Beige Book Report: Boston
March 02, 2016
Most retail and manufacturing contacts in the First District report higher sales or revenues than a year earlier, but far-from-robust growth and, among retailers, somewhat mixed month-to-month changes. Partly because results were weak amidst the region's severe winter weather a year ago, staffing firms cite strong year-over-year revenue growth. Commercial real estate markets are said to be seeing more caution in both leasing and purchases, which, at least regarding the Boston area, is reducing worries about overheated markets. Residential real estate markets remain strong. Staffing firms report increases in wages in the low single-digit range; manufacturers and retailers do not mention wages. Respondents indicate that prices are generally stable. Outlooks are said to be cautiously positive.
Retail
Retailers contacted for this round provide a mixed assessment of current conditions. Given the relatively mild winter in most of New England, sales of seasonal items have been slow. Furniture sales remain good, but a retailer selling in all apparel categories and many leisure categories reports that while January sales were up around 6 percent year-over-year, sales through mid- February are down 10 percent to 15 percent from year-earlier in all U.S. regions. Another nationwide retailer also cites flat sales for discretionary items; for instance, sales of Valentine's Day items usually spike a few days before the holiday, but this year sales were lackluster. Both of these contacts note that contrary to some conventional wisdom, lower fuel costs are not generating higher spending on other items. The general sense is that consumers are somewhat cautious amid a more uncertain economic climate since the turn of the year, and retailers' near-term expectations for 2016:Q1 have been downgraded in response.
The outlook is also mixed; contacts expect fiscal year 2016 same-store sales to be up from 2015 by low-to-mid single-digit percentages. One contact has decided to open fewer new stores in 2016 than originally planned. Nonetheless, most other respondents are engaging in strong multi-year investment plans for opening new stores and enhancing their digital presence.
Manufacturing and Related Services
Of nine manufacturing firms contacted this cycle, three report lower sales than a year ago. Two semiconductor firms say the declines were expected and part of a typical cycle in the industry; one of them expects sales to recover in the first quarter. A manufacturer of parts for auto and aerospace customers, the third firm reporting down sales, notes that business has been slowing for the past year and that they are in a "slow growth environment." One firm reporting overall increases in sales attributes all its strength to strong demand for one of its products from the Defense Department and says sales in its industrial distribution division are down at double digit rates versus the same period a year ago. This contact cites weakness in mining and oil and gas, both directly through firms in that industry and indirectly through suppliers of the industry, as a major factor in weak demand. Other contacts say the strong dollar remains a negative factor reducing demand or dollar profits.
Firms report a relatively benign pricing environment. A firm in the semiconductor industry says reduced energy prices are not showing up as much as expected in the prices they pay. Many responding firms report that customers continue to pressure them for price reductions. Raw milk prices are down versus exceptionally high levels a year ago. Only one firm reports significant deviations of capital expenditures from plans; this exception is the auto and aerospace industry supplier in which business units, in general, are not using all the resources allocated to them for investment. Otherwise, contacts report no major revisions of their investment plans. Inventories are generally in line with expectations.
One-third of contacted manufacturers report headcount reductions. In one case--a semiconductor-related contact--a reduction of staff at headquarters has long been planned. A producer of milk products closed a plant. The auto and aerospace supplier is laying off workers across all business lines including corporate headquarters as a result of declining sales; these layoffs began last spring and are ongoing.
All of our contacts except the auto and aerospace supplier report a positive outlook. As has been the case since the end of the financial crisis, firms remain somewhat cautious.
Staffing Services
First district staffing contacts report continued strength in the New England region, with revenue growth ranging from about 10 percent to 60 percent year-over-year; weather-related revenue hits in January and February of last year partially explain the size of these year-over-year increases. Labor demand continues to expand in recent months, particularly in the IT, specialty manufacturing, web service, legal, welding, and healthcare sectors. Labor supply remains limited; some contacts note that supply has decreased in recent months. Specifically, contacts report shortages of computer programmers, skilled trade workers, skilled electro-mechanical technicians, intellectual property workers, and nurses. As a result, firms continue to utilize referral networks and social media sites such as LinkedIn and Monster to recruit candidates for specialized positions. Bill rates and pay rates have increased in the low-single-digit range, and firms have upheld similar profit margins. Looking forward, contacts either maintain the same level of optimism or are slightly more optimistic than three months ago, generally expecting revenues to increase at a steady pace. Some contacts mention concerns about business response to stock market fluctuations, the strong dollar, and political uncertainty due to the upcoming elections.
