Beige Book Report: Boston
October 15, 2014
Reports from business contacts paint a mixed picture of economic conditions in the First District. Manufacturers cite weaker results than in the last few reports and retailers are seeing flat to moderately increasing sales, while the tourist sector continues to be robust. Results from the consulting and advertising sector are generally quite positive. Commercial real estate markets are level or improving in the region, while residential real estate contacts mostly report declines in sales and prices, but ongoing cautious optimism. Firms are not generally hiring, on net, but those with substantial increases in business--one manufacturer and several in consulting and advertising--are raising their headcounts. Price pressures remain minimal according to contacts, with manufacturers and retailers noting only selective and modest price increases.
Retail and Tourism
Retail contacts for this round report comparable-store sales that are flat or increasing year-over-year; those with increases cite mid-to-high single digit growth from a year earlier. Spending is strong for furniture, household items, leisure and sporting goods, and apparel. Inventories are either "healthy," slightly up, or slightly down, depending on the contact. Respondents cite some modest price increases (2 percent to 3 percent) on certain items and anticipate this trend will continue. For the rest of the year, contacts continue to predict low-to-mid single-digit sales increases on an annual basis, with an outlook for the U.S. economy that ranges from "sideways growth" to "an optimistic outlook for steady growth."
The Boston-area economy continues to enjoy a strong boost from travel-related spending. In August 2014, hotel occupancy rates were up 12 percent year-over-year, while average nightly room rates were up almost 18 percent from August 2013. Through August, restaurant revenues were up 3.5 percent year-over-year, while attendance at museums and other attractions was up 2.2 percent. Though the results are not yet in for September, advance activity was strong for both September and October, traditionally the peak travel months. The hotel industry is predicting a 7 percent revenue increase for 2015 over 2014, with most of this growth reflecting rising room rates.
Manufacturing and Related Services
Of the 11 manufacturing firms contacted this cycle, five report some weakness in sales, a much higher number than in any recent cycle. The reasons cited for the weakness are varied. A manufacturer of industrial motors and brakes says that August was typically slow but that sales had not bounced back in September as much as they usually do, with orders down about 5 percent year-on-year. A furniture maker cites a 10 percent dropoff in sales during the winter which continued through the summer. A firm making advertising products says that sales have been declining 10 percent per year for a while.
One contact expresses caution about an "order bubble" in commercial aviation, an industry that has generally been a robust source of growth in the region. According to the contact, airlines order jet planes to make sure that if they need them, they have a slot in the queue; the worry is that at some point there could be a wave of cancellations.
None of our contacts reports excessive pricing pressure from suppliers or excessive pushback on price increases from customers. One contact says it is "always a battle," albeit successful, to convince customers to accept price increases. None of our contacts is laying off, but only one reports large hiring increases. A contact in the media business says they are "very careful with headcount." The one firm to report substantial hiring, a biotech firm, cites rising costs of hiring skilled workers in New England. As usual, several contacts say they are always looking for workers with particular manufacturing skills, such as machinists. Our contacts report no significant changes in inventories. Most firms cite increased capital spending more or less in line with their plans; only the biotech firm reports major increases.
In general, the manufacturing outlook is positive but very guarded. Two firms, the manufacturer of motors and brakes and a firm in the textile and chemical businesses, say that they are waiting to see how things play out in the fall.
Selected Business Services
Most contacts report that demand for consulting and advertising is up from a year ago, although the pace of growth varies across sectors and firms. Government and strategy consultants note a strong uptick in requests for proposals and eagerly await contract award decisions. A high-end economic consulting firm is still overwhelmed with work, mostly related to mortgage-backed securities (MBS) litigation, and at 12 percent growth year-over-year is now beyond capacity. An advertising merchandise firm is slightly outpacing the 5 percent growth they estimate the industry is experiencing on average; they are seeing less pushback on prices from their large clients and cite an increase in large orders. In healthcare consulting, contacted firms' revenues range from flat to up 10 percent from a year ago.
