Oil Price Suppressed as Supply Glut Overloads Market; Poses Risks and Benefits for U.S. Economy

February 2, 2016

  • A substantial increase in supply ignited a steep decline in the price of crude oil over the past year. U.S. crude inventory has increased more than 20 percent since year-end 2014 and OPEC members continue to pump at elevated levels in an attempt to weaken U.S. producers. The supply glut and downward price pressure could potentially worsen as Iran ramps up production as sanctions are lifted and the U.S. exhausts storage capacity. These trends have ruffled global financial markets and posed questions on how deeply problems in the energy sector will affect other segments of the reasonably strong U.S. economy.
  • Lower dependence on imported oil in the U.S. has come at an unanticipated cost. Previous declines in oil prices have enabled domestic consumers to save at the gas pump and spend on other items, while taking money out of the hands of foreign producers. Increasingly, savings at the pump have come at the expense of domestic producers, triggering reductions in U.S. energy-sector budgets and layoffs that impact economies in oil-producing regions. U.S. consumers pocketed an aggregate $115 billion from lower gas prices in 2015, yet the savings did not translate into large increases in retail sales. Personal savings rose by more than $100 billion last year, suggesting that the savings at the pump are not recirculating through the economy.
  • Energy-sector layoffs involving more than 94,000 workers represented a scant 0.1 percent of total payrolls in the U.S. at the end of 2015. While the effects of energy-sector turmoil on overall employment trends are muted, domestic financial-services companies face uncertainties. Collapsing oil prices have distressed bonds linked to oil and gas firms, and banks including JPMorgan Chase and Wells Fargo are setting aside billions to cover potential losses. Many lenders remain reluctant to press for payment of outstanding balances at the risk of potentially bankrupting energy-sector companies, a situation echoing the extension of repayment schedules in the mortgage market during the financial crisis. Potentially higher yields on lower-rated energy-sector bonds may also raise rates on other borrowing.
  • Nationwide, U.S. office vacancy fell to 14.9 percent behind growing demand and the average rent rose more than 4 percent during the year. Energy-sector cutbacks in spending and staffing were evident in markets with higher concentrations of oil-related workers, including Houston and Oklahoma City, raising the vacancy rate in both metros as some tenants closed. Sublease space is also likely to rise in the coming year as hiring subsides.
  • Declining activity in the oil fields will potentially reduce demand in the coming months for warehouse space used for the storage and distribution of drilling equipment and supplies. Nonetheless, national trends appear sound, with retailers and e-commerce tenants capable of picking up the slack created by a loss of demand related to energy-sector tenants. U.S. vacancy fell 50 basis points to 6.5 percent last year.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

December Retail Sales Dip, Though Strong Consumer Drives Gain for 2015

January 18, 2016

  • Increases in several retail categories were insufficient to off set weather-related factors and avert a minor drop in retail sales in December. For the entire year, however, retail sales increased, illustrating the continuing resilience of the U.S. consumer and providing the Federal Reserve confidence to normalize monetary policy. Currently, the central bank plans to raise its overnight lending rate to 1 percent in 2016, but will monitor domestic economic trends and foreign economies to potentially adjust its planned course.
  • Total retail sales climbed 2.2 percent in 2015 despite a double-digit tumble in gas station sales for the entire year. A bright spot was spending at food service and drinking establishments, which surged 6.7 percent for the year, indicating consumers remain confident in the direction of the economy. Housing-related categories, however, were mixed. Sales of building materials and garden equipment jumped 4.2 percent last year as homeowners undertook home improvement projects, but furniture sales were up only slightly. A low homeownership rate and growing preference for rentals continue to suppress growth in this category.
  • Including the 7.1 percent increase last year, online sales have expanded more than 50 percent since employers resumed hiring in 2010, far outpacing the 23 percent bump in store-based sales over the same stretch. Sales online rose 20 percent during the holiday shopping season, easily surpassing the results posted in other retail categories. The rise to prominence of sites including Amazon will continue to prompt a re-evaluation of traditional retailers’ strategies to reach consumers. As part of Macy’s recent announcement of store closures, the retailer also revealed it will build up its online presence. Prior to the Macy’s announcement, Saks Fifth Avenue disclosed it will purchase Gilt, a luxury goods e-commerce site. Gilt will maintain an online presence and also open some physical locations.
  • Health and personal care stores are benefi ting from an aging population; spending in the category jumped 3.6 percent last year. Overall retail property vacancy was on track to fall to 6.1 percent last year as completions remained minimal and space demand grew; tighter vacancy was also supporting rent growth in the low-2 percent range. Some additional vacancy may arise, though, as Walmart shutters more than 150 U.S. stores, including 102 Walmart Express locations.
  • The rise in the online retail segment continues to generate new demand for space for warehousing consumer goods and order fulfillment. Absorption of space by retail tenants contributed to a 30-basis-point decrease in U.S. industrial vacancy last year to 6.5 percent. An additional decline will occur in 2016 as demand rises and limited speculative space comes online.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Broad-Based December Hiring Solidifies 2015 Results; Tightening Labor Market Keeps Fed’s Options Open

