Beige Book Report: Boston
March 4, 2015
Business contacts in the First District are fairly upbeat this round, notwithstanding selective negative impacts from unseasonably severe weather in southern New England. Most responding retailers and all contacted manufacturers report sales growth from a year earlier; software and information technology services firms also cite revenue increases, and residential real estate contacts say December was strong. By contrast, staffing firms have seen business activity fall off because of weather closures, and residential real estate markets are said to have softened in early 2015 because of the inclement weather. Commercial real estate markets remain mostly solid in the region. Labor markets are largely unchanged, as most business contacts are doing minimal hiring; nonetheless, staffing firms cite inadequate labor supply as their main challenge. Pricing is not generally noted as an issue, except for some manufacturers' concerns with the strong dollar. The outlook among contacted First District firms is largely positive across major sectors.
Retail and Tourism
First District retail respondents report that their comparable-store sales have ranged from flat to up 18 percent on a year-over-year basis; however, the most frequently cited increases were between 3.5 percent and 5.5 percent. Footwear, outerwear, activewear, and winter sporting goods are selling particularly well. The firm reporting the 18 percent increase attributes about three-quarters of the added volume to strong demand for winter-related items like rock salt and snow shovels, as the Boston area and other parts of New England experienced record snowfalls between mid-January and mid-February. Other contacts say that early 2015 sales continued the positive trajectory in place by the end of 2014, but business dropped off noticeably in late January, when the first of four (to date) significant winter storms hit. One retailer reports that over the last month, about 200 of their stores based in New England had been closed for a few days because of the severe weather.
Contacts report that inventories are being actively managed; some deliberately increased stock by taking advantage of wholesale deals that suppliers offered at the end of 2014, while others plan to do some strategic trimming of inventory over the next 6 to 12 months. Most contacts report having fairly aggressive capital spending plans for 2015; investment is targeted toward information technology plus opening new stores and/or renovating or relocating existing stores. These plans are a reflection of expected continual improvement in general economic conditions, improved consumer sentiment, and hence a better retail environment. During the last few years, one contact has continually maintained a "sideways" (flat) outlook for the U.S. economy, but on this round reports that in 2014:Q4 his firm saw the first consistent week-to-week improvement in sales in several years; as a result, he is upgrading his forecast to "better."
Manufacturing and Related Services
All nine manufacturing firms contacted this cycle report higher sales versus the same period a year earlier. The main headwind they cite is the strong dollar. As a contact in the tool business explained, higher exchange rates have both "transactional costs" which are lost sales due to higher costs, and "translational costs" which result simply from the fact that income denominated in foreign currencies comes in lower when translated into dollars. Two respondents said exchange rates were a first-order problem. For the tool-maker, both translational and transactional costs are issues. For a maker of computer storage devices, the costs appear to be largely translational and are said to be more of a problem for its investors than for its U.S. production and employment.
Of the firms that report inventory, only one cites a significant change; inventories are down, but for reasons of efficiency, not cyclical factors. Other than those expressing concern about exchange rates, only one firm reports a pricing issue. A dairy producer says that its 8 percent increase in sales is entirely due to higher prices: sales by physical volume remain exactly the same; because there was a corresponding increase in costs, profits did not change.
All responding firms report stable or rising employment, but only one firm, a manufacturer of health-care devices, says it is increasing employment substantially, adding about 3 percent to staff each quarter. Even firms with very strong sales growth seem hesitant to hire. For example, a maker of fitness equipment reports 16 percent higher sales in the fourth quarter of 2014 compared to a year earlier but is waiting until the second half of 2015 to see if sales growth continues before adding to headcount. Capital investment is up at all contacted firms. However, none report major revisions to investment plans.
The outlook is positive for all manufacturing respondents. One contact at a semiconductor-related firm says sales are expected to be down in 2015 from a strong 2014, and attributes the softness to long cycles in the semiconductor business, which do not follow the standard business cycle.
Software and Information Technology Services
New England software and information technology services contacts generally report good business conditions in recent months, with year-over-year revenue increases ranging from 1 percent to 14 percent. Contacts add that growth was somewhat tempered by weakness in Europe and Asia, and a slight contraction in customer expenditures in the fourth quarter of 2014. Selling prices have generally remained stable, although one firm is escalating renewal prices modestly. While most firms have maintained current wages, one contact noted upward pressure on salaries. Capital and technology spending has largely remained constant in recent months. The majority of firms increased headcount through acquisitions and increased utilization of contractors. One firm reduced headcount to offset the previous quarter's expansion from mergers and acquisitions. Looking forward, contacts are either slightly less optimistic or maintain the same level of optimism as when we last spoke three months ago. While most firms expect high single-digit year-over-year revenue increases in the first few months of 2015, one firm anticipates revenues to be down year-over-year because of the effects of the appreciation of the dollar on their earnings in Europe and Asia. Some respondents continue to express concerns about the overall macroeconomy.
