Beige Book Report: Boston
September 2, 2015
Most business contacts in the First District continue to report moderate growth. A couple of sizable retailers, by contrast, cite slowdowns in sales growth in recent months although other retailers maintain year-over-year increases in activity. Ten of 12 responding manufacturers report ongoing demand increases, notwithstanding recent increases in the value of the dollar relative to foreign currencies. Most software and information technology services firms are also seeing revenue growth, while increases at staffing firms are even more robust. Residential and commercial real estate markets across the region continue to improve. Aside from staffing firms, no respondents cite wage increases and headcount changes are small. With minor exceptions, prices are said to be stable.
Retail and Tourism
First District retailers responding in this round report year-over-year comparable-store sales ranging from flat to mid-single digit increases. Two contacts say their sales results continue to improve or remain strong, but two others cite softer sales across all regions of the United States beginning in either mid-June or mid-July. Inventories are slightly higher as a result of these slower-than-expected sales, but not a cause for concern. One contact experiencing the slowdown characterizes the U.S. consumer as taking "a little pause," while the other expects the slowdown to continue into the holiday season, and has downgraded his 2015 sales forecast to an increase of 2.5 percent to 3 percent, from 5 percent.
Business and leisure travel to the Boston area continues to be very robust. Over the first six months of 2015, the average hotel occupancy rate was 79.9 percent, up 1 percentage point from a year earlier, while the average hotel room rate was up 7.7 percent over the first six months of 2014. Now that the high summer travel season is well underway, the average room rate for June is up 11.2 percent over June 2014. January to June attendance at Boston area museums and attractions was down 4 percent year-over-year; much of this decline is attributed to poor weather and disrupted public transit in 2015:Q1; attendance in June alone was up 3.5 percent year-over-year, and anecdotal evidence suggests that the numbers will be strong for July and August. Boston area hotel revenues are forecasted to be up 8 percent year-over-year for 2015 and up a further 7 percent in 2016.
Manufacturing and Related Services
Of 12 contacted manufacturing firms, 10 report stronger demand. The two exceptions are a producer of fitness equipment and a dairy firm; the dairy firm cites a slowdown in sales of specialty products such as almond milk. Many of our contacts mention China as a performance factor, but so far the effects are modest. One contact, a producer of biotechnology equipment, says their sales in China exceeded expectations in the most recent period. A manufacturer of systems for new buildings reports a definite softening in construction activity in China which affects demand for its products. The strengthening dollar continues to present problems for some of our contacts. A producer of biotechnology equipment says that sales are going to be about $1 billion lower (on $14 billion in revenue) as a result of the stronger dollar. The firm reports, however, that the devaluation of the yuan was good news overall as their yuan costs exceed their yuan sales. Sources of demand growth in the U.S. are varied. A tool maker says that strong construction activity is leading to purchases of replacement tools for existing workers and new tools for workers new to construction trades.
Despite strong demand, most respondents report little or no net hiring. For example, a manufacturer of semiconductor equipment says sales were up 60 percent in the second quarter versus the same period last year but they still are not planning to increase headcount. A manufacturer of bulk chemicals said that they are seeing a much higher number of quits either to go to other firms or for retirement, after many years in which the quit rate was exceptionally low. A manufacturer of building equipment says that the China slowdown will eventually lead to "cost containment" in their U.S. operations, including broad hiring restrictions in the near future, even on their business lines with no exposure to China. Contacts report no significant wage pressure. Input and output prices are generally said to be stable, but there are some exceptions: A manufacturer of bulk chemicals says that slowing demand in China has reduced the price of inputs. A textile equipment firm says it raised prices 5 percent in April and has not noticed any reduction in demand.
Capital expenditures are up for most contacts, generally in line with earlier plans. The outlook is positive for all respondents except the dairy firm, which expects flat sales going forward.
Software and Information Technology Services
Reports from New England software and information technology services firms are varied. Most contacts cite mid to high-single-digit growth in both sequential and year-over-year revenues, with customer demand and sales volumes continuing to expand. By contrast, one firm reports decreases in both sequential and year-over-year revenues, due to weakened demand in China and the strong U.S. dollar. Selling prices, wages, and capital and technology spending have largely remained constant in recent months. Most firms have maintained or slightly increased headcount; one firm cut jobs within its weaker product lines. Most contacts are cautiously optimistic about the next few months, expecting continued revenue growth through the end of the year; only one firm reduced its year-end forecast, projecting a larger revenue drop than it had earlier.
