Rough Weather Restrains January Retail

February 14, 2014

  • Retail spending eased back in January as myriad factors influenced consumption. Poor weather was the largest culprit in the decline, though other hurdles kept shoppers at home and offline. The expiration of long-term unemployment benefits for 1.3 million people at the end of December curtailed spending, while evidence suggests that the slowing pace of personal income growth is beginning to weigh on the rate of retail sales gains. As a whole, however, the economy is on solid footing and the setback in retail sales and job growth over the last two months is likely temporary rather than a long-term trend. Consumers are juggling new priorities, including the cost of government-mandated health insurance, rising interest rates resulting from the Fed “taper” of Quantitative Easing, and a correction in the equity markets. When strong employment growth resumes and the skies clear, shoppers should return.

  • In January, retail sales declined 0.4 percent, while core retail sales (excluding autos and gas) dipped 0.2 percent. The retrenchment was fairly broad-based, and led by motor vehicles and parts (2.1 percent), sporting goods (1.4 percent), and clothing and accessories (0.9 percent). The most shocking decline was in the nonstore segment including Internet sales, which dipped 0.6 percent and is not easily explained by inclement weather. Although the overall report is weaker than anticipated, some bright spots emerged last month. Sales at building supply stores expanded 1.4 percent as consumers sought tools to combat the cold and snow. Grocery stores also benefited from residents hunkering down in January, though the 0.2 percent increase came at the expense of restaurants, which posted a 0.6 percent decline in sales.

  • The impact of weak income growth is becoming a larger concern for the long-term prospects of retail sales. Shoppers’ budgets are increasingly stretched to maintain current consumption levels, which will only be maintained through income growth or the accumulation of debt. Core retail sales are 14 percent above the pre-recession level while household debt is more than 10 percent below the previous peak. Revolving credit surged at the end of last year, an indication that consumers are confident in their prospects and could support retail spending levels.

Impact on Commercial Real Estate

  • While retail spending has returned, the impact on operating fundamentals at “brick-and-mortar” stores has been muffled by the sheer size of the space overhang and number of retailers going dark. Even now, more than four years after the end of the recession, several national chains remain in jeopardy, including Red Lobster and JCPenney. Nonetheless, retail vacancy will drift down 70 basis points to 6.5 percent.

  • Warehousing and manufacturing are highly dependent on the retail sector, so a pause in spending could cool the impressive gains in the industrial commercial property sector over the past few years. Industrial vacancy stands at 8.2 percent, approximately the same rate as prior to the recession. If the U.S. economy expands by more than 3 percent this year, vacancy will retreat another 100 basis points into the low-7 percent range.

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.

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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.

Hiring Falls Short of Expectations in January but Economic Indicators Point to Emerging Strength

February 7, 2014

  • Though many expected stronger employment gains in January, businesses expanded payrolls modestly for the month. The subdued hiring trends starkly contrast with declining layoffs and tightened initial unemployment claims that reinforce that the job market is on sound footing. Whether the poor weather that brought much of the country to a standstill in January significantly impacted job creation or the employment market is truly entering a patch of slower growth remains a subject of debate, but numerous indicators point to rising economic momentum that should support increased hiring.

  • U.S. employers created 142,000 private-sector positions in January. Combined with a loss of 29,000 government jobs, payrolls expanded a net 113,000 positions. Job gains in January were widespread, but fell short of expectations. Rising consumer spending supported the addition of 14,800 jobs at bars and restaurants. Residential development in warm-weather states also built momentum, underpinning a gain of 48,000 construction jobs, the largest monthly increase in nearly seven years. Several office-using employers are also increasing staff to handle higher work volumes, with professional and business services payrolls expanding by 36,000 workers in January. Financial services, and education and health services pared payrolls during the month, while information employment was flat.

  • Employment in 2013 was revised upward to more than 2.3 million jobs for the year. With the increase, 90 percent of all the positions lost during the recession have been recovered, while the private sector has recovered 97 percent of the jobs lost. A rise in oil and gas production across the country has supported hiring in the natural resources and mining sector, lifting the total employed in the sector beyond its pre-recession peak. Education and health services, and leisure and hospitality have also surpassed their pre-recession peak employment levels. Two sectors that remain well-below peak employment levels are construction and manufacturing. Commercial and residential development remains well below the levels set in the last expansion, while the recovered manufacturing sector has increased automation to ease staffing needs.

Impact on Commercial Real Estate

  • Job creation continues to support rising retail spending and has underpinned the retail property sector. Behind improving space demand, national retail vacancy declined 40 basis points last year to 7.2 percent, the lowest level in more than five years. A combination of additional store openings by retailers and limited construction of multi-tenant properties will shave an additional 70 basis points off vacancy this year and support a 2.5 percent jump in rents.

  • Demand for rental housing remains strong. Last year, the national apartment vacancy ticked down 10 basis points to 5 percent and the average effective rent advanced a healthy 3.5 percent. Supply-side pressures will increase in 2014 as developers move swiftly to capture unmet demand. An increase in completions to 215,000 units will underpin a rise in vacancy to 5.1 percent by year end.

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.

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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.