Commercial Real Estate
Commercial leasing activity in the First District is flat or down, depending on the location. General Electric's announcement that it will move its headquarters from Fairfield CT to Boston dealt a blow to business sentiment in Connecticut and further boosted prospects for Boston's booming Seaport District. In Boston, leasing activity is steady and fundamentals remain strong; however, tenants are exercising greater caution in their space demands when renewing leases. In Boston's commercial real estate investment sales market, the number of buyers willing to pay record-high prices continues to decline and lenders appear less enthusiastic about underwriting such bids. In Hartford, leasing activity is described as anemic. Connecticut's investment sales market is active but potential buyers remain less bullish than they were three to six months ago. In Providence, new leasing activity slowed somewhat and deals in progress proceeded at a slower pace, developments attributed to heightened uncertainty stemming from stock market volatility and the national election cycle. Investor interest in Providence's commercial properties is reportedly increasing, but bidding remains conservative. In Portland, leasing activity remains very robust in the industrial and retail sectors, while in the office sector activity remains healthy but the space demands of large tenants appear conservative. Also in Portland, commercial property sales continue at a brisk pace and with strong pricing.
Looking to future demand, construction activity increased in Providence following the groundbreaking of a large life-sciences complex, and civil construction is set to increase in Rhode Island in the coming year as the state secured new funding for infrastructure repairs. Around Maine, a small boom in hotel-building is reported, a state office building project is in the works, and construction is steady for multifamily and light industrial structures. Construction activity is roughly unchanged in Boston and Hartford. The outlook for commercial leasing demand weakened further in Hartford amid perceived risks of corporate downsizing, and a Providence contact is also a bit less enthusiastic than in the previous report. Contacts in Boston and Portland remain largely optimistic for their respective cities' leasing environments. However, across the District, contacts perceive downside risks stemming from equity market volatility, given its potential to blunt both business and consumer confidence.
Residential Real Estate
Residential real estate markets in the First District continued to exhibit strong performance through the end of 2015. For single-family homes, closed sales increased on a year-over-year basis in every state. Massachusetts experienced the largest December sales volume since 2004. Median sales prices increased, except in Connecticut where they decreased modestly. Pending sales were up from December 2014 in every state as well, indicating substantial market activity to close out the year and a healthy outlook for 2016. A contact in Connecticut says that the market there is "regaining traction," and he is optimistic about the coming year. Condominium markets were more mixed, with closed sales increasing year-over-year in three states and declining in the others. Median sales prices for condos also increased in three states and decreased moderately in the other three. By contrast, pending sales for condos were up across the board. A Massachusetts contact reports that the fall in median sales price of condos reflects a higher proportion of low-priced condos being sold in December rather than any actual softening in prices. A Rhode Island contact notes that although this was the first decrease in closed sales for condos since March, the positive pending sales numbers indicate a strong outlook going forward.
The for-sale inventory of both single-family homes and condos decreased on a year-over-year basis in every state in the First District. Both supply-side constraints (limited construction) and healthy demand contribute to this. This is an issue particularly in Massachusetts and the Greater Boston area, where demand is robust; a contact in Boston notes that realtors are "desperate for listings." Contacts from other states view inventory levels as less of an issue: a respondent in New Hampshire says "improved inventory and affordability remain key factors for continued optimism" and one in Rhode Island claims "there is a decent supply of homes to choose from."
The consensus among industry contacts is that residential markets will continue to perform well in 2016. Many contacts note that mild weather has boosted activity this winter. Contacts are unanimous that the increase in interest rates hasn't reduced demand and that buyers continue to be eager. Several also note that expected 2016 increases in mortgage rates provide incentives for buyers to act now.