Beige Book Report: Boston
July 15, 2015
Business conditions are stable or improving on balance in the First District. Retail contacts report sales increases that range from modest to large and they characterize their capital spending plans as aggressive. Revenue growth is moderate-to-strong among consulting and advertising contacts, with the exception of an economic analysis firm that posted flat sales. Manufacturers give mostly positive reports, although the stronger dollar weighed on some. No significant upstream pricing pressures are reported among either manufacturers or retailers, although one retailer raised its own prices to cover a wage increase. Labor market tightness is reported for experienced retail salespeople as well as for high-technology workers and various professional positions. Movements in headcounts are mixed, as two manufacturers report cutting jobs while business services firms are expanding payrolls. Boston's commercial real estate market is seeing accelerating rent growth and aggressive bidding for investment properties. Commercial leasing activity held steady in Providence and Portland and slowed in Hartford. Sales of single-family homes increased in all New England states except Massachusetts, and median sales price increased in four of six states. Condominium sales and price movements are mixed across New England states. Inventories of both types of dwellings remain very low in Massachusetts and declined over-the-year in all of the District's states. The outlook is mostly positive among retail contacts, stable or improving among most manufacturing contacts, and quite positive among business services contacts. Residential real estate contacts are optimistic in the face of perceived increases in buyer confidence, while the outlook among commercial real estate contacts ranges from newly pessimistic in Hartford to bullish in Boston and moderately optimistic elsewhere in the region. Several real estate contacts, both commercial and residential, expressed ongoing uncertainty over the impact of eventual interest rate increases.
Retail and Tourism
This round's report is based on a limited sample. Contacts report same-store sales increases ranging from low single digits to low double digits. Demand for home improvement goods is strong and sales of big-ticket furniture items posted solid increases. Inventories are well managed and wholesale prices are steady or up by about 1 percent over one year ago. One contact reports having raised some prices in order to cover salary increases for a class of employees that had not seen a salary increase in five years. One firm finds that recently it has become more difficult to hire experienced salespeople. Capital spending plans among reporting contacts are fairly aggressive and are focused on investment in new stores and online sales channels. There is a general sense among contacts that the economy continues to improve and that consumer confidence is greater as a result. Contacts expect both the economy and consumer confidence to continue to strengthen through the end of 2015 and into 2016.
Manufacturing and Related Services
Of the nine firms contacted this cycle, only one reports declining sales. The firm in question attributes that decline to the strengthening U.S. dollar, a development that has rendered sales to Canadian customers only marginally profitable. The remaining 8 contacts report sales and demand levels that are either equal to or higher than their respective levels one year ago and generally in line with previous forecasts. A toy manufacturer says that the effects of the West Coast port strikes, which had earlier in the year made it difficult to deliver products, are by now largely played out. A second firm also notes that the strength of the dollar dampened its sales growth in foreign markets. A semiconductor manufacturer reports that this highly cyclical industry is on the upswing. Two firms are reducing their inventories for structural, rather than cyclical, reasons. Among contacts, pricing pressures are minimal in both upstream and downstream markets. Two contacts report that headcounts at their respective firms are being reduced. In one case the decline is being achieved through attrition rather than layoffs and reflects a secular decline in demand for the firm's services. In the other case a firm is shifting jobs from the First District to the Midwest while achieving net layoffs. The outlook is stable or improved for all but one contact.
Selected Business Services
Consulting and advertising contacts report strong demand at their firms in the second quarter. However, an economic analysis firm reports that demand is flat because financial crisis-related litigation continues to wane. A marketing firm and a health care consulting firm both report moderate year-over-year growth to the second quarter. Contacts at two health care consulting firms note that profit margins at pharmaceuticals firms are getting tighter. Strategy consultants experienced double-digit revenue growth over the past twelve months and note a trend toward increasing consolidation in their industry. A government consultant posted moderate growth, driven by a welcome rebound in government contracts. Most contacts plan to give compensation increases that are in line with or slightly above the rate of general price inflation, but two contacts follow a profit-sharing model of compensation. All contacts either hired in the past quarter or plan to expand personnel by year's end. Planned headcount increases for the year ranged from 1 percent to 10 percent, with upside potential in the case of the most optimistic firm. Openings for high-technology positions, MBAs and expert analysts are reportedly hard to fill. Contacts are generally quite bullish on the U.S. economy for the remainder of 2015 and identified fewer external risks than they did last quarter. Some contacts perceive the Greek debt situation to be a risk, if not a particularly worrying one, and some foresee an uptick in uncertainty as the U.S. enters a presidential election cycle.
Commercial Real Estate
Contacts report that office rent growth is accelerating in greater Boston, especially in urban submarkets. One contact describes Boston's office leasing market as the strongest in 50 years. Prices for investment properties in greater Boston continue to rise and, despite accelerating rent growth, contacts remain concerned that recent sales prices embed overly optimistic rent growth assumptions. In Portland, commercial leasing activity is steady at a solid pace and a modest amount of build-to-suit construction activity is reported. In Providence, deal volume is steady in both the office and industrial leasing markets and office vacancy rates are expected to decline moving forward amid lack of construction activity. Also in Rhode Island, business sentiment is described as optimistic in the face of modest improvements in current economic conditions and passage of a state budget that is seen as favoring job creation. Hartford's office leasing volume slowed in recent weeks, prompting one contact to downgrade his outlook for that market; however, Connecticut's investment sales market remains quite strong. Bank lenders in greater Boston are reportedly offering very low interest rates and generous terms for commercial real estate mortgages and construction loans. A common concern among contacts in the First District is the potential impact on investment demand for commercial properties once short-term interest rates start to rise.
Residential Real Estate
Homebuyer confidence is up across the First District, according to contacts. Accordingly, completed sales of single-family homes increased over-the-year to May 2015 in every state except Massachusetts, which posted a decline in completed sales for the same period. The decline in Massachusetts' completed sales is attributed in part to the state's long and harsh winter, which deterred foot traffic even into April. Record-low inventory levels in Massachusetts are reportedly causing changes in the contracting environment, such as an increased willingness of sellers to let buyers out of pending sales contracts and a trend of sellers' making a sale contingent on their finding a new home to purchase. Over-the-year to May 2015, supply of single-family homes decreased in every state in the First District while pending sales increased. Median Sales Price (MSP) of single-family homes increased over-the-year in four of six New England states, while in Connecticut MSP is flat and in Massachusetts MSP decreased. The latest decline in MSP is only the second for Massachusetts in 31 months and contacts insist that buyer demand remains strong. The condominium market saw mixed results. Completed condominium sales are down in Massachusetts, Connecticut, and Vermont and up in Rhode Island, New Hampshire and Maine. MSP for condos increased in all states except Vermont and Maine. Massachusetts currently has only 1.8 months' supply of condominiums available, compared with 6 to 7 months' supply in a balanced market. Condominium inventory is down and pending condo sales are up in all six states. Contacts are generally optimistic about regional demand for residential real estate moving forward, despite voicing some uncertainty about the impact of eventual increases in interest rates.