Staffing Services
First District staffing contacts report softened business activity in recent months, which they attribute to inclement weather throughout the region. Most firms report year-over-year revenue declines in the high single-digit to low double-digit range. Only one firm's revenues were up year-over-year at the end of January; however, the firm expects February revenues to be down substantially. In general, labor demand continues to be strong, with increases for a variety of positions in the healthcare, maintenance work, IT, legal, and sales sectors. Labor supply reportedly continues to be a challenge across all industries, with one firm noting particular difficulties in filling clerical and assembly roles. Firms' strategies to attract candidates continued to include print advertising, online recruiting, networking, and social media outreach. Reports on billing and pay rates are mixed; some firms report low single-digit increases in both rates, while others report no changes. Looking forward, contacts generally maintain a steady level of "cautious optimism." Despite a sluggish start to the year, contacts hope for single-digit to low double-digit year-over-year revenue growth as the weather improves. The main factors expected to affect business in the upcoming months include health insurance costs from the Affordable Care Act, continued weather-related closures, and difficulties in recruiting candidates to meet client demand.
Commercial Real Estate
Across the First District, commercial real estate markets are seen as either steady or improving. According to contacts, the harsh winter weather in the District is affecting retail activity and business productivity in the short run, but is not having significant effects on commercial real estate leasing and sales activity. One contact reports that some office landlords in downtown Hartford are posting higher asking rents for the first time in years. While tenants in greater Hartford appear increasingly to favor downtown locations, it is reportedly too soon to tell whether they will be willing to pay the higher asking rents. Sales activity for commercial properties in Connecticut remains solid while construction activity is minimal. Reports from Boston contacts remain very positive. The city's commercial properties (as well as its multifamily structures) continue to be in very high demand among foreign investors especially, who reportedly rank Boston among the top five commercial real estate markets worldwide. Office rents are seeing significant growth in top neighborhoods as vacancy rates continue to edge down thanks to business expansion and lack of new supply. Despite the tight office market in greater Boston, speculative office construction remains very limited, according to contacts, because construction costs are too high in relation to expected rents; still, build-to-suit office construction continues at a modest pace. Also in greater Boston, a lender to commercial real estate extended a few new loans for construction of small office and industrial properties. In Providence, leasing conditions are unchanged and investor demand for commercial properties remains very cautious, even for properties in prime locations. In Portland, downtown and, especially, suburban office markets are seeing positive absorption, with resulting vacancy rates in the single digits in both submarkets.
The outlook is mostly optimistic across the District, although Hartford and Providence contacts expect slower improvement in commercial real estate fundamentals than do contacts in Boston and Portland. Respondents note a couple of downside risks to commercial real estate investment, including recent property tax increases in Boston and, for some, costs of compliance with the Dodd-Frank Act.
Residential Real Estate
December saw a strong end to 2014, with closed sales of single family homes increasing in all six New England states compared with December 2013. Condominium sales also increased in every state except Massachusetts. The median sales price for single family homes continued to rise in every state except Connecticut (where prices decreased), while condominium prices rose in Massachusetts and Vermont but declined in Rhode Island, New Hampshire and Connecticut. Contacts in Connecticut and Rhode Island emphasized that while Realtors are feeling very positive, the housing market will not be fully "normal" until shadow inventory and distressed sales are reduced further. In other states, lack of inventory remains a concern. In Massachusetts, for example, December was only the second month of the past six with a year-over-year increase in home sales, while prices have increased 26 out of the last 27 months. Contacts in Massachusetts believe these patterns are driven primarily by a shortage of inventory. The level of inventory heading into January in Massachusetts is the lowest in a decade, with only 3.7 months of supply for single family homes and 2.3 months of supply in the condominium market (Realtors say the market is balanced when a 6- to 7-month supply is available).
First District contacts express concern about the possible lasting impact of the unusually harsh recent weather. In Massachusetts and Connecticut, where January data are available, pending and closed sales were down. Contacts across New England report that demand, despite the weather, remains strong but that new listings and hence inventory will decline as homeowners continue to dig themselves out. As one contact in Massachusetts says "the weather will likely only exacerbate the supply-and-demand imbalance in our market and put upward pressure on prices," Longer term, Realtors remain optimistic about the coming year and are hopeful that interest rates will remain low to help potential buyers.