April 15, 2015
Business activity continues to expand in the First District, although contacts are not quite as upbeat as in the previous round. With a few exceptions, retailers, manufacturers, and selected business services firms report increases in revenue compared with a year earlier. For retail and manufacturing, the increases are fairly modest, while most consulting and advertising contacts cite moderate to strong results. Commercial real estate fundamentals continue to improve across most New England markets; residential real estate sales were slowed by severe winter weather, but contacts expect the effects to be temporary. Aside from ongoing energy price increases associated with limited natural gas capacity in the region and the effects of the strong dollar, contacts say non-labor costs and prices are steady. Only a few firms experiencing strong demand are doing any significant hiring; one retailer is raising its entry-level wages.
Retail and Tourism
Retailers contacted for this round report year-over-year comparable-store sales increases between 1 percent and 2 percent. A furniture store chain cites negative effects on sales in 2015:Q1 from the severe winter weather experienced in New England between late January and the first three weeks of February. Respondents say inventories are well managed and prices remain steady. One contact is raising its minimum hourly pay to remain competitive in the labor market in the wake of Walmart's well-publicized increase in minimum wages and to stay ahead of state and local regulations mandating higher minimum wages. Contacts say that consumers are generally more optimistic and that this sentiment will translate into higher 2015 sales.
The travel and tourism sector saw increased activity in January 2015 over January 2014, but lost business in late January and February because of severe winter weather. The weather conditions also had ripple effects for food suppliers, delivery workers, and wait staff. A contact estimates that restaurant revenues in the Boston area were down 30 percent to 40 percent during this period, reflecting lost traffic from corporate travelers, regional leisure travelers, and weekend business from local residents. Museums and other attractions were down 6 percent for 2015:Q1 compared to 2014:Q1. The good news is that, on balance, corporate and leisure travel is expected to be up again in 2015, leading to increases in room rates and occupancy rates in area hotels.
Manufacturing and Related Services
Eleven of twelve contacted manufacturers report higher sales than a year ago; the exception was a maker of hardwood furniture which saw an 18 percent year-over-year decline in sales. Although the firm attributes some of the weakness to this winter's severe weather, the decline prompted the permanent closing of several showrooms. For the firms reporting higher sales, increases are modest, generally in the low single digits, although several firms say sales growth would have been higher were it not for the weather, which in some cases prevented workers from getting to work and trucks from picking up shipments. For two firms, a manufacturer of postal equipment and an information services provider, small increases in sales were welcome after several quarters of declines.
Two issues emerged regarding pricing. The first is exchange rates. As was the case in the last round, most responding manufacturing firms say that the strong dollar means that profits from overseas sales are down significantly. The second pricing issue involves energy. Pipeline capacity for natural gas in the region has not kept up with increased demand in recent years, leading to increasing prices for both natural gas and electricity.
Firms do not report any significant changes in inventories or to their capital spending plans. One firm notes that the changing value of the dollar increases incentives to minimize inventories as changes in exchange rates can lead to restatements. Another firm reports that historically low interest rates in Europe have led them to finance Euro-denominated capital expenditures by borrowing in Euros; in the past, they would have financed these expenditures using their U.S. credit lines.
None of our contacts report employment cuts and only one, a pharmaceutical company, cites significant hiring. Several contacts say they are hiring "selectively" or for "critical skills." A producer of membranes cites "process engineers" as extremely difficult to find, but says other skills are not a problem.
The outlook is positive for all contacts except the furniture manufacturer whose sales declined in the first quarter.
Selected Business Services
Consulting and advertising contacts nearly unanimously cite increased revenues in the first quarter compared with last year. The exception is a government consulting firm that reports flat revenue in their core U.S. business year-over-year, but is up over the previous quarter as government agencies started awarding more contracts, albeit with less assured funding. Respondents in healthcare consulting say revenue growth is modest to strong, and all say demand is accelerating, as healthcare providers continue to seek operational performance improvements in response to implementation of the Affordable Care Act. A large marketing materials firm and small full-service advertising firm continue their moderate year-over-year revenue growth, in characteristically procyclical fashion. Strategy consultants cite robust revenue growth in the first quarter relative to a year earlier. Demand for private equity due diligence continues to grow, and strategic consulting is on the upswing as larger firms look to rebuild in the post-recession phase. Broadly, both consulting and advertising firms continue to experience strong demand growth for technology solutions and healthcare-related services.
