Beige Book Report: Boston
October 19, 2016
Economic activity continues to increase in the First District, mostly at a modest to moderate pace. Although both retailers and commercial real estate contacts report mixed results in recent weeks and months, revenues or sales for responding manufacturers and in residential real estate markets are more consistently positive. In addition, relative to recent Beige Book reports, a larger fraction of contacts in both manufacturing and retail mention raising wages moderately to retain and attract employees. Retailers and manufacturers say their own prices and those of their suppliers are relatively stable. By contrast, the median sales prices of single-family homes rose year-over-year in all six New England states. Outlooks are positive, although contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions.
Retail and Tourism
Retail contacts consulted for this round report mixed year-over-year comparable-store sales results. Some saw sales decreases ranging from -1 percent to -11 percent, while others had increases ranging from a modest 1 percent to a more substantial 8 percent. Respondents cite a variety of factors to explain their results: Some firms enjoyed double-digit sales growth last year, leading the 2016 sale results to suffer by comparison. One contact had poor results in stores near the Canadian border because of the strong U.S. dollar but experienced mid-to-upper single digit sales increases in locations where the exchange rate was not a factor. A large chain with locations in much of the northeastern United States cites mixed results on a comparable-store basis, but overall sales growth around 5 percent due to opening new stores in new territories. Inventories are said to be well managed and merchandise prices largely stable. Labor markets in some areas are reportedly more competitive, so contacts are raising wages to attract workers or to slow turnover in these markets. The consensus outlook for 2016 is for moderate comp store sales growth of 1 percent to 3 percent.
Restaurants located in tourist areas and urban locations fared well during the high summer season. In Massachusetts, meal tax collections were up 12 percent year-over-year in August and are up 4.6 percent on an annual basis for 2016 to date. A contact hypothesizes that the region's lack of rain hurt some restaurants in suburban locations this summer, particularly on weekends, as potential diners elected to remain home and cook outside in the clear weather. Many restaurants are not fully staffed and, given the tight profit margins restaurants experience in the best of times, the labor shortage is said to be forcing some restaurants to shelve plans for expansion.
Manufacturing and Related Services
We made contact with only seven manufacturing firms this cycle. Three contacts report excellent business conditions, three report modest growth, and one reports a decline in revenues. A diversified manufacturer of aerospace and construction goods said that he "cannot think of when the domestic economy has been so strong." A semiconductor equipment firm reports strong sales growth related to the introduction of the iPhone 7. A manufacturer of lab equipment says that sales are up 10 percent year-on-year due to strong sales in Japan. A manufacturer of electrical equipment notes that 40 percent of their sales in commercial construction are for renovation as distinct from new buildings, while typically only 10 percent of commercial construction sales are for renovation. Our contact attributes this atypical pattern to the availability of new technology that lowers energy consumption. The only firm reporting lower sales makes parts for industrial equipment and said that weakness in oil and gas is still hurting them, although managers felt that the oil and gas industry had bottomed out. Overall, firms do not report major changes in capital expenditure plans. One firm reports significant capital expenditures on facility consolidation; that is, they are spending money to centralize production and close plants.
Manufacturing respondents cite minimal cost increases recently and few are raising their own prices. Several contacts report that it is difficult to make price increases stick, although in situations where costs have clearly gone up, customers are willing to make concessions.
Most contacts have nothing unusual to report about employment and wages. The semiconductor equipment firm reports a second annual 3 percent across-the-board salary increase; until last year, the previous firm-wide salary increase was in 2007. The diversified manufacturer of aerospace and construction goods says the labor market is tight and they have resorted to marked increases in starting salaries to lure new workers. The manufacturer of industrial parts has a hiring freeze in place due to slow sales and requires special authorization even for replacements of departing workers.
Commercial Real Estate
Commercial real estate activity is mixed in the First District. Contacts in Boston and Portland note that office leasing activity is roughly flat since late summer, whereas the typical seasonal pattern involves an uptick after Labor Day. These contacts speculate that political uncertainty in advance of the national elections may be delaying leasing decisions. However, another Boston contact reports that office vacancy rates and rents improved again slightly in recent weeks. In Providence, leasing activity is at least steady since August, and August saw increased activity over July. Together these patterns suggest that in Providence the autumn increase in activity may have occurred earlier than usual this year. The investment sales market is also described as somewhat softer in greater Boston, yet contacts expect that premier properties will continue to sell at near all-time-high prices. Also in greater Boston, there is robust growth in construction in the multifamily, gaming, and health care sectors, and modest growth in office construction. However, the amount of speculative office construction remains limited and contacts feel that the current office construction pace is, if anything, slower than what is justified by fundamentals. Office construction remains limited in Portland, but planned institutional and retail construction around Maine increased in recent months. Based on regional factors such as stable employment growth, contacts are mostly optimistic concerning the outlook. However, macroeconomic risks such as political uncertainty and slow global growth added some caution to contacts' forecasts.
Residential Real Estate
Continuing trends from earlier this year, residential real estate markets in the First District showed healthy activity through the end of August (five of the six First District states--excluding Maine, for which July data are the most recent--as well as the Boston metro area are reporting data through August 2016). Contacts cite strong buyer demand in the First District. For single family homes, both closed sales and pending sales increased year-over-year in every reporting state. A Boston contact notes that "the market was extremely busy last month, and we did not experience the normal August lull in activity." The market for condominiums also showed year-over-year increases across the board for closed sales. Pending sales data for condos were more tempered, with Rhode Island and New Hampshire seeing small decreases year-over-year. Several contacts suggest that the District's persistently low inventory represents the only significant drag on residential markets. Inventories for both single family homes and condos decreased again from last year in every reporting state, by large percentages in several states. A New Hampshire contact says "there may be lingering worry over the availability of move-in-ready homes to replace what was sold." A Boston contact refers to a greater than 30-percent drop in inventory as "staggering."
Every reporting state experienced a year-over-year increase in median sales prices of single-family homes and all but Rhode Island and Connecticut saw the same for condos. A contact in Massachusetts says that "ongoing buyer demand continues to push median prices up." A Boston contact reports that "surprisingly, this continuation of record-high prices has not caused buyer confidence or activity in our region to diminish." Many, though, say they are wary of buyers being priced out if prices continue to rise.
Overall, contacts are optimistic, given that the market typically begins to moderate in the fall and winter. Many note that activity was unusually high for August. Several cite low interest rates and the impending presidential election as motivation for potential homeowners to buy now.