Beige Book Report: Boston
December 2, 2015
Reports from First District business contacts suggest that activity is expanding at a somewhat slower pace currently than was the case six weeks ago. Although most retail and manufacturing respondents cite revenue increases from a year earlier, slightly more contacts in those sectors report declines in sales than during the last Beige Book round. Software and information technology services firms cite mostly flat revenues on a year-over-year basis; staffing firms, by contrast, continue to grow robustly. Most commercial real estate contacts say markets are steady, while residential real estate sales and prices continue to increase in the region. The strong dollar is said to be putting downward pressure on prices; otherwise, contacts indicate prices remain a non-issue. Some firms say they are providing larger wage increases than in the past few years to most or to selective job categories to retain existing employees; others are not. Half of respondents across sectors are holding employment steady and most others plan to do modest net hiring; a couple are cutting jobs.
Retail and Tourism
First District retail contacts report mixed comparable-store sales results: some were up or down from a year earlier by 1 or 2 percent, while others had mid-single-digit increases. One contact reports that after a good October, its sales as of mid-November were down sharply across all U.S. regions. More generally, clothing sales are said to have declined, but footwear sales are good and demand for home-related items remains strong. Some respondents are forecasting more muted holiday sales and downgrading their expectations for the full fiscal year. For example, one contact earlier expected to finish 2015 with sales up by 4-plus percent, but based on results since this spring now expects to finish up or down by 1 percent. This same contact hypothesizes that erratic monthly sales results reflect U.S. consumers' "just-in-time" buying mentality instilled by online shopping. Some retail contacts with international operations report that the strong dollar is muting their sales performance when calculated on a U.S. dollar basis.
Boston-area business travel remains strong, but leisure travel has decreased a bit. For the first time in a while, Boston-area hotels performed a bit under forecast between July and September. In August and September 2015, hotel occupancy rates were around 90 percent; this is still strong by historical standards, but down from the corresponding months of 2014. For year-to-date, however, hotel revenues are up 6 percent to 7 percent through September. High-end restaurants that cater to business and corporate clients are doing well, but mid-tier restaurants cite flat revenues through September 2015 compared to 2014. Restaurants are experiencing higher operating costs due to changes in the minimum wage, higher healthcare costs, and higher rents in prime urban areas. Attendance at museums and other attractions decreased in the July through September period compared to 2014. Given these trends, contacts express uncertainty about 2016. Added international air service and continued strong business travel are leading hotels to expect higher room rates and revenues, despite slightly lower occupancy rates, while restaurants and tourist attractions say they are taking a more wait-and-see approach to next year.
Manufacturing
Of 11 responding firms, only two, a maker of semiconductors and a manufacturer of motors and other items for industrial uses, saw falling sales. The semiconductor sales declines reflect the idiosyncratic cycle of the semiconductor business, while the motor-related firm's falloff resulted from exposure to mining and oil and gas, which have been hit hard by falling commodity prices. Low oil prices are affecting several other contacts, with a manufacturer of tools reporting weaker sales to that sector and an aerospace firm pointing to a collapse in demand for helicopters attributable to reduced use of offshore oil platforms. Two additional contacts report that sales failed to grow versus the same period last year. Several contacts mention China. A manufacturer of elevators and other construction-related goods says that infrastructure spending in China was way down. But a supplier of testing and lab equipment for medical uses reports that sales in China were exceptionally strong.
The strong dollar means that several firms are reporting sales increases in local currencies but a fall in dollar sales. Aside from the dollar, the general pricing environment appears to be quite benign. Five contacts cite falling input prices and several report passing those gains on to customers. A manufacturer of milk products indicates that the price of raw milk has fallen significantly.
Inventories are mixed. Several firms report lower inventories, but one maker of semiconductor testing equipment says it is increasing inventories in anticipation of strong demand in the new year. All but one firm report that they are increasing or maintaining employment at current levels; the maker of motors citing falling sales has made significant reductions in employment.
Capital expenditures are in line with plans; for most firms, this means they are up versus the same period last year. The manufacturer of motors and related goods said that despite falling sales and employment, they are maintaining capital expenditures. Several contacts mention increasing spending on research and development.
With the exception of the manufacturer of motors, respondents' outlooks are generally optimistic. The semiconductor maker with down sales was upbeat about the outlook for its other businesses, which include life sciences. And the two firms with flat sales are positive about their ongoing prospects.
Software and Information Technology Services
Reports from First District software and information technology services firms are mixed, with year-over-year revenue growth ranging from slightly negative to slightly positive. Most firms report flat quarter-over-quarter revenue growth; only one firm cites strong quarterly growth. Both selling prices and capital and technology spending have remained constant in recent months. While the majority of firms are either maintaining or slightly increasing headcount, one firm decreased employment by 7 percent. Firms are either holding wages flat or increasing wages slightly to keep pace with inflation. Overall, most contacts maintain the same level of optimism, but one is less optimistic than before, expecting consumer demand to remain soft through the end of the year. Various contacts cite a softer manufacturing sector and weakness in China and the Americas as the biggest factors impacting business currently.
