As we approach the end of another year, the U.S. economy continues its measured recovery. Gross Domestic Product grew at a 2.5% annual rate in third quarter 2011, bolstered by consumer spending, investment and exports, and a 1.1% year-over-year increase in non-farm payrolls that resulted in a net gain of roughly 1.5 million new jobs.
Despite the improvement, the recovery’s slow pace has had a noticeable impact on U.S. consumers. Consumer confidence, as measured by the Conference Board, declined sharply in August to its lowest level since April 2009 and posted only a marginal gain in September, resulting in a third quarter average that fell below the level posted a year earlier.
By November, however, consumer confidence bounced back. Although same-store retail sales increased by only 3.2% in November, its smallest increase since March, the recent back-to-school spending season was declared by some observers to be the strongest since 2006. The holiday season began with a bang as well, as the “Black Friday” and “Cyber Monday” weekend set both traffic and sales records.
While the holiday season’s heavy promotions, deep discounting, and expanded store hours will undoubtedly affect margins and average selling prices, it remains unclear how impactful increased traffic and sales volumes will be on retailers’ bottom lines. With holiday sales accounting for as much as 20-40% of their total annual sales, retailers will remain very aggressive throughout the holiday season as they compete for consumers’ limited dollars.
Economic headwinds continue to perpetuate the ongoing bifurcation of the retail market. The gap between high income and low income households in the U.S. continues to grow while America’s middle class contracts. This “barbell of prosperity” has implications for all retail categories from apparel to consumer products as the high end luxury and low end discount segments continue to grow and thrive while the middle market segment shrinks.
U.S. luxury retailers continue to be the beneficiaries of this growing bifurcation trend, evidenced by their strong same-store sales performance in November. The luxury segment is being bolstered by strong demand and the weak U.S. Dollar that has attracted record numbers of foreign tourists, resulting in higher rents along urban high street retail corridors in U.S. gateway cities such as New York, Washington, DC and San Francisco.
The discount segment is thriving as well, as many U.S. consumers shift spending to “needs not wants.” This trend will continue to have a positive impact on warehouse clubs, outlet malls and perceived value apparel retailers like Nordstrom Rack and TJ Maxx. Notably, the outlet industry, which targets aspirational shoppers looking for luxury or higher-end items at value prices, will likely be one of the primary beneficiaries of tepid consumer confidence as it continues to capture a growing share of retail sales from other sectors.
On the real estate side, the retail supply pipeline is expected to remain at historic lows for the foreseeable future, which will continue to drive down vacancy rates, which now range from 5-6% in the Mall and General Retail sectors to over 11% in the Neighborhood and Strip Center product sectors. According to Property & Portfolio Research (PPR), less than 10 million sq ft of new retail space is expected to deliver this year, well off the pace of 157.7 million sq ft delivered at the peak of the market in 2006. Unlike the multi-anchor power centers and lifestyle centers that filled the pipeline in years past, the new, smaller pipeline will consist primarily of urban in-fill development or new-footprint big-box, single-tenant stores anchored by discount retailers such as Walmart, Target, and Costco.
Retail rent growth along well-established retail corridors in U.S. gateway cities will remain strong and buoyed by the performance of luxury tenants, while class A malls and well-located (high traffic) strip centers in urban in-fill locations with strong anchors are also expected to be above average performers. Rent growth in second tier malls and neighborhood/community centers will generally remain flat before seeing modest improvement in 2012.
Looking ahead, a myriad of factors including lingering unemployment, ongoing stock market volatility, persistent uncertainty about the political climate in the U.S. and financial conditions in Europe will likely impede any significant improvement in consumer confidence levels in the near term, which will temper household spending and restrain overall economic growth through the remainder of the year and into 2012.
For a look at the trends that will affect retail real estate in 2012, download a copy of Cushman & Wakefield’s latest Business Briefing 12 Trends for 2012 at the Knowledge Center or at http://cushwakeretail.com/trendwatch/.