Beige Book Report: Boston
September 7, 2016
Economic activity continues to increase in the First District, although there are scattered signs of slowing growth rates. Most responding retailers and manufacturers cite increased sales and revenues from a year ago, as do staffing firms. A tourism contact indicates Boston-area hotels have shaved their expectations for 2016, but still expect high occupancy and good revenue growth. Commercial real estate activity is flat or up slightly in regional markets. Residential real estate markets are said to be constrained by limited supply, with year-over-year declines in closed sales in five of the six New England states mostly attributed to shrinking inventories. Respondents in several sectors cite tight labor markets, with staffing firms reporting short supply and strong demand. Firms report little action on prices. Looking forward, contacts generally expect "more of the same."
Retail and Tourism
Retail contacts report that since early July, comparable-store sales have ranged from down slightly to up between 2 percent and 4 percent on a year-over-year basis. Respondents offer various reasons for these results. One retailer attributes their positive results to increased customer traffic, while another reports that lower customer traffic was offset by higher ticket orders. Adult apparel and footwear are reportedly selling well, but demand is lower for furniture and household wares. Inventory levels are variously described as lean to higher than planned, with the latter attributed to slower sales. One retailer hypothesizes that sales may have been negatively affected by Massachusetts not holding its usual tax-free weekend in mid-August. Prices remain unchanged or just slightly up. Hiring is "as needed," although contacts say labor markets are tight in a few areas. Expectations vary a bit--those retailers experiencing slower sales are waiting to see if the pattern reverses in the next couple months, while others continue to expect moderate growth to continue for the foreseeable future, unless some unanticipated event occurs.
A travel industry contact reports that Boston area hotels have revised their expectations for 2016 slightly downward--from an 80.4 percent room occupancy rate to 80.0 percent, and room revenues up 4.0 percent instead of the original forecast of a 6.5 percent increase over 2015. While realization of these lower expectations would still represent very good results, the revision is driven by lower spending on business travel in recent months, counterbalanced by a modest increase in leisure travel, both domestic and international. Museum attendance is up 10 percent year-to-date, providing further evidence of an increase in leisure travel. So far, the area has seen no slowdown in Asian, British, and European visitors, despite the strength of the U.S. dollar. However, since foreign travelers tend to plan and pay for their trips months in advance, this contact says it remains to be seen how U.K. bookings might be affected by the Brexit vote and the depreciation of the pound.
Manufacturing
Of seven manufacturing firms contacted this cycle, only one reports significant negative results. That firm spans aerospace, which has done very well, and industrial distribution, which was hit hard by the weakness in the oil, gas, and mining sector; sales were down 35 percent year-on-year in the second quarter but about level with the first quarter. A contact in the medical device business says their sales growth slowed significantly due to an inability to find and retain salespeople. A manufacturer of furniture that has struggled recently reported sales growth and an optimistic outlook for the first time in several years. The remaining manufacturing respondents say that growth is at a pace typical of recent years.
Overall, firms report no major pricing pressure. A dairy producer says raw milk prices are down. A manufacturer of tools reporting a price rise attributes it to innovative new products, not rising costs.
Only one contact, in the industrial distribution business, reports reducing headcount; they carried out a restructuring in the last few quarters that resulted in a 5 percent staff reduction. As noted above, one contact reports that the inability to hire and retain salespeople is constraining revenue growth; however, the hiring problems are confined to salespeople and otherwise, he says, the labor market is not very tight.
None of our contacts reports any major revisions to capital spending plans. Similarly, none reports major revisions to their outlook. The industrial distribution firm indicates that their decision to lay off employees reflects their conviction that the oil and gas sectors will not come back any time soon.
Staffing Services
Business activity in the New England staffing services industry has been "mixed" through August: year-over-year revenues are up for a majority of responding firms; increases range from 3 percent to 30 percent. Several contacts report seasonally slow business in the summer months. All respondents observe a tight labor market with short labor supply and strong demand, the latter evidenced by an usually high number of job postings. Contacts point to a dearth of skilled candidates to fill positions in property and corporate law, information technology, engineering, medicine, and welding, among others. They attribute the lack of labor supply to the low unemployment rate and skills mismatch in the labor market, as well as attractive salaries in permanent positions causing people to hold on to existing jobs or leave temp jobs after short tenure. Both bill and pay rates increased or remained flat for all firms, with increases driven by higher paying positions. Looking forward, most firms remain optimistic; some cite concern over the upcoming November election. They expect continued labor shortages and strong labor demand in the coming months, and say they will have to employ creative techniques to secure qualified candidates faster than their competition.
Commercial Real Estate
Commercial real estate activity in the First District is flat or improving modestly, depending on the location. In the Hartford area, office leasing activity remains limited and office rents are unchanged, while industrial leasing activity continues to show relative strength. Office leasing activity is steady at a healthy pace in greater Boston, where office rents are up slightly in recent weeks and up roughly 5 percent since last year. In the Providence area, office leasing activity increased modestly in August after a seasonally slow July; office absorption is positive so far in 2016. In the sales market, demand for commercial properties in Boston remains robust, especially among foreign investors, while in Hartford investment demand is somewhat softer than it was six months ago. Office construction activity is mixed, with little to no activity in the Hartford and Providence areas and moderate activity in the Boston area. However, the pace of office construction in Boston is said to be slightly below the national pace. The outlook for commercial real estate is neutral-to-pessimistic in Hartford and modestly optimistic for Providence and Boston. Across the District, the key downside risks cited by contacts include an aggregate economic slowdown and political uncertainty in the face of the November elections.
Residential Real Estate
Residential real estate markets in the First District began to show signs of moderation in July following a very busy spring and early summer. For single-family homes, closed sales decreased year-over-year in July in every state except Rhode Island. In Massachusetts, July represents the first year-over-year decrease in 14 months after a year that included several records highs. A contact in Boston similarly notes that although closed sales fell, volume is still well above average. Many contacts cite increasing prices as one reason for declines in closed sales; median sales prices increased year-over-year in every state except Connecticut. Pending sales were generally at higher levels than in July last year although the increases were more moderate than in the preceding months; a contact in Rhode Island notes that these figures "indicate a more tempered market heading into the fall." The market for condominiums showed similar trends, with closed sales decreasing in every state except Vermont and median sales prices increasing or decreasing only slightly. Pending sales data, however, were softer in the condominium market, decreasing in every state except Massachusetts and Maine.
Low inventory persists as an issue in the First District. For both single-family homes and condos, inventory decreased in every reporting region. All reporting states also saw a decreased number of months of available supply, further indication that the number of houses for sale is insufficient to meet buyer demand. Contacts consistently reference the inventory situation as the other explanation for softer closed sales data in July. The press release for Vermont and New Hampshire notes that "Many areas are falling behind last year's closed sales totals simply because of lack of available inventory." Putting together the two explanations, a contact in Massachusetts says "we know some buyers are getting priced out of the market, and the only way we can fix this is with more inventory."
Although sales activity has decreased from preceding months, contacts remain optimistic. A more temperate market is generally expected in the fall, as many point out that the levels of activity are still above average. Increasing prices and low inventories are the main areas of concern. Contacts are adamant that demand is healthy and that these price and inventory issues are hindering buyers who want to take advantage of "record-low mortgage rates and an unemployment rate under 5.0 percent."