Steady Retail Sales Momentum Drives Retailer Innovation

 

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RETAIL SALES MAY 2019
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Research Brief
Steady Retail Sales Momentum
Drives Retailer Innovation
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Healthy labor market keeps consumption on solid footing. Retail spending increased steadily in April, rising 3.2 percent on an annual basis and extending a trend of stabilized consumption. The tight job market continues to fuel the retail sector as unemployment rests at a 50-year low, prompting more discretionary spending as employers boost wages to attract talent.

Familiar faces headline steady retail sales growth. Single-tenant-oriented retailers, including bars and restaurants, home improvement vendors and pharmacies, continue to drive spending. Yearly sales growth for these retailers ranged from the upper-3 to upper-4 percent band last month, well outpacing other retail categories. Growth rates for general merchandise and grocery sales were clustered in the mid-2 percent realm, while a variety of other categories recorded negative changes. While spending at single-tenant establishments is further supported by rising levels of discretionary income, performance among these assets has remained consistent as the average cap rate has stayed in a tight range for the past three years. Yields for other commercial property types have shown more deviation during that span, pointing to the stability of the single-tenant sector.

Online ordering helping brick-and-mortar retailers boost efficiency. Historically high consumer confidence is benefiting bars and restaurants as this category has averaged 6.2 percent growth over the past year, outperforming most other retail sectors. Increased food delivery orders are underpinning the accelerated pace of growth; however, they are changing restaurant layouts, encouraging kitchen-only sites to counter rising delivery costs. Opening spaces with no dine-in options reduces space needs, slashing rent expenses as well as overall operational costs. Grocery stores have also adapted to the increase in online ordering, creating more curbside pickup locations.

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Developing Trends
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Consumers reap rewards of low joblessness. The national unemployment rate continued to drop, falling to 3.6 percent with the addition of 263,000 jobs. Consumers are benefiting from the tightening job market as average hourly earnings rose 3.2 percent on a yearly basis in April, on par with the previous six-month average.

Trade tensions could threaten economic optimism. Implications from the recent 25 percent tariff on Chinese goods will likely take several months to reach consumers. Price increases on common goods could weigh on discretionary spending, potentially hampering consumer confidence moving forward.

Restaurants find ways to cut costs. With average spaces about a third the size of a typical restaurant, kitchen-only sites help restaurants significantly reduce expenses and focus strictly on deliveries. While Domino’s has spearheaded this concept, numerous other food vendors will adopt it in the near future.

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3.2%
Core Retail Sales Growth Y-O-Y
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4.0%

Consumer Confidence Index Growth M-O-M
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* Through April
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; The Conference Board; National Real Estate Investor; Real Capital Analytics; U.S. Census Bureau

 

Unemployment Falls to Record Low; Job Gains Sustain Apartment Demand

 

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EMPLOYMENT MAY 2019
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Research Brief
Unemployment Falls to Record Low;
Job Gains Sustain Apartment Demand
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Improved employment growth supporting historically low joblessness. Employers added 236,000 positions in April, bringing the year’s total job creation to 820,000, which is on par with previous years in this cycle. Expanded hiring activity compared with March drove the unemployment rate down to 3.6 percent, its lowest level in nearly 50 years.

More jobs for high school graduates lift demand for affordable rentals. The unemployment rate for individuals without a college education continues to fall, down 80 basis points year over year to 3.4 percent. More employment opportunities for this demographic will encourage household formation and improve demand for Class C apartments. Vacancy for this tier has been lower than for Class A and B measures for more than three years, translating to accelerated rent growth. The average effective rent for Class C apartments improved 5.2 percent year over year in March, compared with 4.2 percent a year ago. Monthly rates for Class A and B rentals rose by lesser degrees, up 4.4 and 4.6 percent, respectively.

Education and healthcare hiring underscore strength of medical offices. Year to date, the education and health services sector has added the most jobs across all major industries. Steadily rising medical school enrollments are helping to meet staffing needs even as the demand for medical services increases with the aging of the baby boomer generation. The unemployment rate among educators and medical professionals sits at 2.3 percent, but 1.3 million positions are still open. Strong hiring in these fields reflects the positive fundamentals of medical offices. Elevated healthcare demand paired with a contracting construction pipeline well below peak levels will tighten the national medical office vacancy rate to its lowest level in over 10 years. Availability is even more contracted in smaller metros. Though firms are hiring across the country, job creation is becoming more prevalent in secondary and tertiary metros as local populations both expand and age.

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Developing Trends
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Tight labor market benefits short-term unemployed the most. In April total unemployment declined by 387,000 individuals, 57 percent of whom had been without a job for less than five weeks. The number of people who have not sought work in more than six months did not substantially change, with the underemployment rate remaining unchanged at 7.3 percent. These measures highlight how individuals with larger gaps on their resumes are still finding it difficult to obtain employment despite historically low joblessness.

Labor shortage widens, sustaining elevated wage growth. As the unemployment pool shrinks, total job openings continue to rise, measuring 7.5 million in March. There are now 1.7 million more open positions than people seeking work. This persistent labor gap kept annual growth in average hourly earnings at 3.2 percent in April, contributing to a 3.2 percent gain in core retail sales over the same span.

