Beige Book Report: Boston
July 17, 2013
Economic activity in the First District continues to expand at a moderate pace, according to business contacts. Retailers, tourism contacts, manufacturers and consulting and advertising contacts all report modest increases in sales. Commercial real estate conditions are improving or holding steady, depending on location. Residential real estate contacts report increases in both house prices and sales. Overall prices are rising at a modest pace, generally in line with cost increases. Most businesses are holding employment steady, with substantial staffing changes only at firms experiencing significant increases or decreases in sales. Contacts generally expect the recent trend of moderate growth to continue.
Retail and Tourism
Retailers contacted for this round report year-over-year comp-store sales increases ranging between 1 percent and 5 percent. One contact had a low single digit decrease, but notes that sales trends have been improving. Demand is strong for all apparel categories, furniture, sporting goods, and mobile technology. Consumer sentiment continues to pick up, albeit very slowly, and prices at the wholesale and retail levels remain steady. All of the contacts expect continued slow-growth of the U.S. economy.
Through May, hotel revenues are up 1.5 percent year-over-year. Restaurant revenues are up 2 percent, slightly better than expected. Contacts attribute these increases to strong corporate business travel and entertaining. There is some softness in domestic leisure travel, as attendance at museums and other attractions is below expectations. Some of this decrease might be due to record-setting rainfall in New England during June. Contacts expect that leisure travel will increase during the summer travel season.
Manufacturing and Related Services
Most of the 13 manufacturers contacted in this round report modest increases in sales. The one firm to report a significant decline in sales, a manufacturer of electric motors and brakes, could not pinpoint any specific reason for the weakness. Europe remains a source of weakness and China continues to inject volatility for manufacturing exports. One contact reports that sales in China of its products going into new commercial construction were up 46 percent in the second quarter. Only one contact, a manufacturer of textile and printing equipment, specifically mentions the evolving macroeconomic policy picture as an issue, saying that everything depends on what happens to interest rates. All but one of our contacts say that their outlook is for stable or higher sales going forward, but none report having raised their forecasts in the recent months.
Only one of our contacts cites significant staff reductions, the same firm that notes declining sales. That said, the only firms hiring in any significant way are rapidly growing companies in the technology and life science areas. Most of our contacts, 8 of 13, report no change in employment.
All of our contacts, including the one with declining sales, say that their investment plans have not changed and most report the same or higher levels of investment for 2013 as for 2012. Our contact at the firm with declining sales says that they try not to let the business cycle affect investment decisions as, "A good investment is a good investment."
As far as pricing is concerned, no one reports anything out of the ordinary. Firms that need to raise prices, typically, appear to be able to do so; some raw materials prices, like copper, are less of an issue than they were a year ago.
Selected Business Services
Consulting and advertising contacts in the First District report a generally positive, but not exuberant, second quarter. Economic consulting has experienced very strong demand due to growth of high-stakes litigation. Healthcare and pharmaceuticals consulting contacts gave mixed reports, with several contacts reporting robust demand for services related to process efficiency, effectiveness analytics and marketing support, while another reports a slowdown in IT adoption. Strategy consultants had mixed results, with large firms faring better than smaller firms, largely due to greater exposure to the recently booming private equity industry. Marketing and advertising contacts report a slight uptick in growth from an already strong first quarter. Finally, a government contractor reports flat revenue.
Contacts report either no cost growth or costs rising roughly in line with 2 percent inflation, with the exception of one firm whose health and business insurance premiums rose 8 percent to 10 percent on an annual basis. Firms were roughly split between those facing pressure to keep rates flat and those with robust enough demand to institute rate hikes of 3 percent to 5 percent on an annual basis. About half of contacts report no net hiring, with the others increasing their workforces by 3 percent to 5 percent, mostly through larger incoming classes of entry-level workers beginning this summer. Firms reporting no net hiring were split between those who are waiting for stronger demand to justify hiring and those who hired rapidly in the recent past and are trying to adjust to their new size.
Aside from a government contractor who is too uncertain about the future of fiscal policy to offer any clear forecast, contacts expect growth to either pick up or remain strong for the rest of the year. Aside from the government contractor, contacts were minimally concerned about fiscal issues, the European debt crisis, and the state of the macro economy.
Commercial Real Estate
Commercial real estate markets in the First District are, for the most part, maintaining a solid footing. In Boston, rents on prime retail properties continue to climb and office rents are described as steady or rising, depending on location. Office leasing volume is holding steady in Hartford, although deals consist largely of short-term lease extensions with no expansion of space needs. Also in the Hartford area, investment sales demand remains strong for multifamily structures, while well-leased office buildings garner growing investor interest. In Providence, office leasing negotiations proceeded slowly as some tenants pushed back against landlords' rising rent demands, and some office sales fell through or stalled in response to June's spike in long-term Treasury rates. Also in response to the latter development, a regional banking contact reports that borrowing rates were raised on some commercial mortgages under negotiation and, moving forward, 10-year fixed-rate loans are likely to become more scarce. However, a Boston contact reports that borrowing rates and capitalization rates on commercial properties held largely steady in recent weeks.
The outlook among First District contacts is for slow improvement in fundamentals for the rest of 2013, but some downside risks were noted. For example, a gun manufacturer in Connecticut announced plans to relocate to South Carolina in response to the state's passage of stricter gun-control laws, taking jobs out of the state and vacating a significant amount of commercial space. Other gun manufacturers in the state are reportedly likely to follow suit in the coming months. A seasonal slowdown in leasing volume is expected in Providence for the summer months, and a few contacts across the District mention interest-rate movements as a considerable source of uncertainty for investment sales moving forward.
Residential Real Estate
Single-family home and condominium sales rose throughout the First District in May. Contacts in the region report strong demand for housing, particularly in urban areas of New England. According to contacts, slight increases in interest rates will likely spur more buyer activity in the short term as households try to lock in historically low interest rates. In Massachusetts, particularly in the Greater Boston area, inventory levels remain low, placing upward pressure on prices. Contacts in the Greater Boston area caution that inventory remains the most significant constraint on sales growth. In other parts of the First District, smaller cities report depleting inventory levels in urban centers, though realtors in these areas feel that a sufficient number of homes are available to satisfy prospective buyers. In contrast to much of the region, Rhode Island maintains a high level of inventory, but that market appears to be recovering as sales activity and prices continue to increase.
Contacts expect sales activity and the median sale price to continue their upward trend. Inventory levels will likely remain an issue in urban areas due to a lack of new construction there. Contacts anticipate that homeowners may be more inclined to list their home for sale as house values continue to appreciate. Overall, contacts feel the market remains poised for healthy growth in the coming months.