WASHINGTON (MNI) – The following is the second and final section of
the text of the latest Beige Book survey of economic conditions in the
Federal Reserve’s First District, published Wednesday:

For the most part, contacts have revised their expectations
downward since the last conversation in July. Although many still expect
business conditions and profitability to remain strong, they note that
they are in a highly pro-cyclical industry and economic indicators point
towards a pessimistic outlook. The one exception is firms that primarily
provide services to the financial industry, who expect strong growth as
financial firms continue to deal with the aftermath of the financial
crisis and regulatory overhaul. Several contacts say they believe the
increasing prospect of continued political stalemate in Washington is
having serious deleterious effects on both their firms and the economy
as a whole.

Commercial Real Estate

Reports from commercial real estate contacts around the District
contain a mix of good news and bad. On the good news side, in both
Boston and Providence significant amounts of office space were absorbed
in the third quarter as tenants took advantage of attractive rents for
prime locations. In the column of bad news, the outlook turned more
pessimistic among roughly half of contacts in light of a perceived
increase in national and global risks to growth. Respondents also report
a number of other mixed or contradictory signals. While one contact
perceives that leasing activity in downtown Boston has increased in
recent weeks, another contact notes that the pace of office absorption
year-to-date in Boston, while positive, remains well below what would be
expected in a healthy recovery. Sales activity remains limited in
Providence, while Boston continues to enjoy robust investment demand for
prime office and apartment properties. The lending environment is
characterized, on the one hand, by aggressive competition to fund loans
on low-risk properties, such as well-leased buildings in prime Boston
locations, and, on the other hand, by a decline in credit availability
for properties carrying higher risk, such as those experiencing high
vacancy rates. Construction activity in Boston continues at a moderate
pace in the apartment, education, and health sectors, while office
construction activity is described as negligible.

Residential Real Estate

Notwithstanding substantial increases in home and condo sales in
August compared to a year ago, residential real estate markets in New
England remain weak and sluggish. Contacts note that the enormous
decline in buyer activity last year following the expiration of the tax
credit largely explains the year-over-year increases observed this year.
Meanwhile, the median sale prices of homes and condos decreased slightly
in August throughout the region, with the exception of the Greater
Boston area where prices rose. Inventory levels in Greater Boston
reached very low levels in August. Residential respondents throughout
New England describe buyers as cautious and patient, reflecting fears
over job security. Some contacts express concern about the ability of
consumers to secure home-purchase financing. At the same time, several
contacts note an increase in investors purchasing single-family
properties to rent out. Forecasts for the remainder of the year remain
bleak, with contacts anticipating 2011 sales will fall short of last
year’s total. Respondents do not expect a significant improvement in
residential real estate within the next one to two years.

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** Market News International Washington Bureau: 202-371-2121 **

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