November 15, 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.
- 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.
Impact on Commercial Real Estate
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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.