Beige Book Report: Boston
January 13, 2016
Reports from business contacts in the First District are generally upbeat. Holiday schedules reduced the number of responding firms below average this round. Most reporting retailers, manufacturers, and consulting and advertising firms cite year-over-year sales increases compared with the same period in 2014. Residential real estate markets continue to be strong and commercial real estate markets are said to be similar to the mostly positive situation six weeks ago. Contacts say pricing remains steady. Some firms mention increases in the minimum wage as a cost increase; four of the six New England states saw a January 1 rise. Outlooks are positive.
Retail
Retail respondents in this round report 2015:Q4 sales gains from a year earlier in the low to mid single-digit percentages and favorable results for the holiday season. Preliminary 2015 net gains ranged from low single digits to 22 percent, with comparable-store sales increases (for the two contacts reporting this figure) in the 7-percent range. Apparel, electronics, furniture, other home furnishings, and items related to home improvement account for much of these sales. A hardware contact reports sluggish sales for cold-weather items until recently, given the mild weather in most of New England, followed by brisk sales prior to the first significant snowstorm in late December. Some retailers anticipate that the steadily improving sales trend experienced each quarter in 2015 will continue into 2016, although others express more caution about the winter quarter.
Contacts are increasing inventories in anticipation of continuing improvement in sales. Some contacts are experiencing higher wage costs due to increases in the minimum wage in some states or the need to offer higher wages in order to attract retail workers. Merchandise prices largely remain steady. Some larger firms are planning on significant capital expenditures for 2016 related to expanding their business, including online marketing channels, while at least one smaller firm plans to spend only on IT upgrades and normal repair and maintenance. Generally, the outlook for 2016 is upbeat.
Manufacturing and Related Services
Due to seasonal issues, only five manufacturing firms responded this cycle. Four of the five contacts are positive about demand for their products. Our contact at a frozen food manufacturer was the exception, reporting a very competitive environment in that industry with very large retailers demanding and getting price reductions. The good news is varied. A producer and retailer of furniture says sales were higher for the year but weaker than usual in December. An information services producer cites higher sales for the first time in many years, as growth in legal and tax businesses is finally offsetting weakness in financial services. A toy company reports much stronger sales, largely driven by the new Star Wars movie. A maker of laboratory instruments says new orders from India and China are stronger than expected.
There is little news on the pricing front. The strong dollar continues to be a problem for some firms, but lower energy prices are good news. No firms report inflationary pressure although several firms mention successful efforts to raise prices modestly. Inventories are stable.
No contacts mention significant revisions to their capital expenditure plans. The toy manufacturer indicates that capital expenditures in 2015 fell short of plans. Four respondents report that employment is holding steady or increasing modestly. No one cites significant problems hiring workers. The information services provider continues to reduce headcount through attrition.
All respondents report a generally positive outlook. The only major revision is from the information services provider, who anticipates growth for the first time in many years.
Selected Business Services
All consulting and advertising respondents are ending the year with revenue up over 2014, with slight growth at large analysis and advertising materials firms, and strong growth at healthcare and strategy consulting firms. Demand for consulting in the areas of corporate strategy, operations, and private equity is strong. Mortgage-backed securities related litigation continues to dry up, but demand for economic consulting for antitrust, mergers, and business practice litigation remains strong.
Costs are fairly stable for contacts, except a small research consultant, and margins are expanding. Multiple contacts cite increased upward pressure on healthcare costs for employees. Some contacts plan on keeping their prices flat; others will raise prices by as much as 6 percent.
Contacts were not hiring in the most recent quarter, partly because some typically hire in classes during the summer. All contacts plan on hiring in 2016, by amounts ranging from 10 percent to 15 percent. Those that hire in classes will increase class size, and one strategy consultant is adding an additional spring class in 2016. Large research and strategy consultants are seeing increased attrition and decreased yield from offers, due to continued competition from the tech sector. Base compensation is increasing in line with inflation for most of these firms, though incentive-based bonuses are up significantly for strategy and healthcare consulting contacts. Several contacts say they expect difficulty filling tech and high-skilled positions, and one cited restrictions to the H1-B visa lottery as a loss of potential sources of talent.
Predictions for revenue growth for 2016 are in the 5 percent to 15 percent range, except for a large strategy consultant who is skeptical that their run of strong growth will continue. Contacts are generally bullish on macroeconomic conditions, though some raise concerns over the elections.
Commercial Real Estate
Reports from First District commercial real estate contacts are for the most part little changed since last time. Office leasing demand remains robust in Boston and Portland and weak in Hartford. Leasing activity slowed modestly in the past month in Providence, where a contact perceives greater caution among business owners. The investment sales market for commercial real estate in Connecticut is described as somewhat less "frothy" than it was earlier in the fall, with "careful" bids, but demand still reportedly strong, by contrast with the leasing market. In Boston's investment sales market, contacts note that there are fewer bids per property on average than six months ago, but pricing remains robust. In both Boston and Portland, contacts note that the availability of large blocks of contiguous office space has become quite limited, a condition which--coupled with recent rent growth in both markets--is expected to lead to more office construction moving forward. Extending recent trends, new office projects in greater Boston are typically at least partly pre-leased rather than purely speculative.
In Providence, the outlook became more guarded amid expectations that the national election cycle may delay decisions; at the same time, however, for the first time since prior to the recession, developers in Rhode Island are discussing the possibility of new industrial construction. More industrial construction appears likely in Portland as well in 2016, where supply is quite limited and industrial business activity is reportedly strong and growing. The overall outlook for Portland's commercial real estate market for 2016 is very strong, while in Hartford the outlook remains weak in light of risks that more businesses will leave Connecticut or leave Hartford for suburban locations. On the plus side, a Hartford contact sees business and consumer sentiment as being buoyed by low oil and gasoline prices. The outlook remains optimistic for Boston's commercial real estate market, including leasing and investment sales, but contacts also note risks stemming from political and economic uncertainty at both the national and global level.
Residential Real Estate
Residential real estate markets continue to exhibit strong performance across the First District, consistent with the seller's market environment present throughout 2015. For single-family homes, closed sales increased in November on a year-over-year basis in every state. Massachusetts experienced its sixth straight month of year-over-year increases in closed sales. Median sales prices were generally stable, showing modest increases in most states. Pending sales were up in every state with the exception of Maine, indicating a strong outlook going into the end of the year. A contact in New Hampshire says that residential real estate is experiencing its best year since the recession. The market for condominiums showed similar positive sales trends; closed and pending sales increased across the board when compared to last year. Median sales prices for condominiums, however, were mixed. Prices increased in three states, but decreased in the other three. November saw Massachusetts' largest year-over-year increase in condo prices of 2015 to date.
Inventory continues to be an issue throughout the First District. Available homes for sale, available months' supply, and average days on market were consistently decreasing on a year-over-year basis for both single-family homes and condos. Both supply side constraints (limited construction) and healthy demand contribute to this. Contacts cite the improved employment situation as a driver of demand. Many also report that buyers were motivated to purchase in the months leading up to December due to the anticipation of increasing interest rates.
The consensus among industry contacts is that the market is strong and expected to continue to perform well in 2016. A contact in Connecticut cites the mild weather as a contributor to increased activity in the normally slow holiday season. A contact in Boston reports that "sales increases in both markets are encouraging at this time of year which is typically slow." A New Hampshire contact notes that "more of the same is anticipated in 2016, but inventory and affordability challenges coupled with mortgage rate increases will likely keep any sort of monster growth in check." In spite of any potential concerns about increased interest rates, a Massachusetts contact indicates that he feels buyer demand will remain strong in the New Year.