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205,000
Average Jobs Added per Month in 2019
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3.6%

Unemployment Rate in April 2019
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Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; AAMC

 

 

Increasingly Sophisticated Retailers Deploy Range of Growth Strategies

 

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RETAIL SALES APRIL 2019
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Research Brief
Increasingly Sophisticated Retailers Deploy Range of Growth Strategies
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Retail sales showing consistency as year progresses. Softened consumer confidence in March had little impact on spending as core retail sales advanced 3.6 percent year over year. A second consecutive month of moderate yet steady growth can be traced to the healthy job market, rising income levels and increasing spending power. Though overall consumption grew at a stable pace, sales growth was concentrated in a few areas, including e-commerce.

Reinvestment takes priority as companies aim to improve shopping experience. As a historically cold winter subsides, shopping at home-improvement and lawn and garden stores is picking up. Over the past year, spending at these retailers rose 6.0 percent as warming weather kicked off projects such as residential housing starts and remodels. Companies like Home Depot and Lowe’s are making shopping at their stores more convenient by strengthening their omnichannel capabilities. In-store pickup has been widely popularized by home-improvement vendors, leading many other retail segments to adopt the concept. Like many retailers, home-improvement companies are focusing heavily on reinvestment into current operations rather than expansion.

Drugstores multiply offerings to gain wider audience. Spending at health and personal care retailers grabbed headlines in March, with sales rising 5.2 percent during the past year, well outpacing the 10-year average. Investor interest in these assets remains strong, particularly as they evolve into one-stop shops for health-related products and services. Leading the way are CVS and Walgreens, who are exploring new layouts and services to help drive foot traffic. These retailers have added primary care clinics and dental services and are beginning to offer more traditional grocery items at some locations to grow front-store sales. Cap rates for drugstores remain relatively tight, dipping below 5.0 percent for high-credit tenants in heavily trafficked areas.

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Developing Trends
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Employers stay on recruiting trail. Initial claims for unemployment benefits registered 192,000 in March, beating expectations and marking a near 50-year low. With job openings outnumbering job seekers roughly 10 percent, those looking for work are finding plenty of options.

Lowe’s reevaluates business model as sector evolves. Lowe’s has trimmed its brick-and-mortar portfolio in recent months, closing 51 underperforming locations in the U.S. and Canada as well as all 99 of its Orchard Supply stores. Increasingly sophisticated customer tracking has helped some retailers optimize their locations, boosting local revenue and profitability metrics.

Pharmacies taking on new role. As drugstores continue to bolster in-store healthcare, more customers are preferring these retailers over their family physicians and dentists. Pharmacies hold a key advantage in that they are typically open evenings and weekends, expanding services beyond typical healthcare business hours.

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3.6%
Core Retail Sales Growth Y-O-Y
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6.0%
Building Materials & Garden Equipment Sales Growth Y-O-Y
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* Through March
Sources: Marcus & Millichap Research Services; Marcus & Millichap MNET; Bureau of Labor Statistics; The Conference Board; CoStar Group, Inc.; Creditntell; Retail Dive; U.S. Census Bureau

 

 

Labor Deficit Boosts Wages; Invigorates Hiring in Tertiary Markets

 

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EMPLOYMENT APRIL 2019
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Research Brief
Labor Deficit Boosts Wages;
Invigorates Hiring in Tertiary Markets
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Job growth rebounds in March; pace of hiring moderating. Removed from the disrupting effects of the partial government shutdown and winter storms, U.S. employers created a combined 196,000 jobs last month, well above the 33,000 personnel who were added to payrolls in February. Employment gains for the first quarter bring the average monthly total to 180,000, down 19 percent from the first quarter of 2018. The decline in hiring is in line with the current year-end forecast of about 2 million jobs.

Labor shortage curbs onboarding but lifts wages. Employers’ aggressive hiring plans are being thwarted by a shortage of people looking for work, slowing employment growth. The labor shortage works to the advantage of commercial real estate by adding upward pressure to wages. Average hourly earnings improved 3.2 percent over the past 12 months. Such a sustained period of growth has not occurred in a decade. Higher wages are bolstering discretionary spending, increasing the demand for retail stores, apartments, and other properties.


Employment gains coming to smaller markets.
In contrast to earlier in the economic cycle, the majority of jobs are going to the country’s smallest metros instead of the largest. Since 2016, nearly 50 percent of new positions have been in tertiary markets. The current labor deficit has motivated some companies to move to where the prospective hires reside instead of trying to recruit prospects to major cities. Employers can recoup some of the expenses of an office relocation or expansion through the lower operating and living costs often found in these smaller settings. Investors benefit as well. Since much of the post-2010 commercial development has been confined to primary metros, less new supply is being added in several of these more modest cities. While some businesses are building to suit, others are renting existing space, driving down vacancies and lifting rents.

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Developing Trends
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Data suggests the economy is at effective full employment. The unemployment rate remained flat month-over-month, at 3.8 percent, and has not moved out of the 3.7-to-4.0 percent band in a year. Other measures of joblessness, such as the total number of people marginally attached to the labor force and the underemployment rate, remained little changed in March. These factors suggest that the economy is at effective full employment, with little slack left in the labor pool to propel vast hiring.

Employment growth fuels new economic activity, benefiting commercial real estate. The creation of 2.5 million jobs over the past 12 months at a 3.2 percent higher average wage has supported the formation of 1.3 million households, $10 billion in additional core retail spending, and 85.5 million square feet of new office leases. The added jobs and discretionary spending have also boosted both commercial and leisure travel, lifting hotel occupancy to the highest level on record dating back to 1988..

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180,000
Average Jobs Added
Per Month in the First Quarter
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3.2%
YOY increase in Avg.
Hourly Earnings in March 2019
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* Job Seekers as of March; Job Openings as of January
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics