Economic activity throughout New England improved during the month of November, though Massachusetts – the Boston metropolitan area in particular – fared better than its neighbor to the south, according to the Federal Reserve’s most recent Beige Book.
Commercial real estate contacts across the First District, which includes Massachusetts, Connecticut, Maine, New Hampshire, Rhode Island and Vermont, reported that leasing fundamentals overall maintained a very slow pace of improvement consistent with minimal-to-slow employment growth, the Fed said, but Boston’s Seaport District and Back Bay saw absorption accelerate in recent months. For the first time since before the Great Recession, speculative office construction started to occur, contacts told the Fed.
In Connecticut, one contact mentioned political uncertainty as a drag on growth, as the state faces significant budget shortfalls in the coming years.
A regional commercial real estate lender cited October’s government shutdown as the cause of a sharp decline in loan inquiries, but said borrowing activity at the bank has since resumed at a healthy pace. The lending environment still favors borrowers with historically low interest rates and increasingly loose lending standards – too loose in relation to fundamentals, some told the Fed.
Abundant investment capital continued to flow into commercial properties across the region, sourced from private equity firms, pension funds, foreign investors, REITs and high net-worth individuals. Leverage ratios are reportedly on the rise among some investors, but one contact points out that they remain low in absolute terms.
Construction activity, both current and planned, is on the rise in Boston’s hotel and retail sectors, and the recent high growth of multifamily construction in that area is expected to slow considerably over the next 12 to 18 months.
According to the Fed, contacts said construction in the health care sector across the First District has been restrained by uncertainty over the implications of national health care reform.
Overall, contacts across the region are cautiously optimistic. Only one retail contact reported a year-over-year decline in sales, of about 3 percent, and the Red Sox appearance in the World Series boosted Boston’s hotel and restaurant activity in October.
While the Fed’s economic forecast called for slow improvement in fundamentals, and pending steady employment growth, contacts told the Fed that fiscal policy uncertainty at the state and federal levels might yet hamper growth.
