Most manufacturing contacts said stocks were at comfortable levels some indicated inventories were too low stocks at steel service centers remained well below historical norms. Capital spending increased modestly expected growth to continue pace over the next 6 to 12 months. Outlays primarily for replacing industrial and IT equipment renovating structures. Most indicated that higher tariffs had not affected their capital spending schedules those who had reacted to tariffs, more said that they were slowing spending than increasing it some indicated they were delaying decisions until the outcomes of trade negotiations were more clear Demand for transportation services remained strong Construction and Real Estate Construction and real estate activity little changed residential rents increased slightly. Nonresidential construction ticked higher contacts highlighting growth in the office-building sector rising labor and materials costs were slowing growth. Commercial real estate activity increased slightly on top of an already strong level reports of increased demand for for-sale industrial properties. Commercial rents ticked higher, and vacancy rates and the availability of sublease space edged lower. District 8 St. Louis Manufacturing Manufacturing production increased at a moderate rate Steel output increased moderately Steel imports continued to decline. Demand for heavy machinery rose moderately growth from the construction and energy sectors. Demand for heavy trucks increased slightly from an already strong level Manufacturers of construction materials continued to report slow steady increases in shipments Economic conditions improved slightly Firms reported slight increases in employment modest growth in wages. Price pressures increased modestly due to higher transportation costs consumer spending remained mixed. Manufacturers reported modest growth increases in production and new orders. Residential real estate activity improved slightly construction activity declined slightly. Commercial real estate markets somewhat weaker bankers reported loan volumes remain healthy growth continues to slow. Agriculture and natural resources conditions have improved slightly

8 MODEST ACTIVITY WITH REGIONAL VARIATION 8 Employment increased slightly Manufacturing employment grew modestly Arkansas reported slight growth Missouri reported modest growth. Transportation employment increased multiple distribution centers announced expansions firms continued to report challenges attracting workers Memphis and Arkansas noted difficulties filling high-wage, technical positions. Firms continued to use a variety of strategies business partnerships non-wage benefits, to recruit employees. One reported launch of programs that teach foreign-born workers English to prepare them for jobs in medical and manufacturing. Wages increased modestly Multiple contacts reported increases for entry-level workers wages grew in manufacturing and trucking generally flat in hospitality Wages for small business in St. Louis rose slightly. Price pressures have increased modestly moderate growth in fuel contributing to rising transportation costs Louisville increase in rail prices. Coal prices increased moderately steel prices decreased slightly remain elevated compared with a year ago Consumer Spending mixed activity sales tax collections increased in Arkansas, Tennessee, and Kentucky relative to a year ago decreased in Missouri Hospitality sales lower compared with last year also pessimistic outlook for the remainder of Arkansas tourism sales tax revenue slightly increased year over year. Nonfinancial Services Activity improved modestly The number of posted vacancies increased in Louisville, Memphis, and St. Louis. The transportation sector continues to exhibit strong growth higher demand for rail traffic increased investment in delivery and fulfillment centers growth is somewhat constrained by increased freight and fuel costs trucking shortage in drivers further compounded by limitations on driving hours healthcare industry reporting higher demand increased investment in hospitals. Real Estate and Construction Commercial real estate activity declined slightly Louisville reported decreased activity in office and retail demand for office space relatively stagnant. District 9 Minneapolis Commercial construction activity decreased slightly August multifamily permits were unchanged relative to the previous month in most of the District s MSAs Louisville reported a robust level of new construction underway for multifamily also indicated lack of new construction projects for warehouses. economy grew moderately Employment grew moderately strong hiring demand tight labor supply. Wage pressures moderate.growth in manufacturing, real estate, residential construction, professional services, consumer spending, and tourism commercial construction slowed agriculture remained weak. Employment grew moderately despite continued labor constraints. Hiring demand robust Data from state workforce centers showed job postings were up 9 percent strong growth in STEM jobs compared with a year earlier initial unemployment claims dropped by 10 percent over the comparable 2017 period continuing claims were 12 percent lower Wage pressures moderate general business survey found a strong majority of firms raised wages relative to a year earlier, and future increases were also expected increased moderately Numerous manufacturers reported rising prices for certain raw material inputs due to trade conflicts partially passing through to final output prices Consumer Spending and Tourism Consumer spending grew moderately Growing activity in the Bakken oil region was again spilling into higher retail sales in the region and state; North Dakota sales tax collections were 26 percent higher than anticipated retailers in South Dakota reported sluggish late summer sales Tourism activity grew Minnesota lodging properties described a strong summer, with about 50 percent seeing

