December 13, 2013
Retail sales in November grew at the fastest pace since June, representing the latest in a series of indicators pointing towards healthy U.S. economic growth heading into 2014. Employment gains last month, along with a stronger-than-expected third-quarter GDP figure, lends credence that consumers will be larger contributors to economic expansion in the coming quarters. Additionally, an emerging legislative compromise will set the budget for two years, clearing one of the most significant hurdles faced by the economy. While businesses and consumers will enter 2014 on solid footing, they will likely have to cope with higher interest rates as the potential tapering of the third round of quantitative easing becomes more likely. Nonetheless, the capital markets have already accounted for much of higher borrowing costs, limiting the impact of the taper.
Core retail sales, excluding auto sales and gas, jumped 0.6 percent in November, lifting the year-over-year increase to 4.5 percent. The gain was unexpected, but welcome after the National Retail Federation reported a 2.9 percent decrease in retail sales during the Thanksgiving shopping weekend. Discretionary spending was a major contributor to growth, including improvement at furniture, electronics and restaurants. The jump in retail sales at electronics and appliance stores can be partially attributed to the release of the latest iPhone 5. In fact, October’s initial sales figures for electronics stores were revised significantly higher during November’s release
Consumers are spending more despite an overall lack of confidence in the economy. In November, the consumer confidence index retreated two points to 70.4, the lowest level since April, when sequestration commenced. The combination of healthy retail sales and low consumer confidence indicates that additional pent-up demand is prevalent. Over the past few years, households have deleveraged, the equity markets are concluding a six-year bull run and rising home prices are re-establishing the “wealth effect.” As unemployment drops further in early 2014, retail sales growth should hasten.
Impact on Commercial Real Estate
Despite strong retail sales growth, the recovery in retail vacancy has largely been masked by heightened vacancy in neighborhood/community centers. These smaller, open-air centers will record double-digit vacancy at the end of this year, before vacancy falls into the mid-9 percent are in 2014. Power centers, meanwhile, will post sub-6 percent vacancy next year, facilitating a third year of rent growth.
While single-family home developers are proceeding cautiously, multifamily builders are bringing thousands of new units online this year and next to meet demand. The absorption of new units will lift apartment demand 1.2 percent next year and 9.3 percent above the recessionary trough. Many of these new households will spend more freely in furniture and appliance stores.
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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.