Brick-and-Mortar Retail Incorporates More Services with Products as E-Commerce Proliferates

July 22, 2016

  • The rise of Internet shopping as a destination hub is reshaping the economy, steering spending toward new sellers and platforms as product selection, delivery times and convenience improve. The ascent of this trend is spawning the creation of Internet-based businesses and pressuring traditional retailers to adapt as mobile commerce and online portals claim a larger share of retail spending. While these changes have been underway for more than a decade, the impacts continue to reshape the role and function of shopping centers. This has resulted in a higher mix of service-oriented offerings with key product-selling anchors, pushing the retail vacancy rate to 10 year lows.
  • The shift of retail dollars to online destinations has been substantial, with sales reaching a record $46.9 billion for the month of June. The category now accounts for nearly 13 percent of core retail sales, up from 8.4 percent a decade ago. Over the 12 months ending in June, receipts at non-store retailers jumped 14.2 percent, a robust pace that eclipses other retail categories. Promotions such as Amazon’s recent Prime Day, which was countered by several other E-Commerce-Attracting-More-Consumer-Dollars-MMretailers including Wal-Mart, helped draw additional consumers to online portals.
  • As e-commerce makes deeper inroads, the composition of shopping center tenancy has evolved dramatically. Tenant mixes have begun to shift toward service-related businesses. Restaurants and bars now make up an extremely strong presence, as sales vaulted 4.9 percent over the past year. Grocery stores also remain stalwarts, with several chains such as Kroger, Wegman’s and Publix all announcing plans for additional locations to meet consumer demand over the coming years. The category has seen a steady growth in sales over the past several years, logging a 2.5 percent rise over the last four quarters.
  • Several areas of retail are performing well, particularly the healthcare and home improvement sectors, even as digital grabs a larger share of consumer spending. Due to the impracticality of purchasing building materials online, retailers in the category registered a 7.7 percent jump in receipts over the past year. Although online pharmacies are gaining business, the multitude of local drugstores, combined with a larger selection of offerings that includes convenient food and beverage options, contributed to an 8.4 percent surge in healthcare sales volume over the past year. The aging baby boomer population and the rise of urgent care facilities in shopping centers has also bolstered this trend.
  • The emergence of digital shopping continues to generate new demand for industrial assets in order to shorten delivery times to customers who shop online. As a result, the nationwide vacancy rate ended the first quarter at 6.3 percent, down 50 basis points over the past year. Demand for retail floorplates also remains robust, driving the national vacancy rate down 30 basis points to 6 percent during the same time period as builders focused primarily on net-leased quick-service restaurants and mixed-use projects.

Single-Family Home Sales and Building Advance; Hurdles to Faster Growth Persist

July 12, 2016

  • A modest advance in sales activity during the month of May put additional strain on for-sale inventory as the single-family housing market seems to remain caught in a loop that continues to prevent many prospective homebuyers from making a purchase. Sales of existing single-family homes are rising, but the low level of homes available for purchase leaves many would-be buyers unable to transact and is exerting upward pressure on prices. Some of the bottleneck is attributable to the new-home segment, where high prices and a lack of building across a wide range of prices is restricting potential move-up buyers from acquiring new homes. A reduction in the completion of starter homes, in particular, continues to sustain tight vacancy in the multifamily sector as tenures extend for some rental households.
  • With limited inventory of existing single-family homes on the market, some buyers Sales-Riseare turning to the new-home segment, supporting additional building. Single-family home completions recently reached their highest level in the current economic cycle as steady buyer traffic enables builders to pre-sell units, triggering a jump in new-home sales of 9 percent over the past year. However, first-time homebuyers have been virtually shut out as builders focus on higher-end housing. The median price of a newly constructed single-family residence advanced over the past year to $290,100, well above the levels posted prior to the downturn, when builders constructed more starter homes.
  • The supply of existing single-family homes continued to shrink during May, maintaining upward pressure on pricing. For-sale inventory dropped to 4.4 months, the lowest level since 2005. While velocity accelerated from the year-earlier level, the tight inventory underpinned a 5 percent rise in the median price of a pre-owned single-family residence to $231,500, surpassing the prior peak.
  • A tight housing market driven largely by limited for-sale inventory is generating strong renter demand as many would-be homebuyers wait on the sidelines. As a result, apartment demand in the second quarter remains robust while vacancy for single-family residences, according to the U.S. Census Bureau, is hovering near 7 percent, down 400 basis points from the peak achieved in August 2009 and at a rate not realized since the early ‘90s. The addition of thousands of apartments to inventory across the nation this year will continue to fill the void as these potential buyers face a competitive purchasing market, keeping vacancy tight as nearly 258,000 units are absorbed.
  • Sales of single-family homes are fueling an increase in consumer purchases of items associated with the formation of new owner-occupied households and the replacement of older items as other homeowners move into new residences. Spending at furniture and home furnishings stores, as well as home improvement stores, rose nearly 4 percent each in the last 12 months. Furniture and home furnishings retailers will continue to play an important role as traffic drivers for retail property owners, since consumers prefer to physically inspect many items prior to purchase. This year, U.S. retail property vacancy will decline 30 basis points to 5.8 percent.