9 MODEST ACTIVITY WITH REGIONAL VARIATION 9 higher revenue 25 percent saw lower revenue. Expectations for fourth quarter tourism were positive, but more modest. Minnesota hotel demand increased by 3 percent over a year earlier; occupancy rates unchanged increases in average daily rates and revenue per available room Construction and Real Estate Commercial construction activity contracted slightly data suggested commercial construction was down across much of the District compared with a year earlier data showed that new projects and total active construction projects modestly lower than at this time last year. Commercial permitting mixed among the larger markets some continued to see strong multifamily permitting District 10 Kansas City Commercial real estate saw modest growth In Minneapolis-St. Paul, demand for industrial space continued to show strength vacancy rates falling slightly from already low levels despite significant new construction. Office vacancy rates and asking rents generally stable sales of office space trending upward expected to continue to rise in the fourth quarter. Despite a strong increase in new units, multifamily vacancy rates in Minneapolis-St. Paul remained low. Apartment occupancy rates also strong in western North Dakota, thanks to increased activity in the Bakken oil region Economic activity increased at a moderate pace Consumer spending rose moderately retail, auto, and tourism sectors noting higher sales Manufacturing activity continued to grow moderately wholesale trade, transportation, and professional and high-tech sectors reported strong sales. Residential sales continued to decline moderately expectations for additional declines due to seasonal factors and higher interest rates. Commercial real estate activity expanded modestly. Energy activity accelerated, especially for oil additional gains anticipated outlook for District farm income remained subdued employment mixed across industries labor shortages for entry-level and skilled positions. Wage growth accelerated strong wage growth anticipated in the coming months. Price gains also picked up input generally outpaced selling employment mixed across industries most sectors reported rising employee hours retail trade, wholesale trade, real estate, and energy noted increasing employment levels auto sales, restaurant, and tourism reported a decline. Employee hours declined modestly in health services restaurant steady-to increasing for all other industries. Employment levels and employee hours expected to rise modestly majority of respondents noted labor shortages for entry-level and skilled positions, including retail sales, kitchen staff, specialized IT, commercial drivers and skilled mechanics. Wage growth accelerated rising moderately in most sectors and strong growth anticipated in the coming months. Input prices moderately higher selling prices rose modestly. In retail input and selling prices increased robustly expectations for similar gains in the months ahead. Restaurant noted slight gains in selling and input prices both strongly above year-ago levels. Input prices rose strongly in transportation selling prices increased modestly. Manufacturers reported modest price growth for finished products and moderately higher prices for raw materials. Most manufacturing contacts continued to note that recent trade developments had led to higher input prices restaurant, transportation, and manufacturing expected moderate growth in selling and input prices in the months ahead. Consumer Spending Consumer spending rose moderately gains in retail expected slight increases in the coming months. Retail sales expanded robustly household furniture sold well higher-priced items sold poorly Restaurant sales fell modestly but remained well above year-ago levels anticipated sales decline slightly in the next few months. Tourism sales increased slightly projected a slight decline in the months ahead. Manufacturing and Other Business Activity Manufacturing continued to expand at a moderate pace other business experienced strong sales growth. Factory activity grew at durable goods plants nondurable plant activity slowed slightly. The level of production, shipments, and new orders increased slightly each remained higher than year-ago levels. Manufacturers expected moderate increases in capital expenditures in the coming months. Many noted savings due to federal tax cuts majority also noted negative impacts from tariffs, primarily higher input prices wholesale trade, transportation, and professional and high-tech reported strong sales expectations for continued growth in the months ahead. Professional and high-tech firms anticipated capital expenditures to increase

