June 5, 2013
First District business contacts generally report year-over-year increases in economic activity, although some--notably in software and information technology services and staffing--indicate the pace of growth is slowing. Retailers mostly say demand is recovering well after weather-related softness during the winter; manufacturing contacts' sales are also ahead of last year. With only a few exceptions, businesses are not hiring much beyond replacement. Aside from food, input prices are generally said to be unchanged, although a few manufacturers have raised their own prices. The outlook is fairly positive, with most respondents expecting the current pace to continue or pick up.
Retail and Tourism
Retailers are rebounding from the negative impact of harsh and prolonged winter weather earlier this year, but the late arrival of warmer spring weather has affected the sales of some seasonal items. Merchant contacts report April year-over-year comp-store sales ranging from a 0.5 percent decline to a 9 percent increase. Demand is strong for women's apparel, home furnishings, and furniture. Respondents say consumer sentiment seems a bit more positive, especially over the last month or so, yet overall expectations remain cautious. Contacts continue to predict low-single digit sales increases for 2013.
Greater Boston tourism revenues are up after softer performance attributed to harsh winter weather earlier in the year. Through Q1 2013, hotel revenues are up 2 percent year-over-year, and occupancy rates are also up 2 percent. Restaurants revenues are 1.5 percent ahead of a year ago. Much of this increase is attributed to strong domestic and foreign business travel. Attendance at museums and attractions is down, perhaps due to weather affecting leisure travel plans. Boston-area tourism was reduced by the marathon bombings as some groups were forced to reschedule visits.
Manufacturing and Related Services
Three-quarters of contacted manufacturers report higher sales compared with the same period a year ago. Geographically, firms say that Europe remains weak and that both the U.S. and Asia are growing but slightly below expectations; by contrast, one contact called Europe a bright spot because it exceeded somewhat low expectations. An electrical equipment manufacturer reports low to middle single-digit growth across the board except for their products going into residential construction, which consistently rack up double-digit growth versus the year-earlier period. Several contacts, including the electrical equipment manufacturer and a supplier to the semiconductor industry report unusually volatile month-to-month readings.
All of our contacts report little or no pricing pressure on the input side and several say they were able to make price increases stick on the sell side. A dairy firm says food prices are up because of drought conditions, but notes that recent rainfall may change that. Winter storms had some temporary effect on energy prices for some firms.
Five of eight contacts are hiring, although only one is hiring in any significant way and their hiring is outside the U.S. Of the contacts not adding to headcounts, only one is laying off workers; this firm--a maker of parts for machinery--is planning to reduce headcount by 2 percent to 3 percent over the next six months on top of a similar reduction over the last six months.
Six of eight respondents are increasing capital expenditures and one of the others says its expenditures are low only relative to some exceptional investments in 2012. One contact in the electrical equipment business says they have "too much cash" and are looking for investments. Firms cite mixed opportunities to acquire other companies, with one having a "full pipeline" of acquisitions and another saying there is nothing to buy.
Three-quarters of contacts are reasonably optimistic about the outlook. Several who reported some softness in the winter said their customers were talking about demand growing in the second half.
Software and Information Technology Services
New England software and information technology services contacts generally report continued sluggishness through May to date, with year-over-year revenue increases moderating further in the most recent quarter to the low or middle single digits. Two contacts attribute the slowdown to economic uncertainties in the U.S. and Europe, which they say have led many manufacturers to delay the execution of long-term license agreements. A healthcare contact, by contrast, attributes the dip to the ending of federal stimulus funding for electronic health records software. Only one contact, a provider of cloud-based payment and banking software, reports accelerated growth, with revenues in the first quarter up more than 15 percent relative to Q1 2012. Lackluster activity has led the majority of contacts to slow the pace at which they are hiring; many now plan to maintain their current headcounts through the end of the year. Selling prices and capital and technology spending are largely unchanged. Looking forward, software and IT firms in New England remain cautiously optimistic, with most expecting more robust growth in the second half of 2013.
Staffing Services
First District staffing contacts report weaker-than-expected demand in recent weeks, with billable hours generally falling towards their year-earlier levels. The dip in activity reportedly reflects a leveling off in the IT sector and downticks in temporary and permanent hiring in the light industrial and manufacturing sectors. There is, however, renewed activity in the healthcare sector, with one contact reporting a substantial increase in demand for ambulatory nurses. In terms of labor supply, candidates with high-end skill sets, such as mechanical and electrical engineers and software developers, remain hard to find. Nevertheless, bill rates and pay rates have gone largely unchanged in 2013. Looking forward, staffing contacts are generally less upbeat than they were three months ago, with most expecting only modest growth through the end of 2013.
Commercial Real Estate
Commercial real estate leasing and sales activity held roughly steady or improved in recent weeks in the First District. A Hartford contact notes a modest increase in foot traffic for downtown and suburban office space but no significant changes in rents or vacancy rates since the last report, virtually no construction, and a flat industrial market. In Boston's inner-suburban corridor, office rents are up and vacancies down. In Boston proper, prime retail rents are up at least 5 percent over the quarter; office fundamentals continue to improve across the city, very slowly in the financial district and at a brisker pace in the Seaport/Innovation district. Leasing volume dipped slightly in downtown Providence and mostly improved in suburban Rhode Island, with rents about flat. Defense-industry tenants in southern Rhode Island are reducing their space needs in response to federal spending cuts, moves that are likely to put downward pressure on rents in the local submarket in coming months. In Portland, retail leasing activity picked up and apartment rents rose while the office leasing market was flat. Business confidence in southern Maine reportedly improved but no major expansions or hiring plans were announced.
Values for prime downtown Boston properties--including office buildings and apartment buildings--continue to rise, leading to talk of overheating. Investors are purchasing empty retail space in Boston for the first time since the onset of the Great Recession. Continuing a recent trend, investors are increasingly purchasing prime, well-leased commercial properties in Hartford, Providence, and Portland, markets which are seen as value propositions in comparison with higher-priced Boston. So far in the cycle, however, new construction in these markets has been very limited. Commercial real estate loan demand rebounded at one regional lender as competition for such loans drove mortgage interest rates to new lows.
Contacts are mostly optimistic that commercial leasing fundamentals will continue to improve at least slowly in the coming months. The outlook includes upside potential for absorption in Providence, Hartford, and Boston based on deals in progress and current employment trends. In Rhode Island, however, the upcoming gubernatorial election and state and local budget deficits--as well as the defense cutbacks noted above--present downside risks. In Connecticut, negative effects of sequestration on defense-industry tenants seem inevitable, but the commercial leasing implications are uncertain.
Residential Real Estate
Throughout much of the First District, the median sales price of single-family homes and condos rose year-over-year in March and April. Sales of single-family homes also increased from a year earlier in most of the region during April, after weaker sales results in March. According to contacts, demand for homes remains strong due to low interest rates, relatively low prices, and improving confidence among buyers. However, contacts continue to report that shrinking inventory levels are slowing sales and placing upward pressure on prices. In Massachusetts and the Greater Boston area, dwindling inventory levels have been a significant source of concern; contacts in the other states also express worry about falling inventory levels, but to a lesser extent. Several respondents note that much of the housing recovery has been centered around urban areas while rural areas have experienced more modest improvements. Within the Greater Boston area, realtors have observed an increasing frequency of multiple offers on properties.
Contacts anticipate that single-family home and condo prices will continue to rise over the next several months, with inventory levels a significant factor determining the degree to which sales can grow. Overall, contacts say they feel optimistic about the trajectory of the housing market and believe the market will continue to recover as general economic conditions improve.