April 15, 2011
- Core retail sales rose for the 10th consecutive month in March,increasing 5.6 percent for the strongest rate of growth over any 10-month stretch since 2006. Volatility in automobile and gasoline sales suppressed the headline sales figure slightly, but the positive core sales trend, combined with greater job growth, continues to counterbalance uncertainty related to higher energy costs and budget battles in Washington. As a result, the 2011 outlook remains positive, as strengthening economic forces will offset this uncertainty and potential instability.
- Store-based retail sales, which exclude autos, gas, online sales and groceries, climbed 0.8 percent in March, bringing the year-over-year surge to 4.3 percent. The trend offers traditional store-based retailers a positive sign, as consumption appears to have regained much of its vigor lost during the recession. Historically, surges in store-based retail sales have triggered an expansion cycle by retailers. Given the strength of recent retail activity, an accelerated pace of expansion will likely ensue once confidence in the sustainability of the recovery overrides caution.
- Retail property vacancy across the nation was unchanged in the first quarter at 10 percent but down 30 basis points annually on strengthening demand. Lease rollovers likely contributed to upticks in vacancy in some Northeastern markets during the first quarter, but minimal construction and rising demand will result in lower vacancy rates in the region by year end. Like 2010, net absorption in the first quarter was only nominally positive nationwide, but last year’s trend will likely repeat, with space demand growing over the remainder of 2011. The expected boost from continued increases in store-based retail sales will help generate more than 93 million square feet of net absorption nationwide this year, reducing vacancy to 9.5 percent. Rent growth will gain traction in the second half, resulting in a 1.2 percent rise in asking rents and a 1.8 percent advance in effective rents.
Impact on Commercial Real Estate
- Increases in retail sales will spur space demand from companies that store and distribute consumer goods and retailers that operate fulfillment centers for online transactions, sustaining a modest recovery in the industrial property sector. This year, national industrial property vacancy will decline 30 basis points to 12.3 percent on net absorption of 57 million square feet, up from only 15 million square feet in 2010. The surge in space demand will support a 0.6 percent gain in asking rents and a 0.7 percent rise in effective rents, with more robust rent growth to follow next year.
- Sales at food and drinking establishments ticked up 1 percent in March and climbed 5.1 percent over the past year. The national hotel sector also staged a recovery during this stretch, including a solid performance in the first quarter. A revival in business travel supported a 7 percent increase in room demand during the first three months of this year and lifted occupancy to 55 percent, compared with 52 percent one year earlier. Higher gas prices, though, represent a concern heading into the key June-to-August travel season, when about 30 percent of annual room demand and room revenue are typically recorded.