10 MODEST ACTIVITY WITH REGIONAL VARIATION 10 slightly wholesale trade firms expected capital spending to decrease slightly. Transportation expected a modest increase in capital spending some attributing this increase to recent federal tax cuts. Real Estate and Construction Activity in the commercial real estate sector continued to increase at a modest pace as sales, absorption, completions, and prices rose majority of respondents reported higher commercial vacancy rates for the first time since the end of District 11 Dallas Banking slight increase for commercial real estate loans Solid expansion continued Manufacturing output increased robustly demand growth slowed Healthy growth continued in retail and nonfinancial services. Loan demand and volumes increased as did pricing. Home sales were flat to up Drilling activity flat limited pipeline and transportation capacity inhibited growth. Employment increased widespread labor shortages continued to pressure wages restrain business growth in some sectors. Price pressures stayed elevated, partly due to tariffs driving up input costs. Outlooks remained optimistic despite increased uncertainty from trade disputes, rising interest rates, and labor constraints. Widespread job growth continued across sectors labor markets remained very tight most reporting difficulty hiring and several saying the lack of qualified candidates was impeding growth labor shortages spanned most sectors and all skill levels greatest prevalence in mid-skilled positions blue collar workers in manufacturing, construction energy truck drivers. Shortages low-skill workers in the food service and high-skill workers in utilities, telecommunications business and financial services. A few noted labor poaching was a real issue, especially energy sector firms reaching out to workers in manufacturing and retail concern over an extreme shortage of qualified bilingual candidates, particularly for customer service, call centers, accounting, and business development. Upward wage pressure pervasive and strong Some businesses implementing non-wage strategies to recruit and retain workers sizeable signing bonuses, offering part-time and/or flexible work schedules, and keeping employees on the payroll during periods of slower business a staffing firm reported that employers willing to accept candidates that met 60 percent of qualifications rather than usual 80 percent. Price pressures remained elevated due to tariffs, particularly manufacturing and retail. Among manufacturers, roughly 60 percent said the tariffs resulted in increased input costs share among retailers 70 percent. Several noted lower profit margins from not being able to raise selling prices enough to offset the full cost hikes some services firms raised prices to offset wage increases. Construction continued to report high and/or rising material costs. Oil and gas firms said input costs rose faster in the third quarter than in the second and than they were able to raise the prices they charge. Retail Sales sales at Texas stores continued to expand solidly companywide and online sales growth abated somewhat Some noted tariffs are prompting uncertainty online retail has driven some retailers to shift their business model to remain competitive offering in-store pickups for online orders and price matching. Retail notably more optimistic in their outlooks than they have been all year. Nonfinancial Services sector continued to expand robustly revenue growth led by transportation services administrative support services accelerated in professional, scientific, and technical services remained lackluster in leisure and hospitality. Most staffing firms reported surging demand for their services some concern about potential effects of rising interest rates roughly half of Texas general services firms said tariffs were driving up uncertainty outlooks were largely optimistic District 12 Construction and Real Estate Apartment demand exceeded expectations in most major metros in Texas pushing up occupancy and rents slightly.

11 MODEST ACTIVITY WITH REGIONAL VARIATION 11 San Francisco Economic activity continued to expand at a moderate pace labor market tightened noticeably wage pressures picked up. Price inflation increased moderately. Sales of retail goods picked up slightly activity in consumer and business services was solid the manufacturing sector expanded moderately agriculture improved somewhat residential and commercial real estate market activity expanded at a strong pace. Lending activity picked up moderately. labor market tightened noticeably continued hiring challenges due to labor shortages California banking industry observed uptick in mergers resulted in a modest decline in employment as the banks involved resolved job redundancies. A major shipping and logistics business in Northern California reported strong employment growth due to recent and anticipated increases in demand for its services. Wage growth picked up broadly continued upward compensation pressures for finance professionals, health-care providers, and business consultants. A contact in the retail industry raised starting wages in anticipation of intensifying labor shortages during the holiday season some businesses increased benefits like vacation allowances and onetime bonuses rather than wages. Price inflation increased moderately Several noted a moderate pickup in price growth for metal inputs due mostly to tariffs. Rising energy costs resulted in pricing pressures for transportation services and petroleumbased inputs to construction and manufacturing the hospitality industry in Southern California reported many hotels were passing along higher labor and input costs to guests in the form of one-off surcharges. Pricing pressures in the agriculture markets mixed, but flat Retail Trade and Services Sales of retail goods picked up slightly Demand at home improvement stores increased moderately building materials segment exhibited modest weakness. E-commerce retail sales grew somewhat, reflecting gains in consumer confidence Activity in the consumer and business services sectors was solid shipping and logistics industry noted an increase demand for freight services, especially small businesses hospitality industry noted that hotel bookings for leisure guests were solid, and discretionary on-site spending grew business reservations declined somewhat on a year-over-year basis. Real Estate and Construction Commercial real estate activity robust. Construction activity solid, especially industrial and warehouse Southern California rents and occupancy rates increased. In Oregon, commercial activity expanded in rural areas with lower land costs and rents. Demand for retail spaces at malls declined somewhat, resulting in lower occupancy rates.

12 MODEST ACTIVITY WITH REGIONAL VARIATION 12 The 12 Reserve Banks are denoted by black squares, the 24 branches as red circles (a 25 th branch in Buffalo, NY has been closed since 2008), and the Washington, DC headquarters is marked with a star. Source: Wikimedia Commons, November 25,