Costs remain stable for a government consulting contact and one strategic consultant. A small advertising firm and small strategic consultant cite moderate cost increases over last year, but have been able to maintain or slightly increase margins. All other contacts report mild cost increases, mostly in the form of compensation adjustments, and most are increasing margins. The government consultant and small strategy consultant mention strong price competition.
All responding firms plan on hiring in 2015, apart from a government consultant who plans to keep personnel flat in New England this year. Most planned hiring represents modest increases in employment, except that a small advertising firm and a particularly successful healthcare consultant plan to increase their employee base "robustly." Contacts are planning for slight to moderate pay raises over last year, although technical positions such as information technology, coding, and web development remain hard to fill and demand premiums.
Most consulting and advertising contacts express optimism about 2015 and several predict stable growth for the next three or more years. The election cycle is a common concern, as healthcare and government consulting contacts are directly affected by regulatory changes and policy decisions. A government consulting contact expresses worry about a trend of awards being granted increasingly to the lowest bidder rather than the most high-quality firm.
Commercial Real Estate
Commercial real estate fundamentals continue to improve in both Boston and Portland and are roughly flat in the Hartford area. One contact reports that office rents in Greater Boston are up an average of 7.9 percent over the year on the strength of high-demand submarkets such as Cambridge and the Seaport District. Strong sales activity for commercial properties in Boston continues to be fuelled by foreign institutional investors, many of which are increasing their allocations to real estate. Office construction increased modestly in the Boston area and includes a small, but increasing, amount of speculative activity. Multifamily construction is still increasing in metropolitan Boston but one contact says new completions may peak in 2015; construction in the hospitality and health care sectors is expected to increase in the coming year. One respondent reports that a scarcity of skilled construction workers is a nationwide problem that contributed to an increase in construction wages in excess of 20 percent in Greater Boston since 2010. In Greater Portland, two significant office buildings were sold in recent weeks at historically high prices. Also in Portland, the industrial leasing market is seeing increased demand amid limited supply and is expected to generate new construction activity moving forward. Hartford saw a weak first quarter that involved negative absorption of class A office space downtown, but one contact says the weakness reflects the harsh winter weather and likely will be reversed soon.
Residential Real Estate
Closed sales of single-family homes in February (reflecting sales under contract 30 to 60 days prior) increased year-over-year in Rhode Island, Maine, Connecticut, and Vermont, but declined in Massachusetts and New Hampshire. In Massachusetts, sales have declined year-over-year in eight of the last 10 months. Contacts attribute the decrease in sales to tight and declining inventories; only 3.4 months of supply are available in Massachusetts; supply in the Greater Boston area is at its lowest level in more than a dozen years. Contacts say zoning laws make new construction in Massachusetts difficult and assert that new listings--not very responsive to date to ongoing price increases--will not meet buyer demand. As in Massachusetts, inventory decreased in the other First District states when snowy weather buried the region. Median sales prices increased in four of the six states; Vermont saw no change in median price relative to a year ago and Connecticut saw prices decrease, possibly reflecting distressed homes, which continue to work their way through the judicial system.
Closed sales of condominiums increased in February in New Hampshire, Connecticut, and Vermont, while decreasing in Rhode Island, Massachusetts, and Maine. Condo median sales prices rose in Massachusetts, New Hampshire, Maine, and Vermont while falling in Connecticut and Rhode Island. As in the single-family home market, inventory shortages are blamed for declining sales and increasing prices in Massachusetts condominium markets, where only 2.3 months of supply are available. As for single-family homes, condominium inventories decreased in all six New England states.
Contacts expect the spring market to be strong, although starting later this year owing to the harsh weather. Respondents anticipate that new listings will rise after owners repair winter damage and express hope that low interest rates continue to bring buyers to the market.