December 3, 1997
Federal Reserve Districts
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Most reports in recent weeks show the Second District economy maintaining a steady pace of growth. Major retailers report that sales were mixed but, on balance, below plan in late October and early November, though some note a modest pickup by the middle of the month; retail selling prices, merchandise costs and wages remain flat. The housing market maintained a positive tone across most of region. The New York City area's increasingly tight commercial real estate market has pushed up office rents, while a shortage of hotel space in Manhattan has caused a sharp rise in room rates. Regional purchasing managers' reports indicate steady growth in manufacturing activity but little in the way of price pressures. Finally, local banks report some softening in loan demand—especially for home mortgages—and falling delinquency rates in all categories.
Recent surveys conducted by the Conference Board suggest a mixed outlook for holiday spending. Consumer confidence in the Middle Atlantic states (New York, New Jersey, and Pennsylvania) rose to a cyclical high in October; it retreated modestly in November but is still sharply higher than a year ago. However, in response to a supplementary question posed every November, consumers in the region say they are budgeting less for holiday spending, on average, than last year.
Construction and Real Estate
Office markets in New York City and northern New Jersey continue to tighten, as a shortage of available space appears to be boosting rents. Midtown Manhattan's office availability rate (space coming available within the next six months) declined to 10.3 percent at the end of October, from 10.7 percent a month earlier. Downtown's rate tumbled to 17.7 percent from 18.9 percent—strong leasing activity, largely from the financial sector, combined with commercial-to-residential conversions has pulled a substantial amount of office space off the market in recent months. Builders in New Jersey report that the market for Class A commercial space is "tight as a drum", with virtually no large space available; moreover, this strength is spilling over into the Class B market and boosting rents in both segments. One contact notes that landlords now have pricing power for the first time in eight years.
In the Buffalo area, a number of large public sector-driven construction projects are reported to be in the pipeline, including a convention center and a zoo downtown, as well as a few large renovation and redevelopment projects; altogether, an estimated $580 million in public funds will be used.
Other Business Activity
In New York city, tourism and business travel continue to boom. Hotel occupancy rates remained close to 85 percent in the third quarter. Meanwhile, room rates surged 13 percent in September (seasonally adjusted), and were up 14 percent from a year earlier.
Bankers' credit standards across all categories remained the same. Interest rates on all types of loans declined—especially mortgage rates: 45 percent of banks report a decline in residential mortgage rates and 53 percent report lower nonresidential rates. Deposit rates, however, continued to increase, on net. The quality of credit improved, as reflected in falling delinquency rates across all categories.