Staffing Services
Staffing contacts report continued growth in the New England region, with year-over-year revenue increases in the 10 percent to 25 percent range. Labor demand remains very strong, and contacts note that an increased number of companies are relying on staffing firms for recruitment. Labor supply is reportedly tighter than in August, with shortages of skilled ambulatory nurses, medical assistants, administrative assistants, skilled trades workers, IT programmers, legal professionals, and executive assistants. The rate of temporary-to-permanent job conversion remains strong. Firms continue to use recruitment tools such as LinkedIn and job boards in order to identify candidates to fill client job orders. Reports on bill and pay rates are mixed, ranging from flat to increases of 10 percent year-over-year. Looking forward, most contacts are cautiously optimistic, expecting the upward trajectory to continue through the end of the year, despite the challenges inevitably posed by winter weather and holiday season. Many contacts express concerns about the threat of terrorism and its possible effects on the economy.
Commercial Real Estate
According to First District contacts, office leasing activity remains strong in Boston and light in Hartford. In Providence, office leasing tapered off somewhat in recent weeks from the robust pace observed in late summer and early fall, while in Portland leasing activity increased slightly in both the office and industrial sectors.
Investor demand for commercial property in greater Boston is still perceived as very strong, but one contact reports a modest slowdown in sales volume and another notes that recent sales prices are down slightly from the very high levels seen earlier in the fall. These contacts attribute the decline in sales prices to the recent increase in 10-year Treasury rates and the recent decline in sales volume to a somewhat tighter funding environment. However, the tight funding environment is seen as mostly an artifact of year-end factors—for example, many funds have already met their requirements for commercial real estate investment for the year—and therefore funding supply is expected to bounce back in early 2016. In Hartford and Portland, investment demand for commercial property reportedly remains solid, but a Hartford contact describes bid prices as somewhat more cautious in recent weeks, and a Portland contact says the number of bidders is down slightly but prices remain robust. In Providence, outside investors show increasing interest in the city's commercial real estate assets but so far such interest has not translated into sales.
Office construction activity increased modestly in greater Boston, with new projects under way in both downtown and suburban locations; a mid-sized office structure was recently approved for downtown Portland. Two significant retail developments close to Hartford are under discussion, but a contact doubts that both will be funded based on their proximity to each other and to existing retail centers.
The outlook for commercial real estate activity remains weak for Hartford, with an emphasis on downside risks to employment growth. The outlook remains modestly optimistic for Providence, and a contact in that city reiterates his forecast that the city could begin to see increases in office rents by late 2016. The outlook for greater Boston remains optimistic for office leasing demand and further increases in office construction activity are expected. A Portland contact sees a recent increase in efforts to promote the city's knowledge economy, which he hopes will attract more young people to the area.
Residential Real Estate
Residential real estate markets continue to exhibit strong performance throughout the First District. For single-family homes, closed sales increased on a year-over-year basis in all six states in the latest month (September or October). In Rhode Island, single-family home sales saw the tenth consecutive month of increases, the longest period of growth in activity since 2012. In Boston, single-family closed sales were the second highest volume ever recorded during September. The market for condominiums is generally strong as well, with closed sales up year-over-year in every state except Connecticut.
Median sales prices for single family homes are rising or stable year-over-year across the board. Median sales prices in the condo market are mixed; some states saw modest increases and others saw modest decreases relative to last year. A contact from Rhode Island notes that homeowners are experiencing "solid gains in price appreciation," while a contact in Connecticut describes prices as "stable". A Massachusetts contact reports that high prices continue to be a barrier for buyers, especially first-time home buyers. Both the single-family and condo markets show year-over-year increases in pending sales, indicating that these markets will remain strong going forward into the winter months. Continuing recent trends, single-family and condo inventory decreased year-over-year in every First District state. Contacts continue to indicate that low inventory is a persistent issue with no easy remedy, given the dearth of new construction. Average days spent on market and months of available supply are decreasing on a year-over-year basis in most states, indicating ongoing robust competition among buyers.
Overall, contacts are optimistic about the outlook, noting the marked increase in activity when compared to last year. Many report that markets are unusually strong for the season, as there is generally a slow-down in activity going into the holidays. For example, one respondent says that sellers are extremely motivated right now and he expects robust activity to continue, despite the season. Residential contacts unanimously report that expected increases in interest rates are affecting consumers' decisions to buy and/or sell. Some say the recent strong activity may be due to buyers wanting to lock in low interest rates before an increase occurs. Others express concern that the expected rise is driving people away from buying homes, especially first-time buyers.