Retail Sales Trend Up As Discretionary Income Advances; Retailers Refine Strategies to Sustain Growth

 

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Research Brief
April 2018
RETAIL
Developing Trends
Job formation cools after February’s robust gains. U.S. employers added just over 100,000 positions in March, following more than 300,000 workers added to payrolls in February. A loss of roughly 4,000 jobs in retail trade was noted, with department stores headlining the reduction. Nonstore and miscellaneous retailers each added roughly 4,000 employees.
Accelerated interest rate hikes possible after inflationary concerns resurface. After inflation measured 2.1 percent in March, its highest level since February 2017, the Federal Reserve indicated a steeper rate-hike path may be needed. This potential change would increase the cost of debt.
Small-format stores generate retailer interest. As retail continues to evolve, retailers are shifting to smaller layouts, attempting to maximize profits per square foot. Target and Kohl’s are among a number of retailers to recently adopt this strategy.
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Retail Sales Trend Up As Discretionary Income Advances; Retailers Refine Strategies to Sustain Growth
Rising take-home pay fosters retail momentum. Increased discretionary income stemming from tax cuts and a tight labor market are starting to materialize. Inflation-adjusted core retail sales recorded a 2.5 percent year-over-year increase for the fourth straight month, following an average of 2 percent expansion the previous 18 months. E-commerce sales continue to propel retail activity, benefiting the industrial sector as over 200 million square feet of space is expected to be leased this year, dropping the national vacancy rate to 4.9 percent. Building materials sales also ascended at a healthy clip, logging a 4.8 percent boost on an annual basis, well above the 3.7 percent March year-over-year average of the past two decades. This growth can be largely attributed to do-it-yourself home improvement projects. Retail heavy weights plan expansion. Miscellaneous store sales, which include florists, gift, office, used merchandise tenants, among others, posted a 9 percent year-over-year increase in March, compared with the 20-year monthly average of 1.7 percent. Goodwill has supported this sector’s accelerated growth, as the company plans to continue expanding its retail operations as well as make an entry into e-commerce this year. Conversely, sporting goods, hobby and book sales continued to falter, reporting a 5.6 percent yearly decrease. Despite the sector’s weakened performance, Dick’s Sporting Goods plans to open about 20 stores in 2018, a slower pace than what they initially announced. Dick’s expansion may accelerate if the company is able to acquire vacated Toys ‘R’ Us space at discounted prices.
2.5% Inflation-Adjusted Core Retail Sales
Y-O-Y*
2.1% Core Inflation
Y-O-Y*
* Through March
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; BLS; CNBC; U.S. Census Bureau
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 by top industry professionals, showcasing time-sensitive information and valuable analysis. Add The Research Brief blog to your reading list today.
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.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Home Price Appreciation Widens Affordability Gap, Sustains Strong Apartment Housing Demand

 

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Research Brief
March 2018
HOUSING
Developing Trends
First-time homebuyers accounted for 29 percent of sales in February, down from 31 percent one year earlier. Rising interest rates could put additional strain on home sales this year. Limited for-sale inventory, especially in the entry-level home segment, will keep many would-be homebuyers on the sidelines.
During February, new home sales reached the highest level since April 2009, with more than half of all sales occurring in Southern states. Nationally, the median price of a new home increased nearly 10 percent to more than $330,000 as sales remained concentrated in homes priced above $300,000. A labor shortage as well as high land and materials costs continue to drive the building of larger, luxury homes.
Apartment vacancy remained unchanged during 2017 despite deliveries reaching a 25-year peak as nearly 365,000 units came online. Demand will stay strong again this year, keeping the rate below the long-term average of 5.7 percent.
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Home Price Appreciation Widens Affordability Gap, Sustains Strong Apartment Housing Demand
Robust housing demand spurred by steady employment gains and wage growth ticked up the homeownership rate by 60 basis points to 64.3 percent at the end of 2017. The increase was driven by a 220-basis-point advance in the homeownership rate for those under age 35 to 36.4 percent. Though it is encouraging that this age group is actively purchasing homes, this segment remains below its pre-recession rate of 40 percent, indicating there is still room for improvement.

For-sale inventory has risen since the end of last year, but with approximately 1.6 million housing units listed, the number of homes available for sale in February remained nearly 1 million units below the long-term average. As a result, monthly home sales will struggle to gain traction in the near term following two years of little to no transactional growth. Despite tight inventory

levels, overall home prices are accelerating at a subdued pace as buyers remain on the sidelines by not providing offers on marketed homes. Housing needs are then directed to apartments. Last year, more than 340,000 units were absorbed, the highest level since 2000.

In select metros, home prices have appreciated more than 50 percent since the prior peak, with household income growth failing to keep pace. This has driven a wedge in affordability in markets such as Denver, Portland, San Jose and Texas’ four major metros. Of the 335,000 apartments slated for completion this year, more than 80,000 units are in these markets. With monthly rents averaging $800 less than the mortgage payment on a median-priced home in these metros, renter demand remains healthy through 2018.

