The Investment Real Estate Research Blog

December 5, 2011

• Consumer spending displayed surprising resilience in October, with retail sales posting strong gains. The pace of spending slowed from September’s more robust numbers, but did not suggest broad-based weakening. Retail sales recorded gains for the fifth consecutive month and follow on the heels of solid GDP numbers, which reflect robust business investment gains, and an improving employment landscape. Monthly employment numbers remain positive while initial jobless claims for the first week of November continued to drift down to the lowest level since April of this year. These economic indicators signal positive momentum and moderate economic strength, but numerous headwinds, most notably global economic uncertainty, will constrain the pace of economic growth, pare back employment gains, and pressure wage growth, thus raising downside risks to a vulnerable U.S. economy.
• Total retail sales increased 7.2 percent in October on a year-over-year basis, off pace from 7.9 percent reflected in September’s data. Excluding motor vehicle and gasoline sales shaves 110 basis points off growth to a strong 6.1 percent, marking six consecutive months of consistent 6-percent-plus gains. Spending was less dispersed in October than in prior months, concentrating in just a few segments, while department, apparel and furniture stores recorded declines. October sales reflect a bifurcated mix of stronger spending on necessities, such as healthcare and utilities, up 0.7 percent for the month, but also on discretionary items in the electronics, appliances and non-store retailer segments, which climbed 3.7 percent and 1.5 percent, respectively.
• The decline in department and apparel store sales raise concerns for the holiday retail outlook, as department store sales have receded below levels posted one year ago and retail hiring expectations remain low. While retail spending patterns continue to beat previous predictions, the outlook for continued growth remains at risk as the broader economic recovery faces substantial headwinds. Industry expectations for the 2011 holiday season sales remain mixed, but cautiously optimistic ranging between a 2.8 and 3.0 percent gain, on par with or slightly outpacing last year.

Impact on Commercial Real Estate

• Property sector operations also exhibited positive momentum nationally. Modest completions resulted in a vacancy decline of 30 basis points over the year to 9.9 percent as of the third quarter. Vacancy rates across most retail sub-types remain stable, but elevated and above the historical trend. Store closings in general merchandise, apparel, furniture and other categories continue to slow, with many retailers opening more stores than they close. Asking and effective rents reflect a slowing pace of decline for the fourth consecutive quarter, indicative of a gradual bottoming of retail rents.
• Industrial properties are benefitting from strength in the manufacturing sector and stronger consumer spending. Trade, capacity utilization, and the prospect of inventory rebuilding promises to stimulate warehouse demand. The threat of a eurozone recession heightens the risk for weaker trade volumes, which would attenuate demand and slow expansion in the property sector. If economic conditions continue to trend positively, the national vacancy rate is forecast to improve by 70 basis points on a year-over-year basis to 12.1 percent.

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 weekly 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.

November 4, 2011

• The pace of hiring in October remains consistent with the moderate GDP performance and reflects the protracted US economic recovery. Similar to prior months, private-sector firms added jobs in professional and business services, leisure and hospitality, and healthcare. The headline unemployment rate edged down, but has made little progress recently, fluctuating within a narrow band since earlier this year. The average workweek has held constant, reflecting no acceleration in the number of hours worked over the past 12 months. Consequently, this slack in the labor markets creates little upward pressure on hourly earnings, which currently trails the pace of consumer price inflation and suggests less real take home pay and weaker discretionary spending.
• Employment grew by a net 80,000 jobs in October, continuing the pattern of private-sector gains blunting losses incurred by government restructuring. The private-sector added totaled 104,000 jobs last month compared with the loss of 24,000 jobs by state and local governments. Job gains in trade, transportation and utilities totaled 35,000 – largely powered by nearly 18,000 retail positions – outpacing growth in professional and business services. Education and Health Services recorded 28,000 new jobs, exhibiting positive momentum across all subsectors. Leisure and Hospitality expanded payrolls as well, with the gains highly skewed toward the food services sub-category, which captured 80 percent of job gains. In addition, significant upward revisions to employment data for August and September netted a total of 102,000 additional workers added to payrolls.
• In perspective, monthly payroll trends may appear fairly mundane, but measured on an annualized basis; total employment expanded by 1.5 million jobs as of October and represents an average of 125,000 new jobs created per month. Jobs created in the private sector total 1.8 million compared with the public sector, which shed 323,000 positions in the same period. The 9.0 percent unemployment rate has maintained a range of 20 basis points since the spring, but improved by 70 basis points over one year ago. Similarly, the unemployment rate for teenagers and 20-24 year olds, while still high, reflect an annualized decline of 300 and 150 basis points, respectively. The number of long-term unemployed, which has not improved in the past 12 months, and the high rate of underemployment, which stands at 16.2 percent, an 80 basis point improvement over the year, appear to be bigger concerns.

Impact on Commercial Real Estate

• A durable recovery in the retail sector relies not only on sustainable sales, but also strong wage growth – a more problematic issue given higher consumer inflation rates and weaker earnings. Wage growth should significantly improve in response to hiring momentum in the next six months. Positive economic trends will support retail demand through increased consumer spending, pulling down vacancy 20 basis points in the fourth quarter to 9.7 percent and 50 basis points next year.
• Strong job gains in the younger age cohorts – those with the highest propensity to rent – will unlock an increasing number of new household formations. Apartments will outperform the for-sale market in the foreseeable future as households remain mobile to remain eligible for more employment options or relocation mandates. The national apartment vacancy rate will retreat to 5.4 percent at the end of 2011, an annual improvement of 120 basis points.

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 weekly 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.