Beige Book Report: Boston
March 01, 2017
Summary of Economic Activity
First District businesses contacted in early February reported modest to moderate increases in activity from a year earlier. Retailers cited flat or single-digit increases in sales, while two-thirds of responding manufacturers saw revenue gains. Staffing firms mostly saw slight year-over-year declines in revenues, attributable in part to tight labor supply. Commercial real estate markets in the region were steady, with "good but not great" office leasing activity in Boston, Portland, and Providence. Residential real estate markets across the region saw increased median sales prices and mixed sales results, partially attributable to ongoing inventory shortages. Across most sectors, input and selling prices were stable, although staffing firms have raised bill and pay rates. While some responding firms expressed concern about increased uncertainty, most continued to say they were upbeat about 2017.
Employment and Wages
Retail firms cited a continuing tight labor market for positions involving information technology. Retailers planning to open new stores expect to hire sales associates and front-office personnel in line with that growth. Manufacturing respondents reported that employment was up, although for most it was a very minor change. Manufacturers continued to say they had difficulty finding skilled engineers and one added that the shortage of engineers was a problem overseas as well. No manufacturers reported any significant wage pressure. Among responding staffing firms, all observed strong overall labor demand and tight labor supply. Two firms mentioned lower demand from the manufacturing sector; sectors with particularly low labor supply were IT, accounting, and healthcare. Staffing firms indicated that bill and pay rates had increased since the previous quarter; most reported little pushback to increasing bill rates.
Prices
Retailers indicated that selling prices and vendor prices were level or up 1 percent to 2 percent. Manufacturers reported no exceptional pricing pressure from either customers or suppliers. A manufacturer of milk products said that it was the most stable pricing environment in the industry in 10 years. A chemical manufacturer noted that increased global production of olefins had driven down the price.
Retail and Tourism
Retail contacts consulted for this round reported that year-over-year sales growth in January to mid-February ranged from flat to low single-digit increases. One furniture retailer reported that its January sales were up 4 percent year-over-year, but severe winter weather in the Northeast during the first two weeks of February deterred shoppers. Demand for footwear, outerwear, women's apparel, and outdoor goods was reportedly strong, but there was some softness in sales of men's and children's apparel. Contacts expect to see modest growth (in the low single digits) in 2017.
Boston area hotels posted an 81.1 percent occupancy rate and another consecutive record high daily average room rate for 2016. Based on advance hotel bookings, projections for 2017 were similarly upbeat. However, some hotel and restaurant groups feel that the executive order limiting travel from certain countries may have adverse business effects as the United States may not be perceived as a welcoming country. Adding this worry to other concerns raised by a strong U.S. dollar, the possible effect of Brexit on the British exchange rate, and the outcomes of upcoming elections in key European countries creates some significant uncertainty about how the tourism sector will fare in 2017.
Manufacturing and Related Services
Of nine manufacturing contacts, six reported sales gains versus the same period a year earlier, two noted little change and one reported lower sales. For those reporting growth, it was generally stable. One of the firms reporting no growth said it reflected an exceptionally strong start to 2016.
Although contacts were generally positive about the near-term outlook, many expressed concerns about policy changes from the new administration. Three mentioned that the border adjustment tax would present a problem for them. A manufacturer of semiconductor equipment said that restrictions on the H1B visa program would affect its ability to staff positions. Another said that uncertainty about policy was the problem; for example, a border adjustment tax would have a big effect on where they located future production facilities and they would be reluctant to commit to new investment without some resolution of the issue. One contact noted that a risk in the coming year was that a plateauing of sales in the auto industry would lead to discounting of new cars and resulting pricing pressure on suppliers.
Staffing Services
New England staffing services contacts reported mixed changes in year-over-year revenue. Unlike recent reports, most firms saw declining year-over-year revenue; nonetheless they said that the economy remained strong and they were optimistic about the future of their firms. Facing supply shortfalls, most contacts were trying out new ways to fill their open positions, including partnering with local non-profits, offering sign-on bonuses, and increasing their social media presence. While all firms expressed optimism about the next few months, several were concerned about policy uncertainty with the new administration. One healthcare staffing firm, for example, lost a substantial number of listings a few weeks ago when one of its clients issued a hiring freeze in Boston, waiting to see what happens with Obamacare.
Commercial Real Estate
Commercial real estate activity was mostly unchanged in the First District. In Connecticut, office leasing activity was limited while industrial leasing was steady if not robust, and one contact expects further development of large retail fulfillment centers in the state in 2017. Demand for industrial property appeared to increase more broadly across the District, driving new build-to-suit construction in numerous locations. In Boston, Portland, and Providence, office leasing activity was described as good but not great, and vacancy rates remained low to very low. A Boston contact says that the city's office absorption pace slowed in recent months, a fact attributed partly to a longer-term trend among employers of reducing the space allotted per worker. Office construction remains limited across the First District, and contacts cite high building costs and a modest demand outlook as restraining factors. Boston's investment sales market saw steady demand and prices remained high by historical standards, but investors continued to express caution over the future direction of prices, especially in light of rising interest rates. Construction activity continued to increase in Rhode Island but was concentrated in multifamily, hospitality, and infrastructure projects. Investment sales remained strong in Portland but continued to cool in Connecticut. Contacts offered mixed reports on the retail leasing environment: the region's mid-market malls saw increased store closings while demand for core urban retail and high-end mall space remained strong. Contacts are cautiously optimistic that fundamentals will hold steady or improve in 2017.
Residential Real Estate
The end of 2016 continued recent trends for residential real estate markets in the First District. Closed sales for single-family homes increased in three of the six First District states and decreased, though only moderately, in the other three and in the Boston metro area. (Five of the six First District states and Boston reported changes from December 2015 to December 2016, while Maine reported year-over-year changes to January 2017). For condos, closed sales increased in four states and decreased modestly in Massachusetts, New Hampshire and the Boston metro area. Despite sales being down year-over-year, a Boston contact reported that the optimism going into 2017 is "overwhelming." Record numbers of homes were sold in December in Rhode Island and in 2016 as a whole in Maine. Pending sales were also generally up, which indicated a good outlook going into 2017. Many contacts again cited low inventory as a strain on the market. Inventory decreased for single-family homes and condos in every reporting region.
Median sales prices rose year-over-year for single-family homes and condos in every reporting state and the Boston metro area. A Rhode Island contact commented that "as prices rise, more people will see gains in home equity which will give them more freedom to move. That should provide some relief to our supply shortage." Overall, contacts were optimistic about housing markets going into 2017.