Employers Maintained Hiring Trend in April; Underemployment Rate Tightening

July 11, 2016

  • The substantial jump in hiring during June to the highest monthly level this year suppresses talk of a sharp slowdown in job creation and strongly reaffirms that the U.S. economy remains on a growth track. Although last month’s survey occurred before the unexpected outcome of the Brexit vote, secondary employment indicators including initial unemployment claims and elevated job openings point to a stable labor market and prospects for further growth. Employers’ ability to add staff to pursue expansion opportunities, however, could be complicated by tightness in the labor pool that may taper the pace of job creation from the heightened levels of the past two years.
  • Strong hiring in the service sector and a modest contribution from manufacturers generated a gain of 287,000 jobs in June, the highest monthly total since last October. The return of Verizon employees to work accounted for most of the gain of 44,000 information positions, while expanding consumer and personal services sectors also posted solid increases. Healthcare practices grew and retailers created nearly 30,000 posts as out-of-school students took summer jobs. Leisure and hospitality payrolls swelled by 59,000 positions, principally at hotels, bars and restaurants. Some of the hiring may be attributed to preparations for the major political party conventions scheduled later this month in Cleveland and Philadelphia.
  • Employers added an average 172,000 positions monthly in the first half of 2016, and the aggregate gain during the period marked a moderation from levels recorded in the first six months of the preceding two years. Nonetheless, employers remain on pace to create 2.1 million positions this year, which will further reduce excess capacity in the labor market. Last month’s unemployment rate of 4.9 percent nearly matches the Federal Reserve’s targeted level of 4.8 percent, while the more encompassing underemployment rate tumbled to 9.6 percent, the lowest recorded in more than eight years.
  • Office-using staffing continues to grow and push the limits of existing workplaces. Financial services payrolls are expanding, reflecting additional hiring in real estate fields, and professional and business services establishments created 38,000 positions in June. Included in the total are more than 15,000 temporary positions to fill short-term needs of establishments with fiscal years ending June 30. The growth in permanent office-using employment, however, will generate net absorption of 86.5 million square feet this year and reduce the national office vacancy rate to 14.8 percent.
  • Retailers added 192,000 positions in the first half of the year as many national chains continue to build an online presence to complement physical stores. This year, retailers will absorb 67 million square feet of space to lower the national vacancy rate and support growth in the average rent of 2.8 percent. Additionally, growing needs for warehouse space to service online operations will contribute to a 40-basis-point dip in the national industrial vacancy rate to 5.9 percent.

Baby Boomers, Millennials Shaping Retail Landscape, Driving Spending Patterns and New Distribution Channels

June 29, 2016

  • Positive demographic trends continue to generate demand for an array of goods sold through physical and online retail destinations, supporting an increase in retail sales over the past year. While baby boomers and millennials spend money in different ways, the combined two groups account for more than 150 million Americans and spending power in excess of $5.5 trillion, accounting for nearly 30 percent of yearly GDP. The vast scale of these segments of the population has prompted changes across the economic landscape as retailers seek to combine traditional methods and new technologies to capture more customers and sales.Retail-Spending-Rising
  • The emergence of the millennial generation continues to generate demand for products typically associated with household formation. Spending on the furniture and home furnishings segment advanced 3.6 percent over the last 12 months as millennials start new households or unbundle from existing ones. In addition, homeowners continue to frequently visit home improvement stores as rising property values prompt remodeling, fueling a gain in spending at building material and garden center stores 3.6 percent over the past year.
  • The aging of the baby boomer generation, combined with regulations extending insurance coverage and benefits to more consumers of all age groups, has greatly benefited the healthcare industry. In this segment, drug stores have emerged as clear winners. Sales at these retailers soared 8.3 percent over the past 12 months, driven partly by purchases of medications and healthcare related products. Approximately 57 million Americans will be over the age of 65 by 2020, making up 16 percent of the total U.S. population, supporting a positive long-term outlook for the drug store sector.
  • As the millennial generation continues to grow up, they are fostering substantial growth in demand for apartments. While wealthy, affluent millennials favor urban environments with live-work-play options in lifestyle communities and mixed-use developments, the bulk of this group continues to lease suburban properties where rents are more affordable. This dynamic led to the completion of more than 215,000 rentals over the year ending in the first quarter. During the same period, tenants absorbed in excess of 237,000 units, compressing the nationwide vacancy 30 basis points to 4.2 percent. Tighter operations have also supported robust gains in the average rent as reflected in an increase of nearly 6 percent since the first quarter last year.
  • Rather than spending money on things, millennials are allocating income to experiences, leading the age cohort to drive a 6.5 percent gain in sales at bars and restaurants during the past 12 months. The combined spending power of the generation continues to positively affect the entire hospitality industry. First-quarter occupancy at U.S. hotels hit 60.7 percent, the second highest level on record, and supported gains in revenue metrics. Hotel brands continue to respond to the aging baby boomers and the emerging millennial class by changing design standards and features to suit changing guest preferences.

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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.

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