Beige Book Report: Boston
April 13, 2016
Most First District businesses continue to report rising sales and revenues. Retail and tourism contacts mostly cite positive results; two-thirds of contacted manufacturers and software and IT services firms report sales increases. Home sales are up in all six states and commercial real estate market conditions vary across the region. More respondents say they plan to increase hiring than has been the case in the last few Beige Book rounds and some mention wage increases. Contacts cite no price issues, although several manufacturers and retailers note positive effects of low energy prices. Outlooks are generally positive, as contacts expect recent results to persist.
Retail and Tourism
Similar to six weeks ago, this round's retail contacts report a range of year-over-year comparable-store sales results, varying from a slight single-digit decrease to a 10 percent increase. Two contacts specifically note that their sales gains were driven by increased customer traffic; contacts also say that the mild 2016 winter, combined with lower fuel costs, freed consumers to spend in other categories. Contacts operating in Canada or near the Canadian border note that the strong U.S. dollar is lowering sales and profits. Inventories are well-managed. Capital spending plans range from doing minimal maintenance and IT investment to aggressive expansion plans. Most respondents this round plan to hire additional workers. One cites continuing difficulty finding quality hires amid a "more competitive" labor market. Contacts say they currently expect same-store sales growth overall in 2016 to be in the low-to-mid single digits.
Final 2015 results for Boston hotels recently became available: new all-time highs were set for occupancy rates (81.8 percent) and average room rates ($255 per night, up 6 percent over 2014). The hotel forecast for 2016 as a whole is robust, with the average occupancy rate down slightly and the average room rate up, to yield an expected 5 percent increase in hotel revenues. A contact notes that corporate travel activity, while still strong, may have softened a bit, but that leisure travel is holding up; however, international visitors seem to be spending less in high-end stores, perhaps because of the strength of the U.S. dollar. Boston-area restaurants are doing much better in the first quarter than a year earlier. Boston's tourism forecast for the second quarter is strong; besides the seasonal boost from college graduations, more corporate meetings are scheduled and leisure travel is expected to benefit from the beginning of new and/or direct flights from Europe and China.
Manufacturing and Related Services
Two-thirds of the manufacturing firms contacted this cycle report higher sales. A toy-maker says that volatility in financial markets and uncertainty surrounding the economy at the beginning of the year had no discernible effect on demand for toys. A manufacturer of semiconductors says the market slowed in the middle of last year, leading to an overall sales decline in 2015 versus 2014, but indicates that sales picked up in mid-November and have been up 5 percent to 8 percent year-on-year since then. He attributes some of that increase to replenishment of stocks depleted during the slowdown. Firms that reported declining sales included a frozen fish producer, a furniture manufacturer, and a chemical firm; the latter attributed some of the weakness to developments in the Brazilian market. The furniture maker has been dealing with declining sales for several years, but says the declines are significantly worse now.
Overall, none of our contacts report significant price pressures either on the supply or demand side. Several contacts note that the benefits of lower energy prices are finally showing up in their bottom lines. All but one of our contacts report that they are hiring. The semiconductor firm reduced hiring during its slowdown last year but is back to normal now. Several firms report that it is hard to find or keep workers; a manufacturer of garden hoses says that finding low skill workers has become very problematic. A chemical firm is raising wages by 15 percent at a southern U.S. facility to keep trained workers from leaving. Respondents report no news on inventories aside from idiosyncratic factors.
Capital expenditures are up or unchanged for all but one contact. A specialty chemical maker says they exhausted the incremental gains from plant improvement and are considering building a new plant for the first time since well before the 2008 recession.
The outlook is positive for all manufacturing respondents except the furniture manufacturer. A publisher has a positive outlook for the first time in many years.
Software and Information Technology Services
A healthcare software firm reports mid-single digit revenue growth from a year ago, which represents a full year of normal steady growth after a low point around Q1 2015. This firm's growth tends to be relatively invariant to economic conditions, but had slowed after ARRA subsidies for hospital automation software phased out. A business and consulting IT firm cites mid-single digit organic growth over last year, as well as revenue-growth contributions from three major acquisitions. Bookings for an IT firm serving manufacturing customers represent low single-digit decreases year-over-year, which the contact attributes to softening manufacturing demand from emerging markets in particular, and overseas in general, due to lingering headwinds from a strong dollar. Although it is a small percentage of their business, this firm is seeing strong growth in its "internet of things" projects.
