Consumer Confidence Notches Post-Recession High; Another Strong Holiday Season in Reach for Retailers

 

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Research Brief
September 2018
RETAIL
Developing Trends
Robust economy powered by strong labor market. The nation’s job creation streak was extended to 95 months in August as employers added 201,000 workers to payrolls. This continuation of job growth has pushed the national unemployment rate down to 3.9 percent, which in turn has led to businesses offering more competitive compensation packages. With more money circulating through the economy, retail sales are projected to rise notably this year by 5.4 percent. This jump follows a previous five-year average of 3.8 percent.
Wage growth reaches highest mark in nearly one decade. Last month, average hourly earnings rose 2.9 percent on an annual basis, the largest jump since 2009. This increase supports the national median income rising 3.7 percent to $62,400 by year end. As a result, consumer confidence should remain elevated through the remainder of 2018 and likely into 2019.
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Consumer Confidence Notches Post-Recession High;
Another Strong Holiday Season in Reach for Retailers
Soaring confidence elevates consumption. Strong consumer spending continued in August, boosting core retail sales 5.9 percent on an annual basis and surpassing the previous four-month average of 5.8 percent. A healthy job market and steadily rising wages remain key drivers of consumer confidence, pushing it to its highest level this cycle. With optimism climbing, consumers are making more discretionary purchases, benefiting electronics and appliances retailers as the sector recorded 4.1 percent annual growth. Prior to the past 12 months, this sector has witnessed sporadic growth, contributing to a negative 10-year average. Clothing retailers also posted strong gains last month, logging a 6.4 percent increase compared with the 10-year average of 2.1 percent. Off-price clothing retailers like Ross and TJ Maxx have headlined the sector’s recent surge in sales. Retailers expect another robust holiday season. With the holiday season around the corner, retailers are poised for continued growth. The convergence of several economic tailwinds have consumers spending more money on big-ticket items — a trend that should continue in the coming months. Consequently, many retailers are optimistic, raising their 2018 outlooks as they expect to record strong holiday sales for the second consecutive year. In-store and online sales are both projected to rise in the months ahead with convenience likely to play a key determinant of sales for each channel. With this in mind, many retailers are continuing to strengthen their omnichannel platforms as the holidays approach, attempting to widen their reach and improve convenience.
4.1% Appliances and Electronics
Sales Growth Y-O-Y*
8.2% Consumer Confidence
Index Growth Y-O-Y*
* Through August
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Moody’s Analytics
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

 

Affordability Concerns Rise as Demand Exceeds Housing Construction

 

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Research Brief
September 2018
HOUSING
Developing Trends
The rising cost of homeownership has decelerated existing home sales activity to the slowest pace in more than two years. Sales declined for a fourth straight month in July and were down 1.4 percent from one year ago.
New home sales continue to be driven by trades of higher-priced homes with the median new home price rising 1.8 percent annually to $328,700. Approximately 60 percent of all new home sales were priced above $300,000 during July.
Apartment vacancy fell to 4.6 percent in the second quarter, down 10 basis points year over year amid strong demand. Despite thousands of Class A units completed in recent quarters, vacancy for this class remains tight at 5.1 percent. The average effective rent for Class A units is approximately $100 more than the monthly mortgage payment on a median-priced home, solidifying the shift in preference for renting versus homeownership.
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Affordability Concerns Rise as Demand
Exceeds Housing Construction
Monthly housing payments surged this year for homebuyers as mortgage rate increases and rising home prices lifted the cost of homeownership. The monthly payment on a median-priced home now stands $130 higher than at the beginning of the year, driven by a 70-basis-point interest rate increase. Fixed-rate mortgages now average about 4.5 percent, their highest level since 2011, and this has increased the gap between the monthly mortgage payment on a median-priced home and the average monthly apartment rent to $320.

The shortage of entry-level homes for sale has been amplified by the rapid interest-rate increases. Move-up buyers have become more reluctant to sell their existing home because many homeowners locked in rates as low as 2 percent. With interest rates now as much as 250 basis points higher, purchasing power and affordability have been

impacted. This is slowing activity in the mid to upper price ranges and restraining new home sales. Builders have been unable to construct homes at the entry-level price point because of elevated construction and land costs. Home sales activity has flattened as a result.

Risk of a housing shortage could rise as residential building flattens. Multifamily developers have been setting a record pace over the past five years, but single-family home construction has remained less than half of levels prior to the Great Recession. With the strong economy and tight labor market boosting household formation, residential deliveries will likely fall short of demand. Though pockets of overdevelopment may emerge, the broad-based shortfall of housing supply could expand the affordability gap and prompt renters to extend their apartment stay.