Economic Expansion Building Steam, Invigorates Commercial Real Estate

January 31, 2014

  • Led by a resurgence in consumer spending and devoid of many of the headwinds that restrained the economy over the last few years, economic growth in 2014 should surpass 3 percent, its highest level since 2005. Last year, GDP advanced 1.9 percent, though outsized gains in the second half of the year lend credence that the economy is on solid footing. As the private sector firmly grabs the reins of the recovery, government intervention is dwindling. The Fed has begun to unwind their economic stimulus and should close out its quantitative easing by the end of the year, while midterm elections should restrain legislative initiatives that impede economic growth.

  • GDP grew 3.2 percent in the fourth quarter, lifting the second-half pace to 3.7 percent, the strongest six-month rise since 2003. Consumer spending jumped 3.3 percent in the fourth quarter, marking the most significant gains since late 2010. Since two-thirds of the American economy is driven by consumption, the advance is an encouraging sign for the long-term economic outlook. Exports were also a strong contributor during the quarter, an indication that global economic momentum is improving.

  • Two components dragged on economic growth last quarter: government spending and the housing market. The partial government shutdown and reduced spending from sequestration resulted in a 90-basis points deduction from GDP growth. The reduced hours worked by government employees during the shutdown alone sapped at least 30 basis points from the economy. Housing, meanwhile, is adjusting to a higher interest rate environment amid higher home prices. The recent increase in valuations has priced many potential buyers out of the market while eliminating the viability of single-family homes as investment vehicles.

Impact on Commercial Real Estate

  • A consumer-led economic expansion will pay dividends for retail property owners this year. Space demand is anticipated to rise 1.6 percent during 2014, pulling down the overall vacancy rate by 60 basis points to 6.6 percent. For multi-tenant centers, the vacancy rate will decline to 8.5 percent.

  • Although a cooling housing market is dragging on the pace of economic expansion, higher prices will benefit apartment operations. For the first time since the housing bubble burst, the payment on a median-priced home exceeds the average rent. The strengthened renter demand will come as the nationwide inventory expands by 1.5 percent. Despite this construction surge, vacancy will finish the year up just 20 basis points at 5.1 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.

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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.

Economic Momentum Inspires Fed to Taper Quantitative Easing; Treasurys Edge Higher but Few Ripples Expected

December 19, 2013

  • Reiterating the positive economic news of recent weeks, the Fed announced plans to taper its quantitative easing (QE) program in January. This will be the central bank’s first step toward withdrawing its unprecedented support for the U.S. economy. The token reduction in bond and securities purchases follows a series of positive reports suggesting the economy is better positioned to mount a self-sustaining recovery. Third quarter GDP growth significantly exceeded expectations, job gains have surprised to the upside, retail sales have been solid and the housing market appears to be on solid footing. In addition, an impending budget deal will offer fiscal stability for the coming two years, removing risks of another government shutdown and additional sequestration. More importantly, the budget deal will eliminate some of the brinkmanship that heightened uncertainty and stymied economic performance. While the taper will likely lead to modestly higher interest rates, the Fed’s stance remains dovish and leaves the door ajar for future intervention.

  • Following its December meeting, the Fed announced a reduction of its monthly bond and securities purchases, edging the acquisitions down to $75 billion. The $10 billion reduction will be applied equally to Treasury bonds and mortgage-backed securities and begin in January. In a move consistent with the nature of the most recent QE program, the central bank declined to announce an end date to its bond and securities buying. This will moderate risks of overreaction by equity and capital markets, though some uncertainty will persist. Should the economy continue to build momentum, the Fed may announce further reductions to its asset purchases when Bernanke convenes his last FOMC meeting as Chairman in late January.

  • To alleviate stress caused by the withdrawal of stimulus, the Fed offered new guidance on the federal funds target rate. With inflation at the lowest level since 2009, plans to lift the overnight rate when unemployment falls to 6.5 percent have been extended to “well past the time” that level is reached.  Most of the members of the FOMC anticipate the rise occurring in 2015, while a handful of officials expect the first rate hike in 2016. This extended outlook will lend stability to the financial markets.

Impact on Commercial Real Estate

  • The third round of quantitative easing (QE3) started in September 2012 with the Fed committing $40 billion per month to the purchase of bonds and mortgage backed securities. The intent was to bolster economic activity by boosting liquidity and by restraining long-term interest rates. The following December, the FOMC increased the monthly acquisition budget to $85 billion. Interest rates remained exceptionally low, and were instrumental in the recovery of the housing market. In May 2013, Bernanke hinted that he may begin tapering the program, triggering a rapid escalation of interest rates to nearly 3 percent. Treasury rates receded in September when the Fed chose not to taper, but they have remained in the upper 2 percent range since. With the implementation of the taper, interest rates will creep higher, but with much of the change already factored into the figures, a spike in interest rates will be unlikely.

  • The taper announcement will have little immediate impact on the commercial real estate investments. Although the rates on the10-year Treasury will likely drift upward, cap rates for most commercial assets will remain contained as spreads tighten for both the competitive lending institutions and buyers. Only properties with very low cap rates such as premium net leased assets or top tier apartments in prime markets face a potential lift in cap rates in the short-term, and even for these best-in-class properties with ultra-thin spreads, any movement would be nominal.

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.

Follow Marcus & Millichap Research Services on Twitter!

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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