Retailers Optimize Shopping Platforms, Lifting Sales and Customer Engagement

 

 

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RETAIL SALES DECEMBER 2019
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Research Brief
Retailers Optimize Shopping Platforms, Lifting Sales and Customer Engagement
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Evolving shopping behavior drives spending to record high. Sales growth for Black Friday and Cyber Monday neared 20 percent as consumers sustained robust spending patterns. Digital channels delivered strong growth during the four-day weekend, with online sales on Black Friday hitting a record-high $7.4 billion and Cyber Monday posting the largest online shopping day in the nation’s history with spending reaching $9.4 billion. Though internet sales captured headlines, retailers’ strengthening blend of physical and online footprints continues to build the underlying foundation for the growing digital marketplace.

Retail heavyweights spearhead brick-and-mortar’s transformation. Walmart and Target were among the biggest winners during the shopping events as their well-diversified sales platforms positioned them for in-store and online success. In addition to maintaining their dominant physical presence, these retailers have heavily invested in their online infrastructure and logistics networks to expedite shipping methods and more closely compete with pure-play internet vendors. An increasing number of retailers are mirroring this concept, supporting not only increased online sales but also in-store spending as customers tend to stay more engaged with retailers who boast a viable mix of physical and digital channels. Roughly 62 percent of the adult population in the U.S. went to retail centers during the long weekend, up from 60 percent one year ago, pointing to the vital role physical locations play in the evolving retail landscape. Consumers appear to be effectively utilizing retailers’ blend of sales platforms to make more informed purchase decisions.

Confident consumers fueling holiday spending. Continued wage growth and historically high levels of consumer confidence will help maintain momentum through the remainder of the year. Total retail sales for the 2019 holiday season are expected to rise roughly 4 percent to $730 billion, with online spending accounting for 22 percent of that. On a yearly basis, this figure averages roughly 12 percent, illustrating the small share internet platforms account for relative to physical stores.

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Developing Trends
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Ultra-tight joblessness propelling wage gains. With the unemployment rate near a 50-year low, many organizations are boosting compensation packages to attract new talent. This has helped keep annualized wage growth around 3 percent for the past year, benefiting retailers as this has generated more disposable income for many consumers.

Consumers evaluate economic outlook as trade war prolongs. Though consumer confidence remains near historical highs, recession risks stemming from ongoing trade negotiations have dampened economic optimism in recent months. November marked the fourth consecutive month the index decreased, falling 8 percent during that span.

Physical locations key for retailers. For the fifth year in row, shoppers buying online from physical retailers outnumbered those who purchased from pure-play online vendors — 45 percent to 39 percent, respectively.

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~4.0%

NRF 2019 Sales Growth Estimate
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~$730B

NRF 2019 Holiday Sales Volume Estimate
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* Estimate
Sources: Marcus & Millichap Research Services; Adobe Analytics; ICSC; National Retail Federation; ShopperTrak

 

Strong Fourth Quarter Job Creation Bolsters 2020 Real Estate Outlook

 

 

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EMPLOYMENT DECEMBER 2019
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Research Brief
Strong Fourth Quarter Job Creation Bolsters 2020 Real Estate Outlook
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Job creation soars in November. The U.S. economy added 266,000 positions in November, the largest monthly gain since January. The surge in hiring was lifted by the resolution of the General Motors-United Auto Workers Union strike, returning 41,000 auto workers to payrolls. However, even omitting these positions, an above-average 225,000 personnel were still added. The month’s robust hiring lowered the unemployment rate 10 basis points to 3.5 percent, matching the historical low.

Healthcare hiring driving demand for medical properties. Employers have added approximately 2 million jobs this year, and while employment growth has eased compared with last year, hiring has been particularly robust in the health services sector. The need for healthcare professionals is driven by demographics. About 5 million people will turn 75 over the next five years, exacerbating the need for medical services and increasing demand for hospitals, urgent care centers, senior housing facilities, and medical office space. Markets popular with retirees or with well-established biomedical research hubs will likely see added tenant demand for buildings that support these services.

Employment growth favoring smaller markets. The pace of job creation will ease going forward as the labor market nears full capacity. Because there are more open positions than people available for hire, employers are implementing new recruiting strategies, including adding jobs in secondary and tertiary markets to tap underutilized labor pools. This trend has helped tighten office and apartment vacancies in these metros. With construction in smaller cities still limited, supply and demand trends will deliver elevated rent gains. Investors targeting secondary and tertiary markets will benefit from space demand created by this staffing shift.

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Developing Trends
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Market remains near full employment, but some hiring options remain. Both the labor force participation rate and the employment-to-population ratio have changed little over the past year. Yet, the number of people marginally attached to the labor force has declined about 25 percent over the past year. These individuals, who wanted work but ceased looking, are now finding opportunities as tight labor conditions prompt employers to consider candidates with long job absences.