Prices are increasing in a bimodal fashion for contacts in consulting: Firms with relatively flat revenue are holding price structures constant for now, even as they bid on more jobs and anticipate winning their "usual" fraction; those whose business is booming are raising prices somewhat, taking on new personnel, raising wages, and experiencing increased compliance costs, and revenue growth is still outstripping costs. An advertising materials firm that has exhibited steady growth is keeping to its 5 percent increase in staff for this year, while the better-faring healthcare consulting firms are increasing employment in the 6 percent range. These firms are generally filling client-facing salesperson roles with some ease, and developer and e-commerce related roles with greater difficulty.
All contacts are hopeful about the future; they say that macroeconomic conditions are improving. Even the slower-growing firms see increases in demand and additional deals in the pipeline, and estimates for next year's growth range from 5 percent to 15 percent. The government and strategy consulting contacts' main concern is that they secure a normal percentage of the contracts for which they are contending. The business strategy contact notes strong business in the Northeast, but is concerned over a lack of new businesses being formed. The economic analysis firm continues to expect MBS-related work to dry up soon and is comfortable with the idea of throttling back growth when it happens. Healthcare consulting contacts feel somewhat at the mercy of government healthcare reforms, but generally feel that "the wind is at their backs" and growth will be sustained for the foreseeable future.
Commercial Real Estate
Commercial real estate fundamentals are either holding steady or improving across the First District. In Boston, contacts report that rents continue to rise in the popular Fort Point Channel area and have even started to increase in portions of the Financial District after several flat months. Healthy demand for office space and lack of new office construction are seen as the forces behind the latest rent increases in Boston, which are perceived as being in excess of increases in operating costs. Office leasing is also reportedly strong in Boston's inner suburbs, such as Waltham and Burlington. Construction activity in greater Boston is reportedly steady, but at a high level, with an emphasis on mixed use and "adaptive reuse" of existing structures. Labor shortages and associated high labor costs are seen as potential constraints on the growth of construction activity moving forward, in Boston and more broadly within Massachusetts. In Providence, leasing activity picked up modestly in both the office and industrial sectors since the previous report and industrial space remains in short supply in relation to demand. In greater Portland, the retail sector continues to grow, resulting in higher rental rates downtown and increased construction of small-scale retail outlets in surrounding areas. Maine's hospitality sector also remains strong, with better-than-expected occupancy rates at recently opened hotels in Portland and new hotels under construction around the state. In Hartford, leasing volume is unchanged in recent weeks and there is no significant construction activity reported. While that city's office vacancy rate has declined slightly in recent months, there has been no noticeable increase in asking rents. Also in greater Hartford, investment sales demand remains healthy and the number of properties being placed for sale is on the rise. A similar increase in supply of buildings for sale is reported for greater Boston, and contacts in both cities infer that a growing number of owners believe that prices are at or near their peak, borrowing costs are near their trough, or both. Contacts also report that demand for Boston's commercial real estate, especially from foreign buyers, remains strong and is expected to continue so for the foreseeable future.
Contacts are either cautiously optimistic (as in Hartford and Providence) or optimistic (Boston and Portland) that commercial real estate fundamentals will continue to improve. In both Providence and Hartford, contacts note that uncertainty over the outcomes of upcoming state and/or local elections is contributing to uncertainty in the local economic outlook.
Residential Real Estate
Closed sales of both single family homes and condominiums declined in August compared with a year earlier in at least four of the New England states. In Maine, by contrast, sales of single family homes increased as condominium sales decreased. Information for New Hampshire is not available. The median sales price also declined relative to August of last year for single family homes and condominiums in at least four states. The exception is Massachusetts, where prices for single family homes increased year-over-year for the twenty-third consecutive month and condominium prices rose for the fifteenth consecutive month. Massachusetts contacts say the sales decline and price increases are driven primarily by a shortage of inventory, as demand is steady; inventories have been falling on a year-over-year basis for more than two years. Contacts say affordability is a concern: "With prices on the rise, it's becoming more difficult to save the down payment, especially with rents as high as they are. We are hearing that buyers are approaching their threshold for what they are willing to pay." In contrast, Maine is seeing inventory increases and contacts expect to be busy in the fall market. In Connecticut and Maine, contacts report a need for higher paying jobs in their states to help sell the inventory of non-starter homes. As one contact in Maine stated, "We need the middle class to feel better. Right now they question what the next few years will be like." Notwithstanding declines in closed sales and median sales prices, residential real estate contacts say they are cautious but optimistic.