Prices are stable at the healthcare and business IT firms, and up 4 percent from last year at the primarily manufacturing IT firm; the latter also expanded margins by actively cutting expenses. A healthcare IT firm notes that increasing employee healthcare costs was a burden.
Hiring is net positive for all contacts. A healthcare IT firm is hiring across the board, while business and manufacturing IT firms are hiring more selectively in growth areas. They all say wages are increasing in the mid-single digits, though several note particular competition for developers.
A healthcare IT contact is optimistic and expects steady growth for the foreseeable future; most hospitals in the United States already use some sort of automation software, so opportunities for growth are mainly overseas. A manufacturing IT contact is optimistic, feeling that currency headwinds are dying down and the domestic economy is stabilizing. Their main concern lies with potential weakness in Europe, as it has been a "bright spot" during an otherwise soft few years. A business and consulting IT contact also expresses optimism but sees some uncertainty in domestic markets--particularly with the election cycle--and identifies overseas factors as the biggest potential destabilizers.
Commercial Real Estate
Reports from commercial real estate markets across the First District are mixed. Office leasing activity is increasing in Portland and maintaining a strong pace in Boston, but remains slow in Providence and very slow in Hartford. In greater Boston, the office vacancy rate edged down further--to as low as 6 percent in the Cambridge area--and rents increased marginally. Elsewhere in the District, leasing fundamentals are roughly flat since the last report. Investment sales volume is down in Boston from one year ago and contacts perceive that prices are levelling off, despite the fact that one office tower in the city recently sold at a near-record price per square foot. Investment sales demand remains strong in Portland and steady in Hartford, but contacts in both cities report that bidding has become less aggressive in recent months. Construction activity increased significantly in greater Boston in recent months. Local construction wages are up from a year ago, especially among skilled trade workers such as carpenters (8 percent) and crane operators (6 percent), according to a contact. The education, health care, hospitality, retail, and office sectors all contributed to Boston's recent construction boom; although construction in Boston's multifamily sector remains robust, its pace of growth is slowing. Construction is steady in Portland, up modestly in Providence thanks to new institutional projects, and remains slow in Hartford. While some contacts note that construction loans are becoming harder to obtain, other contacts describe the lending environment--particularly for loans on existing structures--as aggressive, with loans offered at very low spreads over the LIBOR rate. Aside from fiscal stress in Connecticut, the main risks to the outlook cited by contacts are political uncertainty in advance of the presidential election and national and international macroeconomic risks. Even given the recent increases in office construction in Boston, contacts do not foresee a glut in office space because construction activity remains low by historical standards and the new buildings are mostly pre-leased.
Residential Real Estate
Residential real estate markets in the First District had a strong start to 2016. For single family homes, closed sales increased in February on a year-over-year basis in all six states. Massachusetts had the most closed sales in the month of February since 2007. Pending sales for single-family homes also increased consistently from last year. Contacts unanimously cite the mild winter weather and low mortgage rates as explanations for higher-than-usual demand. Additionally, price increases for single-family homes moderated. While Rhode Island and the Boston area experienced significant increases in median sales price, all other areas saw only small increases or decreases. The market for condominiums also improved relative to last year, though less uniformly than the single-family market. Both closed and pending condo sales were up in every state but Vermont. Median sales price numbers were mixed, with increases from last year in three states and decreases in three states. Overall, contacts agree that high buyer demand is the main driver of increased activity. As a contact in Connecticut reports, borrowing power has increased for buyers thanks to low interest rates. This has led to "people entering the market in droves" and "buyers coming out in force" across the First District.
Low inventory continues to affect the First District residential real estate market. For both single-family homes and condominiums, inventory decreased or remained flat year-over-year in every state but Rhode Island. Despite the modest inventory increase in Rhode Island, our contact says that the "quickening pace of sales is beginning to outstrip supply." All reporting states recorded a decreasing number of days on market and months' available supply of single family homes and condos since February of last year. Contacts in Vermont and New Hampshire say the inventory shortages are attributable to both lagging construction and a dearth of sellers of existing houses coming to the market.
Overall, respondents say the pending sales numbers indicate a bright outlook for the residential real estate market. Contacts predict that the costs associated with buying a home will continue to be low, as there is no indication that mortgage interest rates will increase any time soon. Recent mild weather has helped the market to start the year strong and contacts expect this to continue into spring.