Low unemployment brightens real estate outlook.
The 21-month stretch with unemployment at or under 4 percent has contributed to accelerated household formation and greater wage growth. The added housing demand has helped reduce the national average apartment vacancy rate to 3.7 percent as of September, a nearly 20-year low. More households and higher incomes have also boosted retail spending by 4.4 percent this year, underscoring the need for shopping centers.
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180,000

Avg. Number of Jobs Added Per Month in 2019
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1.5%

Y-O-Y Rate of Employment Growth
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* Through November
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

 

Fed Issues Third Rate Cut, Sustains Prospect of Continued Growth

 

 

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FINANCIAL MARKETS OCTOBER 2019
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Research Brief
Fed Issues Third Rate Cut, Sustains Prospect of Continued Growth
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Fed remains accommodative. In an effort to lengthen the economic runway, the Federal Reserve on Oct. 30 cut the overnight rate by 25 basis points for the third time in 100 days. Domestic growth has been moderating this year, falling to 1.9 percent in the third quarter as the trade war with China curtailed exports and ebbed inventory investment. With tariffs on Chinese goods increasingly coming into play, the economy could face additional pressure, but the Fed has signaled that another rate cut in December will be dependent on incoming data. Several Fed members have argued against additional cuts, as both inflation and unemployment remain very low. A decision on rate policy will largely be determined by the holiday retail season and ongoing trade talks. Should a resolution to the trade war be achieved, the economy and interest rates will likely witness an upward bounce. The Fed’s commitment to short-term Treasury purchases remains another key factor, increasing liquidity in the overnight markets and reducing short-term interest rates. This has helped “uninvert” the yield curve as the three-month Treasury rate fell below the 10-year reading. Though this has reduced recession risk, many speculate that a recession could still be on the horizon.

Investor activity sluggish despite widened yield spreads. With the 10-year Treasury hovering between 1.5 to 1.8 percent in recent months, investors have been favored by strong levered yields. The average combined commercial real estate cap rate remains in the low-6 percent range, delivering a 400- to 450-basis-point premium above the 10-year Treasury, among the widest spreads witnessed in the past decade. While this has bolstered levered return prospects, many buyers remain wary of a potential economic slowdown and their underwriting models continue to deliver more cautious valuations. Sellers, meanwhile, continue to cite strong performance metrics that support aggressive asking prices. The resulting bid/ask spread has moderately slowed transaction activity for all commercial real estate property types excluding industrial assets. Though third quarter commercial real estate sales slowed relative to the same period last year, they are still quite strong compared with the long-term average.

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Developing Trends
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Job creation moderates yet retains stability. The national unemployment rate contracted to a record low in September at 3.5 percent. This has contributed to softened employment growth this year, adding an average of 161,000 jobs per month, relative to a monthly average of 223,000 jobs in 2018.

Retailers hopeful as consumption accelerates. In September, core retail sales rose by 4.5 percent year over year for the second consecutive month. Consumer spending remains elevated, demonstrating a strong recovery from the sluggish growth pace of 2.5 percent in February. This points to a positive growth outlook for the holiday season.

Fed using data-driven strategy. Inflation will play a pivotal role for future rate policy as Chairman Powell noted the Fed’s preferred inflationary measure — core PCE — remained below the Fed’s 2 percent target in recent months.

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6.3%
Average CRE Cap Rate
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1.77%

10-Year Treasury Rate
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* Through Oct. 30
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank

 

Fed Delivers Third Rate Cut, Sustains Prospect of Continued Growth

 

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FINANCIAL MARKETS OCTOBER 2019
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Research Brief
Fed Delivers Third Rate Cut,
Sustains Prospect of Continued Growth
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Fed remains accommodative. In an effort to lengthen the economic runway, the Federal Reserve on Oct. 30 cut the overnight rate by 25 basis points for the third time in 100 days. Domestic growth has been moderating this year, falling to 1.9 percent in the third quarter as the trade war with China curtailed exports and ebbed inventory investment. With tariffs on Chinese goods increasingly coming into play, the economy could face additional pressure, but the Fed has signaled that another rate cut in December will be dependent on incoming data. Several Fed members have argued against additional cuts, as both inflation and unemployment remain very low. A decision on rate policy will largely be determined by the holiday retail season and ongoing trade talks. Should a resolution to the trade war be achieved, the economy and interest rates will likely witness an upward bounce. The Fed’s commitment to short-term Treasury purchases remains another key factor, increasing liquidity in the overnight markets and reducing short-term interest rates. This has helped “uninvert” the yield curve as the three-month Treasury rate fell below the 10-year reading. Though this has reduced recession risk, many speculate that a recession could still be on the horizon.

Investor activity sluggish despite widened yield spreads. With the 10-year Treasury hovering between 1.5 to 1.8 percent in recent months, investors have been favored by strong levered yields. The average combined commercial real estate cap rate remains in the low-6 percent range, delivering a 400- to 450-basis-point premium above the 10-year Treasury, among the widest spreads witnessed in the past decade. While this has bolstered levered return prospects, many buyers remain wary of a potential economic slowdown and their underwriting models continue to deliver more cautious valuations. Sellers, meanwhile, continue to cite strong performance metrics that support aggressive asking prices. The resulting bid/ask spread has moderately slowed transaction activity for all commercial real estate property types excluding industrial assets. Though third quarter commercial real estate sales slowed relative to the same period last year, they are still quite strong compared with the long-term average.

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Developing Trends
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Job creation moderates yet retains stability. The national unemployment rate contracted to a record low in September at 3.5 percent. This has contributed to softened employment growth this year, adding an average of 161,000 jobs per month, relative to a monthly average of 223,000 jobs in 2018.

Retailers hopeful as consumption accelerates. In September, core retail sales rose by 4.5 percent year over year for the second consecutive month. Consumer spending remains elevated, demonstrating a strong recovery from the sluggish growth pace of 2.5 percent in February. This points to a positive growth outlook for the holiday season.

Fed using data-driven strategy. Inflation will play a pivotal role for future rate policy as Chairman Powell suggested the Fed’s preferred inflationary measure — core PCE — will have to significantly rise before another rate reduction is issued. Core PCE has remained in the upper-1 percent range in recent months.

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6.3%
Average CRE Cap Rate
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1.77%

10-Year Treasury Rate
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* Through Oct. 30
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank