Commercial Real Estate Activity in the Tenth District Declined Further

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The Federal Reserve Bank of Kansas City released its new CRE Index today. The value of the index fell from -0.8 to -1.3, indicating the previously low level of commercial real estate activity declined even further below historical norms during the last quarter of 2023. The level of commercial real estate activity has been declining over the past 12 months as the Federal Reserve tightened financial conditions.

“Though interest rates and financial conditions stabilized near the end of last year, CRE conditions in the region deteriorated further due to large declines in the use and absorption of commercial space,” according to Nicholas Sly, vice president at the Federal Reserve Bank of Kansas City.

Chart 1: The KC Fed CRE Index declined due to falling absorption rates and lower CRE loan demand

Chart 1 shows that the values of the KC Fed CRE Index over time. The value of the index drops precipitously during the 2007–08 global financial crisis. The value of the index begins to rise in 2009 but does not normalize for several years, consistent with the slow recovery following a period of financial instability. The value of the index remains elevated through the longest expansion on record for the U.S. economy, before collapsing in 2020 at the onset of the COVID-19 pandemic. The index recovers much more quickly from the pandemic than from the financial crisis but indicates signs of stress in recent quarters.

Note: An index value of zero corresponds to overall conditions being at their historical average and differences from zero are measured in terms of standard deviations from the historical norm.

Table 1: Primary divers change in the current KC Fed CRE Index

Table 1 lists all the variables that comprise the CRE index accompanied by their standardized contributions to the change in the index. The variables with the largest contributions to the change in the index are CRE Absorption and CRE Property sales.

Notes: Contributions may not add to total change in index due to rounding. The contribution of each metric is calculated as the change in the standardized value of the variable from the previous quarter multiplied by the coefficient of the variable in the index.

Chart 2: Though most CRE contacts reported adverse conditions in the sector, responses were mixed across property types and market segments

Chart 2 shows the change in the Shannon entropy of the CRE index respondents over time. The measure is inverted to show that higher levels of Shannon entropy indicate lower signal quality. Shannon entropy declined during the first half of the recovery period between 2010 and 2015 and began to rise again between 2015 and 2019. Shannon entropy has been at an elevated level for the past few years.

Note: Values correspond to measures of Shannon entropy, with higher numerical values indicating more mixed responses and lower signal quality of the KC Fed CRE Index.

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About the KC Fed CRE Index


Nicholas Sly

Vice President, Economist, and Denver Branch Executive

Nicholas Sly is Vice President and Denver Branch Executive at the Federal Reserve Bank of Kansas City. In this role, he serves as the Bank’s regional economist and its representa…

Bethany Greene

Research Associate II

Bethany Greene is a Regional Affairs Research Associate at the Denver Branch of the Federal Reserve Bank of Kansas City. In her role, she provides research support for a number o…