Retail Sales Back on Track as Discretionary Spending Remains Strong



MARCH 2019

Retail Sales Back on Track as Discretionary Spending Remains Strong

Retail sales bounce back after December lull. Following a lackluster end to 2018, core retail sales rebounded in January, climbing 3.7 percent on an annual basis. At the same time, average hourly earnings are rising, posting 3.4 percent yearly growth in February. Increased take-home pay is sustaining optimism in the economy, enabling consumers to make more discretionary purchases.

Retail sector generating notable gains. Retailers continue to benefit from the gradual uptick in earnings, producing especially strong results for many vendors selling products that cater to discretionary spending. Clothing retailers sit at the forefront of this movement, attracting consumers with the latest store concepts and fashion trends. Digitally native brands like Bonobos and Indochino are making a strong impression within this segment as they seek to develop an omnichannel platform by adding brick-and-mortar locations. This is creating more demand for retail space, further driving down vacancy. With more refined business models, the retail sector continues to gain stability, boosting investor confidence and pushing deal flow. As a result, transaction volume has increased each of the past six years, signaling the growing strength of the sector.

Elevated consumer confidence prompts heightened consumption. Like clothiers, electronics and appliance retailers are also benefiting from an increase in discretionary purchases. Over the past several months, this category has witnessed sales swell amid historically high levels of consumer confidence. Spending on these items advanced 4.0 percent in January, indicating sustained economic momentum as the increase sits well above long-term averages. These retailers will remain sought-after tenants for investors in the coming months, serving as viable strip center anchors as well as complementary tenants in power centers.

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Developing Trends

Earnings stay on upward trajectory. The nation’s average hourly earnings ticked up to $27.66 in February. In the past 12 months, this figure has averaged 3.1 percent growth, following regular mid-2 percent bumps over the previous two years.

Physical retail a key ingredient to success. The shift among online companies to brick and mortar is an increasingly popular trend. During the next several years, digitally native brands are expected to open hundreds of stores largely due to the impact the move has on sales. Opening a physical store within a market has proved to have a significant effect as that retailer’s local web traffic jumps by an average of 37 percent in subsequent months.

Optimism in economy picks back up. Consumer confidence fell slightly to start the year but rebounded in February. The confidence index climbed 8 percent on a monthly basis, reflecting continued optimism in the economy.


Core Retail Sales Growth Y-O-Y


Consumer Confidence Index
Growth Y-O-Y

* Through January
** Through February

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; The Conference Board; ICSC; Moody’s Analytics; U.S. Census


Low Unemployment Fuels Housing Demand, Favors Apartments



MARCH 2019

Low Unemployment Fuels Housing Demand, Favors Apartments

Tight labor market curbs job creation. The U.S. economy added 20,000 jobs in February, the lowest monthly total since September 2017. While the partial government shutdown and winter storms contributed to last month’s meager showing, the pace of hiring should recover in March. Still, the very tight unemployment rate will likely limit 2019 job creation to the low-2 million range. The total number of unemployed people now stands at 6.2 million, well below the 7.3 million current job openings. With qualified candidates hard to find, employers are facing significant recruiting challenges.

Declining underemployment supporting apartment demand. The tight labor market is helping those who have had a difficult time finding a job in the past attain new opportunities. This is reflected in an 80-basis-point drop in the broad-based underemployment rate, the largest single-month decline in the measure’s history. The rate accounts for people who are normally excluded from the standard unemployment rate, such as discouraged individuals who have not looked for work in recent months and part-time employees seeking full-time positions. As more of these workers find full-time employment, new households will form, boosting demand for apartments. Class C units in particular will benefit as they offer inexpensive housing options. While Class C monthly rates have appreciated 33 percent over the past 10 years, Class A and B rents rose by greater margins. The gap between the average Class C effective rent and Class A or B rent is wider now than it was a decade ago. This could direct more potential renters toward that option, reducing availability. The Class C vacancy rate fell to 4.1 percent at the end of 2018, its lowest level since 2000 and 50 to 100 basis points below comparable measures for Class A and B units. In general, the unemployment rate and the Class C vacancy rate have tended to move together over time. This poses a risk for investors should the economy lose substantial momentum.

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Developing Trends

Government shutdown distorts joblessness. Despite limited hiring, the total number of unemployed fell by 300,000 in February. About 225,000 people were temporarily laid off from work in January, including government employees furloughed by the shutdown. The return to full federal operations brings the unemployment rate closer to what it may have been in January without the shutdown.

Contained inflation grants Fed maneuvering room. Another byproduct of the tough hiring conditions are rising wages. Average hourly earnings improved 3.4 percent over the past year, the fastest pace since April 2009. Greater take-home pay, however, has not sparked increased price inflation, granting the Federal Reserve more latitude in their management of economic growth. The Fed will maintain a data-driven approach to monetary policy this year as it considers a range of tools to use if needed.


Average Jobs Added Per Month over the Past Year


Unemployment Rate in February 2019

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; RealPage, Inc.