$272,300 Median price of existing single-family home in July 2018 4.0 Months of supply at current sales pace in July 2018
* Through 2Q Mortgage payments based on quarterly median home price for a 30-year fixed rate mortgage, 90 percent LTV, taxes, insurance, and PMI.
Sources: Marcus & Millichap Research Services, RealPage, Inc., Freddie Mac, National Association of Realtors, 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

 

Rising Consumption Boosts Grocery Sector; Segment in Transformation to Emerging Models

 

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Research Brief
August 2018
RETAIL
Developing Trends
Aldi to drop dollar-store look while keeping discounted prices. Over the next several years, Aldi will spend more than $3 billion remodeling 1,300 stores as it seeks to compete with more upscale brands like Safeway and Whole Foods. The expanded and redesigned stores will include more produce and organic products.
Lidl changes approach to maximize profitability. Since entering the U.S., Lidl not only scaled back expansion plans, but also chose to adjust the size of some new stores moving forward. It will begin leasing locations as small as 15,000 square feet — less than half the size of the originally outlined stores.
Evolving retail landscape prompts Publix to reinvest in brick-and-mortar locations. This year, Publix will use some of its $1.5 billion investment budget to remodel existing locations. This includes upgrading technology and revamping layouts to satisfy current consumer preferences.
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Rising Consumption Boosts Grocery Sector;
Segment in Transformation to Emerging Models
Grocery stores gather momentum as retail sales record big gain. For the third consecutive month, core retail sales posted strong year-over-year growth, matching the three-month average of 5.6 percent. A range of economic factors have helped bolster consumer confidence over the past few months, leading to this elevated level of spending. Numerous retail categories reported robust sales in July, including grocery stores, which logged 3.8 percent annual growth. This measure well exceeds the category’s 10-year average of 2.6 percent.

Grocers refine strategies as consumer preferences change. Grocery stores continue to transform with the evolving retail climate by improving customers’ overall experience. Some grocers, such as Kroger, have put the brakes on expansion as they reinvest more capital back into existing brick-and-mortar locations,

integrating dine-in options, wine bars and more quality products to bolster foot traffic. The features now included in grocery stores have made them a one-stop shop for many consumers. Conversely, smaller formats have also gained popularity as grocers attempt to maximize sales per square foot. Chains like Hy-Vee and Meijer have adopted this concept, seeking to penetrate urban markets.

Smaller grocery chains may feel brunt of transitioning industry. Oversaturation of the grocery market remains a concern, particularly as e-commerce becomes a bigger part of the sector. Although Internet sales have yet to truly disrupt the grocery industry, they may lead to some smaller chains surrendering market share due to limited budgets for investment into online infrastructure and reinvestment into physical stores.

5.6% Core Retail Sales Growth Y-O-Y* 3.8% Grocery Store Sales Growth Y-O-Y*
* Through July
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; Bloomberg; Convenience Store News; Food Dive; Moody’s Analytics
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

 

Economy Drives Increased Spending; Housing-Related Consumption Rising

 

 

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Research Brief
June 2018
RETAIL
Developing Trends
Job market gains momentum as expectations are surpassed. The U.S. recorded another month of job creation as 223,000 employees were added to payrolls in May, compared to 190,000 expected. During that period, the retail trade sector staffed 31,000 workers; also, 25,000 construction jobs were generated. This continuation of strong hiring activity has driven the national unemployment rate to its lowest level in 18 years.
Single-tenant retail adapting to evolving retail environment. Drug stores are generally considered relatively stable assets; however, they are not immune to e-commerce. Just like many retailers, drug stores have begun to refine their strategies, attempting to combat online prescription retailers, as well as internet heavyweights such as Amazon and Walmart. Many drug store chains are beginning to offer a more convenience-oriented selection, aiming to increase foot traffic and boost overall sales.
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Economy Drives Increased Spending;
Housing-Related Consumption Rising
Retail sales accelerate as unemployment rate tumbles. Retail spending posted another strong month with help from an incredibly tight labor market. The 3.8 percent unemployment rate has placed upward pressure on wages as many companies compete for quality employees. This trend has supported modest but steady wage growth, driving the annual pace of wage gains to 2.7 percent in May this year, in turn supporting a 5.1 percent increase in core retail sales. With a number of tailwinds propelling retail sales, spending has been strong in several categories, particularly building materials, which grew by 5.0 percent over the past year. Elevated discretionary income has empowered homeowners to tackle home improvement projects, which many are undertaking instead of selling their homes and buying new ones. This has in turn weighed on home sales activity. Apartments help fill void left by limited single-family housing construction. Although more emphasis has recently been placed on accelerating single-family home development, builders are still falling short of the increasing pace of household formation. In 2018, the U.S. will create an additional 1.5 million new households. Elevated apartment construction over the past several years will be a critical factor in meeting the nation’s housing needs, with 335,000 new apartment units slated for delivery this year. This wave of rentals coming to market will boost vacancy in neighborhoods where construction is most concentrated, nudging the national vacancy rate above 5 percent, as new units are absorbed. However, rising vacancy is not indicative of a broad-based shortfall in demand, as most markets are witnessing declining or stationary vacancy rates.
5.1% Core Retail Sales Growth Y-O-Y* 3.8% Unemployment
Rate**
* Trailing 12-month average
** Through May
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; BEA; BLS; RealPage, Inc.; 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