Staffing Services
First District staffing contacts report robust growth in the New England region, with high-single-digit to low-double-digit year-over-year revenue growth. Labor demand has risen, particularly in the IT and healthcare sectors, which reportedly reflects increased confidence in the overall economy. Labor supply continues to be "very tight", with contacts noting shortages of IT workers, software developers, skilled trades workers, and network administrators. The rate of temporary-to-permanent job conversion remains strong. Firms have expanded their advertising presence on job boards and social media sites such as LinkedIn in order to better attract top candidates. Pay rates have grown by 3 percent to 20 percent, with the sharper increases reflecting a greater supply-demand gap. Most firms have maintained their profit margins by increasing bill rates in line with the rising pay rates. Looking forward, contacts are optimistic, expecting the positive growth trajectory to continue through the rest of the year. Some contacts express concerns about the Chinese economy, the strong dollar, and stock market fluctuations.
Commercial Real Estate
Contacts in the First District give mostly upbeat reports concerning the region's commercial real estate markets. Extending trends reported last time, office rents in Boston continue to climb, office vacancy rates continue to fall, and investors are pushing prices for Boston's commercial properties to near all-time highs. A few Boston contacts note that, over the past couple of years, the pace of delivery of new office space has been slow relative to historical norms under similar market conditions, contributing to the recent surge in rents. However, contacts also report that there has been a modest uptick in office construction activity in Boston's Seaport and Financial districts, involving a combination of pre-leased space and unleased space, and in some cases incorporating additional uses such as retail and residential space. Construction of hospitals and related facilities also continues to expand in the Boston area.
In Providence, office leasing activity experienced only a very modest summer slowdown, maintaining a decent pace that is expected to strengthen come September; a contact in that city reports that the number of large blocks of vacant office space is down considerably in recent months. The Portland area continues to see strong leasing activity across the office, retail, and industrial sectors, pushing vacancy rates into the single digits, and the city's hotels are enjoying very high occupancy rates. In Hartford, leasing activity is light amid flat economic activity but the city's investment sales market remains strong and has recently attracted the interest of foreign buyers. A regional lender to commercial real estate notes that his bank saw a recent spike in loan payoffs resulting from an increased number of property sales among its borrowers; at the same time, it struggles to secure new lending opportunities amid fierce competition from insurance company lenders and from the commercial mortgage backed securities market.
The shortage of skilled construction workers and accompanying wage pressure continues to weigh on the outlook for construction activity in Boston--according to one contact, within the next six months relevant labor costs in the metropolitan area could rise to levels that would significantly curtail construction activity relative to current plans. With the exception of a Hartford contact--whose outlook is modestly pessimistic--most commercial real estate contacts are optimistic concerning leasing fundamentals moving forward, but Boston contacts continue to be "nervous" about current high sales prices and low capitalization rates.
Residential Real Estate
Closed sales of both single-family homes and condominiums increased on a year-over-year basis in all six First District states in June. Contacts in the real estate industry say that sellers seem to be recovering from the harsh winter weather, and increased activity that began to show up in the last Beige Book continues. June represented the first year-over-year increase in closed sales of single-family homes for Massachusetts in 8 months. In Boston, where sales increased 10.2 percent, the volume numbers were near record highs. Median sales price increased from a year earlier on single-family homes in half the First District states and fell in Vermont, Connecticut, and Maine. Contacts in Massachusetts characterize the price appreciation as modest. Pending sales increased from July 2014 for nearly every state in the First District; the exception was condos in Maine. Inventory has decreased in every state but Connecticut. Massachusetts contacts say building and zoning laws continue to make new construction difficult. Contacts say low inventory has created a strong "sellers' market." Additionally, the available months of supply decreased in every state's single-family home market. The number of days spent on the market also decreased for both single-family homes and condos in most New England states.
Contacts express a generally optimistic outlook as the market continues to recover from the unseasonably slow winter. Some note that sellers may still be working on repairs before putting homes on the market and expect upward trends in sales and prices to continue into the fall. Many are weary of the inventory shortage and express concern that rising prices and potentially increasing interest rates will begin to present financing issues for buyers.