2018 Job Growth Closes on a High Note, Tight Unemployment to Restrain Hiring




2018 Job Growth Closes on a High Note, Tight Unemployment to Restrain Hiring

Aggressive recruiting accelerates employment growth in 2018, raising housing demand and consumer spending. The economy added 312,000 positions in December for an annual total of 2.6 million new roles, outperforming both 2016 and 2017. Unemployment fell to a half-century low. Employers sustained a higher rate of hiring amid a tighter labor market in part because they filled positions with less-experienced candidates and provided more training to cover the skill gap. A broader range of people finding full-time employment is, in turn, increasing housing demand. Much of that is going toward more affordable multifamily options, supporting a 12 percent rise in apartment absorption in 2018. Some firms are also raising wages to attract the best talent as average hourly earnings appreciated 3.2 percent last year. Greater take-home pay is increasing retail consumption and consumer spending, and sales over the most recent holiday shopping season improved by the largest margin in six years. Travel spending within the U.S. is up as well, contributing to the best year for hotel occupancy on record dating back to 1988.

Favorable outlook for 2019 despite potential headwinds. The new year begins with positive momentum from the jobs market but a low unemployment rate will add mounting pressure to recruiters. Many small businesses continue to report difficulty in finding qualified workers as their most pressing business dilemma. Another challenge is increased inflation risk from rising wages and tariffs that could force the Federal Reserve to tap the brakes on economic growth. Despite these headwinds, job additions will remain in the 2 million range, sustaining commercial real estate demand. Further hiring will underpin positive rental activity, keeping apartment vacancy comfortably below 5 percent. Among retail properties, availability will fall to a near-two-decade low, supported by a moderated construction pipeline.

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Developing Trends

Labor force participation rises at end of year. The unemployment rate ticked up 20 basis points to 3.9 percent in December as more people re-entered the labor force. Many are starting new positions, but others have just begun the job search.

Higher construction wages impacting development. Among the sectors raising pay is the construction industry. The 3.9 percent increase in average hourly earnings helped employers hire 280,000 personnel in 2018, about 30,000 more people than last year. Rising construction costs will weigh on the pace of development and renovation.

Healthcare hiring speeds up as new medical facilities open. Healthcare payrolls grew by 346,000 personnel in 2018, mainly for ambulatory services. There is a growing need for such employees at outpatient facilities and urgent care centers, increasingly important tenants for shopping centers.


Jobs Added in December 2018


Unemployment Rate in December 2018

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; RealPage, Inc.; STR Inc.


Extremely Tight Unemployment Among College-Educated Strengthens Demand For High-End Apartments



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Research Brief
October 2018
Developing Trends
Year-to-date job growth outperforms last year’s comparison. In September, 134,000 jobs were filled, bringing the total expansion of the employee base for the year up to 1.9 million people. That is 180,000 more jobs than were added in the same time period in 2017.
Job opening and applicant gap widens. The latest data show there are 7.1 million job openings, above the 6.0 million people who are seeking jobs. The gap is even wider among professions commonly requiring college degrees. In August there were 2.6 million job openings in professional, business and healthcare services, versus 1.2 million people looking for jobs.
Falling unemployment driving Class C apartment demand. As the employee base has grown for nine years, so has demand for workforce housing. Class C apartment vacancy has dropped 570 basis points to 3.7 percent in the third quarter from its 2010 peak of 9.4 percent, when unemployment was 9.9 percent. The average Class C rent has risen 35 percent to $1,016 per month since 2010.
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Extremely Tight Unemployment Among College-Educated Strengthens Demand For High-End Apartments
Unemployment continues to decline, including for those with a degree. The number of unemployed people in the U.S. fell by 270,000 last month to just under 6 million. The last time fewer people looked for work was in December 2000. Last month’s job growth pushed down the unemployment rate 20 basis points to 3.7 percent from the previous month. For those with a four-year college degree, the rate dropped 10 basis points to 2.0 percent, its lowest level since 2007.

Extremely low unemployment among the college-educated bolsters high-end apartment demand. The growth of jobs requiring a college education typically bodes well for multifamily properties, particularly higher-quality Class A and B apartments. Over the past two decades when the unemployment rate for those with college degrees fell to this month’s level, the vacancy rate for Class A apartments also tended to drop below 5 percent.

This trend occurred again in the third quarter, as vacancy for Class A apartments slid to 4.7 percent in September, a five-year low.

Luxury apartment availability may decline even further going forward. The high-skill labor shortage is pushing college-degree wages higher, impacting apartment demand. In the past four quarters, the median weekly earnings for an employee with a bachelor’s degree or higher improved 5.3 percent, well above the 0.4 percent rate of appreciation posted in the previous annual period. Though wages for this niche are rising, homeownership for these professionals remains limited. Higher interest rates are increasing the cost of home payments, adding appeal to apartments. Younger professionals often prefer the flexibility of renting and are partial to living in popular neighborhoods with high-end amenities, underscoring demand for luxury units.

134,000 Jobs Added in September 2018 3.7% Unemployment Rate in September 2018
* Job openings through August; Unemployed through September
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; RealPage, Inc.
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