January 11, 2016

  • U.S. employers pushed ahead with hiring plans in December to top off a strong year of job creation. The vigor of the U.S. labor market evident throughout 2015 will enable the Federal Reserve to place greater weight on inflation trends in guiding its monetary policy decisions this year. Nonetheless, a chaotic opening week of 2016 highlighted by volatile global equity markets and concerns over China serve as a reminder that potential disruptions to U.S. economic growth persist and that the path forward contains hidden obstacles.
  • Growth across multiple industries enabled U.S. employers to add 292,000 jobs last month, pushing total new jobs in 2015 to 2.65 million, the second-highest annual total of the current expansion cycle. Service providers led the way in December, with professional and business services adding 73,000 workers during the month. Medical practices and testing facilities also chipped in with nearly 53,000 positions in response to the enrollment of new workers in employee-sponsored healthcare plans and growing needs of an aging population. Education employers also added jobs during the month, capping a year of consistent monthly gains. The sound state and security of the job market continues to provide the means for many workers to pursue educational goals that were put off during the recession and in the early stages of the recovery.
  • Several gauges of labor-market slack ended 2015 on a high note and will provide confidence to Federal Reserve policymakers. The underemployment rate registered 9.9 percent in December, marking the third consecutive month with a reading of less than 10 percent, the first such occurrence since 2008. The number of workers who could find only part-time work also fell for the second consecutive year in 2015, a sign of greater employer willingness to make long-term commitments that was not evident in the early phases of the current expansion.
  • Including the gain in professional and business services payrolls last year, the primary office-using employment sectors added more than 800,000 positions during 2015. The hiring of more than 4 million workers in the principal office-using sectors over the past five years places the U.S. office sector at an inflection point as 2016 begins. Vacancy was on track to fall modestly in 2015, but the sector could perform more vigorously this year as recent staffing gains translate into actual requirements for larger workspaces.
  • Trade employers created 31,000 positions last month, including a nominal addition to retail payrolls. Overall, new-store openings supported the hiring of 274,000 retail workers in 2015 and coincided with an estimated 40-basis-point dip in U.S. retail vacancy to 6.1 percent during the year. The average rent rose nominally during the year, but minimal new construction and tight vacancy will enable more property owners to push up rents more forcefully in 2016.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

U.S. Consumers Get in the Holiday Spirit; Retail Sales Rise, Fueled by Gains in Discretionary Categories

December 18, 2015

  • Retail sales expanded moderately in November, highlighting the strength of the U.S. consumer. Price-driven declines in gas station spending were offset by gains in online sales, food services and other discretionary spending categories, helping to allay any fears about a slowdown in the economy. The Federal Reserve’s decision to gradually raise the benchmark interest rate while watching for a buildup of inflationary pressure toward their 2 percent target will be supported by stable gains in this sector.
  • Core retail sales, which omits volatile auto and gas spending, advanced 0.7 percent over the past year as consumers started shopping for the holiday season. Bright spots include additional purchases of items needed to form new households, such as home goods and furniture, as existing home sales and household formation continue to rise following an extended contraction during the downturn. Additionally, food services and drinking establishments posted substantial growth, up 6.5 percent year over year, as consumers feel better about their economic situations and spend freely in categories beyond the essentials.
  • Gasoline station sales have fallen substantially over the last year as the drop in crude oil has filtered into retail gas prices, lowering consumer bills in the category. Less spending at the pump raises the prospects for improvement in retail sales over the coming months, particularly as consumers divert the savings from lower gas prices into purchases of other goods. Despite inexpensive gas throughout 2015, consumers have thus far opted to pocket the savings and pay down debt; however, the holiday shopping season and a strengthening labor market will likely support increases.
  • Retail sales at restaurants and bars recently surpassed spending at grocery stores for the first time in history, highlighting the secular shift among consumers toward dining out more often, particularly as the economy has continued to expand. Retailers and investors alike have benefited from this trend, as eating establishments are often located near or in shopping centers, raising the flow of traffic to benefit other merchants. Rising retail space demand has fostered a 40-basis-point drop in vacancy over the past year to 6.3 percent.
  • Internet sources, riding numerous Black Friday and Cyber Monday promotions, are boosting sales as consumers become more comfortable shopping online. Nonstore sales, which includes e-commerce, vaulted 7.3 percent year over year, outpacing all other retail categories. Industrial properties have benefited from a greater push by online merchants to offer expedited shipping times to consumers. The filling of space in major metros by these retailers contributed to a 60-basis-point vacancy drop to 6.5 percent nationwide thus far in 2015. An additional decline is likely in the fourth quarter.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

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