September 10, 2010
- Though consumption and retail sales have made significant headway toward recovery this year, the 6.3 percent decline in consumer credit since July 2008 will remain a drag on economic growth and job creation through the rest of 2010. Top-tier borrowers retain access to credit, but these lower-risk consumers continue to impose austerity measures as they de-leverage in the wake of the recession. At the same time, less creditworthy borrowers have been substantially cut off from credit due to high levels of lender risk aversion. As a result, tightened consumer credit will remain a headwind to the recovery as it drags on consumption. Even after credit becomes more readily available, consumption will likely continue to lag until employment and income growth improve sharply, an event not likely to occur until mid-2011.
- Total consumer credit outstanding fell 0.1 percent in July, marking the 20th monthly decline in the past 22 months. Further, a 0.5 percent drop in revolving credit, which consists almost entirely of credit card debt, fueled the overall decrease in balances outstanding. With July’s decline, revolving credit has fallen for an unprecedented 22 consecutive months, slipping by 15 percent, or $145.6 billion.
- Several factors have contributed to the decline in consumer credit. Creditworthy borrowers continue to de-leverage by paring debt and purchasing fewer goods and services on credit. Even the addition of 723,000 private-sector jobs year to date through July failed to stimulate borrowing, with revolving credit declining 4.4 percent during this period. Less qualified borrowers, including many who remain unemployed or under-employed, have been denied credit, further curtailing consumption. Compounding the issue, lenders continue to write off uncollectible balances, increasing the amount of credit card debt charged off by banks by more than 200 percent over the last two years. In the near term, only reinvigorated job growth will encourage a resurgence of lending and borrowing, but substantive hiring remains elusive.
- The decline in consumer credit has joined job losses, overdevelopment and worse-than-usual store closures to pressure retail properties. During the 22 months of declining revolving credit, an additional 205 million square feet of vacant space accumulated. The vacancy rate rose 200 basis points since late 2008 to 10 percent in the second quarter of 2010 and will climb another 40 basis points this year to 10.4 percent as retailers continue to adapt to the weakened retail environment.
- Tightened retailer inventories in the face of reduced consumption have impacted warehouse and distribution properties that store and transport consumer goods. Since revolving credit started to decrease in October 2008, the national industrial property vacancy rate rose 270 basis points to 12.7 percent in the second quarter of this year. Negative net absorption during that time totaled more than 166 million square feet. In 2010, declining space demand will increase vacancy 40 basis points to 13 percent on a 19.2 million square foot drop in occupied space.
Impact on Commercial Real Estate
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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.