$243,400 Median price of existing single-family home in February 2018 3.4 Months of supply at current sales pace in February 2018
Sources: Marcus & Millichap Research Services; U.S. Census Bureau; Real Page, Inc.; National Association of Realtors; National Association of Home Builders; New York Fed Consumer Credit Panel/Equifax
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 by top industry professionals, showcasing time-sensitive information and valuable analysis. Add The Research Brief blog to your reading list today.
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.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Federal Reserve Projects Three Rate Hikes in 2018; Watching Tariff Impacts Closely

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Research Brief
March 2018
FEDERAL RESERVE
Developing Trends
Unemployment projected to fall below 4 percent nationally. A constrained labor pool and more than 6.3 million job openings have prompted Fed projections of unemployment reaching below 4 percent nationally through the coming year.
Combination of tax cuts, higher wages boosting retail outlook. Increased wages and cuts in personal income taxes will support gains in retail sales this year. Enhanced spending power, combined with incredibly low retail vacancy, will spark greater rent growth as firms migrate toward the few remaining open floor plates that meet their qualifications.
Reduced benefits of owning homes encourage vibrant rental environment. Tight labor markets and increasing wages are driving strong growth in household formation, yet recent reductions in tax benefits for homeownership should favor demand for apartments, particularly in high cost states.
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Federal Reserve Projects Three Rate Hikes in 2018;
Watching Tariff Impacts Closely
Fed raises benchmark interest rate, plots path for additional increases. The Federal Reserve increased the federal funds rate by 25 basis points, lifting the overnight lending rate to 1.5 percent. While the Fed noted that the inflation outlook had moderated in recent months, an upgraded economic forecast factoring in recent tax cuts and a rollback in regulation strengthened growth projections for the next two years. As a result, the Fed has guided toward two additional rate hikes this year, while setting the stage for as many as four increases in 2019.

Trade impacts still being considered by Federal Reserve. While the effects of the tariffs on steel and aluminum are still being absorbed, recent comments from Capitol Hill included talks of increasing tariffs on numerous goods originating from China. While the Fed noted the potential for economic disruptions and

slower overall growth as a result of the full implementation of these actions, forecasts for the near-term economic outlook remain positive.

Lending costs rise alongside Fed rate increase. As the Federal Reserve lifts interest rates, lenders will face a rising cost of capital, which may lead to higher lending rates for investors. However, in an effort to compete for loan demand, lenders may also choose to absorb a portion of the cost increases. While higher borrowing costs may prompt buyers to seek higher cap rates, the positive economic outlook should provide rent growth that outpaces inflation over the coming year. As a result, sellers remain committed to higher asking prices, which has begun to widen an expectation gap as property performance and demand trends remain positive.

1.5% Fed Funds Rate* 2.88% 10-Year Treasury Rate*
* As of March 21
Sources: Marcus & Millichap Research Services; BLS; Federal Reserve Economic Data
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 by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
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.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Robust Gain in Retail Spending Reiterates Positive Commercial Real Estate Outloo

 

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Research Brief
March 2018
RETAIL
Developing Trends
Influx of new positions in February extends job creation streak. With the addition of 313,000 positions last month, the nation has witnessed employment growth for 89 consecutive months. Retail employers expanded payrolls by 50,000 new hires in February with general merchandisers accounting for over one-third of that figure.
High-wage jobs contribute to ascending retail sales. As positions in healthcare and professional and business services become more prolific, the median household income is expected to increase by 3.3 year over year at the end of the first quarter, in line with the prior quarter-end measure.
E-commerce expansion forges elevated industrial interest. As Internet sales rise, demand for industrial assets remains intensified, resulting in an expected vacancy drop by year end despite this year’s anticipated delivery total of nearly 200 million square feet.
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Robust Gain in Retail Spending Reiterates
Positive Commercial Real Estate Outlook
Core retail sales growth extends past holiday season. Steady spending across an array of categories led to an advancement in core retail sales. Home furnishings continue to climb at a healthy annual clip, supported by millennials seeking their first apartments. The profusion of new households into the market is expected to keep apartment vacancy low despite this year’s elevated apartment completion pace. Accelerated household expansion is supporting grocer performance, particularly as the optimization of space and improvement of the overall shopping experience drive foot traffic.

Unfavorable weather fails to deter shoppers from brick-and-mortar stores. Even with the extreme winter weather many parts of the U.S. faced in February, year-over-year electronics and appliances sales advanced at

the brisk pace of 4.3 percent, up from January’s hike of 1.6 percent. Clothing sales also posted a noteworthy annual boost of 4.6 percent, considerably higher than last month’s yearly ascent of 1.9 percent. Discount retailers such as Ross and T.J. Maxx have contributed to the category’s strength in past months. Ross Stores recently announced plans to open 100 additional locations this year.

Rising discretionary income strengthens economic metrics. Although increased take-home pay via tax reform has yet to produce quantifiable results, extra dollars circulating through the economy are anticipated to lead continued growth in core retail spending in the coming months. A gain in take-home pay will not only bode well for the retail market but also apartments as tenants are able to keep pace with rent growth.

4.0% Core Retail Sales
Y-O-Y*
12.7 % Consumer Confidence Index Y-O-Y*
* Through February
Trailing 12-month average
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services, BEA, BLS, The Conference Board, U.S. Census Bureau
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 by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
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.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250