Beige Book Report: Boston
November 30, 2016
Most First District businesses contacted in early November reported ongoing moderate growth in sales or revenues. Retailers cited year-over-year sales results ranging from very small declines to mid-single-digit increases. Manufacturing respondents reported increased sales from a year ago. Staffing firms noted fairly strong year-over-year revenue increases in recent months. In commercial real estate, leasing activity was flat or up modestly in most First District markets. Residential real estate contacts continued to cite rising prices, but closed sales were up in some states and down in others. Most respondents indicated they were raising wages modestly to recruit and retain workers. Prices were said to have increased only slightly.
Retail and Tourism
Retail contacts consulted this round reported year-over-year sales results -- both overall and on a same-store basis through -- October and mid-November ranging from flat or very low single-digit decreases to increases in the mid-single digits. Prices remained flat or rose 1 percent to 2 percent. Respondents said they expect that the current fiscal year will end with modest positive sales growth and that this positive growth will continue in 2017. All categories of apparel, furniture, and home furnishings sold well. Contacted retailers said they plan to hire more workers, raise wages for some or all positions to attract new hires, and raise wages for some or all categories to retain existing workers. Two contacts noted that the need to pay higher wages would cut into their operating profits and one of them indicated that competitive pressures prevent them from raising retail prices in order to absorb higher labor costs.
A Boston-based tourism contact reported that their latest data (through September) showed continued strong business and leisure travel. Inbound air travel to Logan International Airport was up 6 percent year-over-year through 2016:Q3; international visitors were up 19 percent over the same period. The number of travelers from Asia increased 34 percent at least in part because of new airline service to Boston in 2016. Self-reported data indicate that one-third of this increase in visitors from Asia reflects business travel and two-thirds leisure travel. Occupancy rates in Boston-area hotels were flat in September, but average September room rates were up 5 percent from a year earlier, bringing the average room rate to a high not seen since 2012. Attendance at local area attractions and museums in September was up 6 percent year-over-year. Contacts expressed some uncertainty about whether the strong international travel numbers will continue in 2017, especially for leisure travelers, if the U.S. dollar remains strong against other major currencies.
Manufacturing and Related Services
All nine manufacturing respondents in this Beige Book round reported increased sales from a year earlier. A furniture manufacturer reported strong sales for the first time after several years in which the long-term viability of the firm was in question. Three contacts said that the strong dollar and weak commodity prices have slowed sales; two of these indicated that the strong dollar had weakened sales in Europe. A manufacturer of specialty chemicals reports that his plants are running "24/7."
There appears to be little upward pricing pressure right now. All contacts reported that prices were steady or down. A milk producer said that milk prices were down 10 or more percent versus a year ago.
Despite seeing stronger sales, only two contacts reported major hiring. One, a specialty chemical manufacturer, said that finding hourly workers was exceedingly difficult. This contact said that only one out of every three or four hourly hires works out; the problem is absenteeism, with many workers unable or unwilling to work five days in a row. Another respondent said that eight out of ten potential hourly hires either cannot pass a drug test or cannot pass a simple math test. Several of our contacts said they had trouble finding engineers. Two contacts reported lower headcount due to "attrition" or new systems.
One contact reported significant revisions to capital expenditure plans since we last talked 12 weeks ago; they said that they will more than double spending on new plant and equipment as a result of the successful introduction of a new product. The contact noted that the bar for investment is higher than before the recession: before the recession, an investment project needed to make sense even if sales fell 5 percent but now the rule is that it must make sense even if sales fall 25 percent.
Staffing Services
Business activity in the New England staffing services industry has been fairly strong in the past couple of months: year-over-year revenues increased between 10 percent and 25 percent for all but one responding firm. Labor demand continued to increase and labor supply continued to tighten in the fall. Legal, marketing, and medical assistant positions were particularly hard to fill. One contact cited the "often negligible" difference between public benefits that potential job candidates receive and earnings from a minimum wage job as a possible explanation of the tightening labor supply. Bill and pay rates have stayed flat or risen: most staffing firms are not getting pushback in response to increasing pay rates. One contact pointed out that his clients recognize that it has become more costly to recruit and secure qualified and experienced candidates. Most of the staffing firms plan to increase in size in 2017, citing the need for specific skills to grow the company, overworked staff, and expected increases in revenue. All firms plan to increase wages for their employees over the next year. Looking forward, staffing contacts were optimistic about how their companies will fare in the coming months; however, they recognize that the new administration introduces some uncertainty. Two contacts expressed optimism concerning the new political climate, predicting tax cuts.
Commercial Real Estate
Commercial leasing activity was flat or up modestly across the First District. In the Portland area, office leasing activity was flat at a slow-to-modest pace, but vacancy rates remained very low. Office leasing was also flat in greater Hartford. However, Connecticut continued to see fairly robust activity in the industrial property market, including sales, construction, and leasing. In Rhode Island, commercial leasing activity was up modestly from the third quarter, the office vacancy rate was down significantly from a year earlier, and asking rents for office space were on the rise. A contact noted that despite these improved fundamentals, office rents in downtown Providence remain too low to justify new office construction. In Boston, office leasing volume was flat and one contact said the rate of growth of high-tech firms was slowing. However, Boston's office vacancy rate continued to decline slowly, thanks to the paucity of new construction in recent years. Contacts reported that lending terms for construction loans continued to tighten. While some investors reportedly are nervous that property prices in prime commercial real estate markets such as Boston are poised to decline moving forward, the most sought- after properties in the Boston area continued to trade at record prices.
The outlook among contacts was cautiously optimistic, on balance, and most agreed that it was too soon to predict the impact on commercial real estate markets of the incoming Trump administration. Nonetheless, contacts in Boston and Hartford expect tepid economic growth moving forward based on local conditions, and a Providence contact cited space constraints as a barrier to economic growth. All contacts expected borrowing costs for commercial real estate to increase and price appreciation to slow or turn negative as a result. However, contacts opined that investors' equity positions are strong enough to weather moderate price declines.
Residential Real Estate
As in recent months, residential real estate markets in the First District showed healthy buyer activity with increasing strains on inventory. Closed sales for single-family homes and condos were mixed, with moderate year-over-year increases in some states and moderate decreases in others (five of the six First District states as well as the Boston metro area reported year-over-year changes from September 2015 to September 2016; Maine reported changes from October 2015 to October 2016). Pending sales, however, were up across the board for single-family homes and mostly increasing for condos. A Boston contact noted that buyer demand was "remarkable" while a contact in Rhode Island called 2016 "a banner year for home sales." Despite the mixed results for closed sales, the increasing pending sales numbers indicate a positive outlook going forward. A Massachusetts contact said "buyers in October kept up this summer's momentum into the fall." As usual though, many contacts cited decreasing inventory as a drag on the market. Inventories decreased year-over-year in every reporting region for both single-family homes and condos. Contacts expressed concern that this trend is driving prices up and pricing out first-time home buyers.
Prices also were generally increasing year-over-year. Median sales prices for single-family homes increased in every reporting region. For condos, the same was true in all but two First District states. Buoyed by strong buyer demand and shrinking inventories, prices remained at or near record levels in some areas. Several contacts again characterized the market as a "seller's market," given that sellers are able to price homes at their desired level and still have an abundance of buyers to choose from.
Overall, contacts seemed optimistic about the outlook. Many were wary of low inventory, but maintained that buyers seemed unfazed by the heavy competition and high prices. Several contacts cited low interest rates, low unemployment, and the stable economy as reasons for their optimism.