This article is republished with permission from REITCafe.
Tumbling stock markets in early 2016 are making people question the purported strength of commercial real estate markets. Retail availability stood at 8 percent in the third quarter of 2015, according to CBRE—100 basis points above the low reached in 2006. Rents are moving up, and new retail construction has been limited, which has helped the market maintain balance. Market fundamentals have been strong, but will negative headwinds affect consumer spending or change the outlook for the retail sector this year?
Economic indicators are mixed, as they have been through much of the recovery. Job growth is currently fueling consumer spending. During 2015, the United States added 2.65 million jobs. The growth was healthy, but below 2014 levels. In addition, 2015 wage growth was positive, but low. Consumer confidence improved in December, after having decreased in November, according to the Conference Board.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 172 | 173 | 161 | 138.5 | 170 |
| Multifamily | 166 | 167 | 170 | 139.8 | 166.7 |
| Office | 177 | 172 | 164 | 148 | 175 |
| Retail | 172 | 173 | 165 | 139.8 | 175 |
| Average Spread | 171.75 | 171.25 | 165.00 | 141.5 | 171.75 |
| 10-year Treasury Yield** | 2.05 | 2.03 | 2.15 | 2.17 | 3.04 |
Disposable income has been boosted by lower gas prices that are taking less of a bite out of consumers’ wallets, but consumers used fuel savings to pay down debt instead of spending more during the holidays. The National Retail Federation reported 3 percent growth in holiday retail sales during November and December. Retail sales growth fell short of forecasts and was also slower than in 2014. A relatively warm December limited sales of cold-weather gear.
Store traffic and spending in physical stores decreased during the holidays as online shopping gained momentum. Omnichannel retailing emphasizes the importance of both brick-and-mortar stores and an online presence, but holiday shopping statistics make it clear that consumers are increasingly shopping online. RetailNext reported that sales at physical stores fell 6.7 percent during the weekend before Christmas, while store traffic fell 10.4 percent. Adobe reported 13 percent growth in online sales for November and December.
Retailers are working to combat weak earnings and deal with the changing market. Walmart announced plans in January to close 269 stores. Macy’s elected not to spin off its real estate into a real estate investment trust (REIT), but has announced store closures and is looking for other ways to unlock value from its real estate. JCPenney and Sears also have recently announced additional stores closures.
As 2016 gets underway, a number of factors are weighing on retail markets. Global economic concerns, particularly China’s economic problems, and a falling stock market are affecting consumers. Higher interest rates also are affecting consumers’ spending decisions. The Fed’s first increase in December was widely expected and had little impact on consumers, but how far and fast rates will rise is unknown. Furthermore, the strong U.S. dollar is affecting spending by tourists.
Despite the uncertainty, many retailers, especially discounters and restaurants, are expanding as more people are employed and spending money. Barring further major economic shocks, the overall outlook for consumer spending and retail demand is positive, and retail REITs should continue to outperform the FTSE NAREIT All Equity REIT Average.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 1/22/2016.
