Heightened Consumer Confidence Remains Driver Behind Strong Spending, Improving Outlook for Retail

 

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Research Brief
May 2018
RETAIL
Developing Trends
Job market easing modestly. The U.S. economy added 164,000 jobs in April, dropping the national unemployment rate to 3.9 percent, the lowest measure since December 2000. Job openings, however, reached a record 6.6 million positions, signaling that there may be a shortage of qualified workers.
Large companies beginning to invest more in their workers. The sizable corporate tax cuts could become more evident in the near future, as companies like CVS, Starbucks and Target have committed to raising wages. A tightening labor market should provide a boost to wages, as well.
Consumers optimistic about U.S. economy. With the national economy exhibiting considerable strength, consumer confidence has risen 7.8 percent year over year. Key economic indicators point to a continuation of this upward trend.
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05/2018
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Heightened Consumer Confidence Remains Driver Behind Strong Spending, Improving Outlook for Retail
Stout retail sales growth a product of strong economic metrics. The confluence of several factors contributed to another month of steady spending. Core retail sales increased 4 percent year over year in April, the third straight month of at least 4 percent annual growth. Near record-high levels of consumer confidence have aided retail sales in past months, as many consumers now have more discretionary income, largely due to tax cuts and solid wage growth. Wage gains have remained range-bound in the mid-2 percent area for the past few years, but this number is expected to rise as large companies portend wage hikes. Additionally, the unemployment rate slid below 4 percent in April thanks to another month of job creation. With a number of tailwinds propelling retail, the sector is poised for continued growth this year. Investors seek stability when exploring retail investment options. With investor sentiment moving back to an upward trend, retail investments have become a more engaging option for those looking to deploy capital into commercial real estate. Positive spending trends in grocery stores have generated increased investor demand for centers anchored by these assets. High foot traffic and the adoption of omnichannel retail practices make them particularly attractive. Food and beverage sales have also generated a strong performance in recent months. Bolstered spending in this category has enticed some investors to examine quick-service and fast-casual restaurant investment opportunities more closely. These assets have proved to be relatively stable through a range of economic conditions, providing investors with the confidence of the assets’ durability.
4.0% Core Retail Sales
Y-O-Y*
7.8 % Consumer Confidence Index
Y-O-Y*
* Through April
Trailing 12-month average
Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services; BEA; BLS; 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

 

Continued Job Creation Bolsters Household Formations; Supports Space Demand For Commercial Real Estate

 

 

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Research Brief
May 2018
EMPLOYMENT
Developing Trends
The labor market added 164,000 jobs in April. This marks the 91st straight month of employment additions as the unemployment rate dropped to 3.9 percent, the lowest since 2000. Tight labor conditions, however, could mute employment expansion going forward despite elevated demand for hiring from employers.
Manufacturing employment adding to industrial demand. In the past 12 months, manufacturing jobs increased by 241,000, with 24,000 jobs created in April. Rising employment in the manufacturing sector points to increased industrial space requirements over the past year, which has increased the already high demand for distribution sites. The combination of rising demand drivers will push the national industrial vacancy below 5 percent by the end of the year, with rent growth above 6 percent.
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04/2018
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Continued Job Creation Bolsters Household Formations; Supports Space Demand For Commercial Real Estate
Year-to-date employment growth signals economic acceleration. Employment additions in the first four months of 2018 outpaced the previous two years over the same time frame, with 799,000 jobs added. The quickened pace of job growth should accelerate commercial real estate demand across all sectors, as companies expand payrolls and operations.

Increased employment setting stage for escalating apartment demand. The number of workers unemployed or working part-time involuntarily moved to the lowest level in the expansion, at 7.8 percent. It peaked at 17 percent in 2009. Many of these workers making the jump from part-time to full-time employment are young adults living with their parents. Now that they are employed full-time, a good deal of them should be able to move out and form their own households. Currently,

23 million young adults live with their parents. After peaking in 2016, the number of young adults living at home declined by 400,000 last year, a sign of pent-up household formations releasing.

Class B and Class C apartments poised for gains. A large percentage of these newly formed households will have a high propensity to rent and be drawn to Class B and C apartments. The expanding demand for Class B and Class C properties will keep their vacancy rates tight and uphold rent growth that has outpaced Class A properties, which are contending with elevated supply additions. In the first quarter of 2018, Class B and C apartment rents advanced 4.7 percent and 5.3 percent respectively, reflecting the positive demand for units at those price points, while Class A units saw slower growth at 4.3 percent.

164,000 Job Gain
April 2018
3.9% Unemployment Rate in April 2018
* Through April
Sources: Marcus & Millichap Research Services; BLS
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

 

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