Beige Book Report: Boston
October 14, 2015
Business activity levels continue to increase in the First District, according to contacts. Most responding manufacturers, retailers, and advertising and consulting firms report higher revenues than a year ago with only one respondent in each of the three sectors citing flat or down results. Reports on commercial and residential real estate markets are similar to six weeks ago, with the strength of commercial leasing demand varying across markets and continued year-over-year gains in home sales and median prices in most of the New England states. Most consulting and advertising respondents plan to increase employment, but several manufacturers are cutting staff. Contacts cite very limited, if any, upward pressure on prices and say they plan to raise wages only modestly.
Retail and Tourism
Retailers consulted for this round report year-over-year changes in comparable-store sales ranging from flat to up by 7 percent. Most of these figures reflect performance recorded through the third quarter of 2015. A few contacts report that their third-quarter sales were good or better than expected, but one contact continues to report slightly softer sales growth across all regions of the United States since mid-June. Apparel, furniture, and items related to home improvement are selling well. Inventories are up slightly, due to continuing expected improvement in sales, adding merchandise for the holiday season, and stocking up on winter-related items. Expectations are that total 2015 sales will show gains between 3 percent and 8 percent compared with 2014.
Contacts continue to report that vendor prices remain steady or that they are seeing very modest increases of about 1 percent. Some contacts expect that the U.S. economy will continue to improve and that consumers are now more apt to spend. However, another feels that the U.S. economy has slipped back into a "sideways" momentum, perhaps in response to macro-political situations both domestically--the threatened government shutdown--and internationally, specifically involving Russia and Syria.
Manufacturing and Related Services
Of 10 firms contacted this cycle, only one, a manufacturer and retailer of furniture, reports falling sales. The furniture company says they are experiencing longer term decreases, but in addition they saw particularly weak sales accompanying the stock market declines in recent weeks. Another firm, a manufacturer of parts for the aerospace and automotive markets, reports higher sales than a year ago, but growth substantially lower than expected. Only one firm, a manufacturer of storage devices for computers, specifically mentions the slowdown in China as affecting results. Five contacts, including a manufacturer of lab equipment and a drug company, note the strong dollar as a headwind for their business.
Most firms report no news on the inventory front. The firm with slowing sales growth says they reduced inventory as a result of the lowered outlook.
No contacts report significant pricing pressure either in their end markets or from suppliers. Three contacts note the benefits of lower energy prices.
Four contacts report that they expect employment to decline. A manufacturer of postal equipment attributes cutbacks to fundamental changes in the nature of the company. A media company indicates the staff reduction is part of a long term trend in their industry. The manufacturer of aerospace and auto parts says declining sales growth led to layoffs and a substantial reduction in its temporary workforce.
Most responding manufacturers report capital spending consistent with earlier plans. The manufacturer of aerospace and auto parts, by contrast, has cut capital spending plans in recent months by 10 percent to 15 percent, expecting demand to slow further in coming months. Other manufacturing contacts say the outlook is stable.
Selected Business Services
Revenues are mostly up from a year earlier at responding consulting and advertising firms in the First District. A large advertising materials firm and a large pharmaceuticals consultant experienced mid-single digit growth over last year. Two smaller firms, a research and strategy consultant and a healthcare consultant, were up 20 percent from last year; both cited increases in demand, as businesses are making more drastic strategic changes and consolidation continues in the healthcare industry. A large economic consultant was flat over last year, as work related to mortgage-backed securities (MBS) litigation continued to decline; the replacements for the MBS work are diverse and include antitrust work with the Department of Justice and healthcare.
Consulting contacts increased or plan to increase compensation by 1 percent to 3 percent. The small research and strategy consultant increased headcount by 10 percent and hopes to add another 5 percent this year; they are finding it very difficult to find quality people to fill these positions. Both healthcare consultants are hiring in the mid-single digits; one says hiring has been easier than expected. The advertising materials firm increased employment 2 percent and the large economic analyst was flat on net, though they had to do more hiring to cover increased attrition. Contacts cite increased competition from tech jobs and difficulty in filling programming, IT, and e-commerce related positions.
Respondents are bullish regarding the fourth quarter, with most expecting revenue growth rates to be similar to recent experience. Specifically, contacts from larger firms forecast mid-single digit growth through next year and the small research and strategy consultant expects to end the year up 25 percent.
Commercial Real Estate
Conditions in the First District's commercial real estate markets are mostly unchanged since the last report. The strength of office leasing demand continues to vary across cities within the district. According to contacts, demand for office space remains robust in Boston and Portland, while leasing volume is gaining momentum in Providence and remains quite slow in Hartford. Portland's industrial leasing market is described as very strong, with a single-digit vacancy rate. Investment sales volume remains high in Boston and Portland and moderately strong in Hartford. In Providence, construction activity is concentrated in the higher education sector, but a multifamily project should break ground in the spring of 2016. In Maine, significant current and planned construction is coming from health-related institutions, including some large senior living facilities, and multifamily construction remains active in Portland. Construction activity is limited in Connecticut but a few retail developments are being discussed. A regional lender to commercial real estate achieved an uptick in new loan volume but growth in outstanding loans continues to be hampered by high payoff rates among existing loans.
The outlook in Hartford was downgraded in response to fresh reports of fiscal stress in Connecticut and threats by a large employer to move its headquarters out of state. A contact says the near-term outlook for Portland is strong, but points to longer-term challenges to the state's economy related to its aging workforce. A Providence contact believes that office rent growth is possible by late 2016 if current absorption rates persist. The outlook for greater Boston remains optimistic, but one contact is concerned that the flow of investment capital from sovereign wealth funds into Boston's commercial real estate market could slow in response to the impact of lower oil prices on the funds from oil-rich countries such as Norway and Russia.
Residential Real Estate
Closed sales of both single-family homes and condos increased on a year-over-year basis in each of the six First District states. In Boston, the volume of closed sales in August was the highest on record. In Rhode Island, single-family home sales saw the ninth consecutive month of increase from the prior year, the longest running growth period since 2012. One contact notes that the market seemed to be stronger than usual for late summer, possibly due to delays on the inventory side that resulted from the harsh winter weather. Another says the season is wrapping up with "solid momentum." Median sales price also increased from last year in most states, but not for single-family homes in Connecticut and Vermont nor condos in Maine and Vermont, which saw moderate price decreases. Massachusetts contacts note that prices increased more markedly in the condo market than in the single-family home market. Continuing recent trends, inventory decreased year-over-year in every state in the First District. This marks the 42nd consecutive month of inventory decline in Massachusetts. Contacts cited low inventory as a persistent issue for buyers as it has created a strong "seller's market" in which sellers are increasingly willing to move on to other buyers. Similarly, the months of available supply and average days on market decreased from August of 2014 for both single-family homes and condos in all the New England states. A Maine contact notes that inventory continues to move quickly and competition among buyers is robust.
Overall, contacts express an optimistic outlook. Most contacts are anticipating a stronger fall than last year, as increases in August pending sales for both single-family homes and condos suggest that closing activity will continue to increase in the coming months. Massachusetts, in particular, saw huge year-over-year increases, with pending sales of single-family homes rising by over 40 percent. Several contacts note ongoing concerns regarding low inventories and one contact cites mild concern about the impact of potentially rising interest rates on home affordability.