The 0.9% increase in retail sales in January won’t change the dismal outlook for the retail real estate sector in 2009, real estate economists say. The consensus seems to be that the January figure was a blip and that rising unemployment and falling house prices will continue to put downward pressure on consumer spending this year and the next.
In short, projections for retail properties remain bleak. Through 2010, vacancies are forecast to hover near peak levels while rents will drop by high single digits.
The modest increase in retail sales reported Thursday by the Commerce Department was the first increase registered since June. The government reported a 1% increase including gasoline sales, or 0.9% without the gasoline sales. But the figure was likely uncharacteristically high due to a large margin of error on the seasonal adjustment and heavy discounting by retailers anxious to get rid of leftover holiday merchandise, says Sam Chandan, president and chief economist with Real Estate Economics. The Commerce Department previously revised the retail sales decrease reported for December from 2.7% to an even bleaker 3%.
As a result, most real estate research firms don’t anticipate having to adjust their projections to account for a better retail environment. Indeed, the economic vacancy rate for retail properties will reach 18% this year, according to estimates by Boston-based Property & Portfolio Research (PPR).
As of third quarter 2008, the national retail vacancy rate stood at 13.3%. Rents are expected to drop 8% in 2009, to $17.80 per sq. ft. In fact, retail rents won’t bottom out until 2010, when they will reach approximately $17.22 per sq. ft., says Suzanne Mulvee, senior real estate economist with PPR.
“It’s hard to interpret one month’s number as a sign that things are stabilizing when the unemployment rate continues to rocket and house prices continue to decline,” she says. “I look at this and think ‘Is this everyone believing the gift cards they got during the holidays are not going to be valid and just going out and spending them?’ It’s hard to put a positive spin on it.”
In January, the unemployment rate rose to 7.6% for the first time in 17 years. House prices declined 9.2% compared with the same period a year ago, according to New York-based Deloitte.
Consumer credit shows no sign of loosening up, says Chandan. What’s more, various metrics of consumer behavior point to a rather lackluster month.
Shopper traffic, which measures the number of people who visit stores, fell 3.8% in January from December, and 12.9% from the same period a year ago, according to ShopperTrak, provider of shopper traffic counting information based in Chicago.
Same-store sales, which measure sales growth at stores open at least a year, declined 1.6% year-over-year, reports the International Council of Shopping Centers (ICSC).
Another issue, according to Chandan, is that the category that experienced the largest increase in total sales in January, at 2.7%, was non-store retail, not a good sign for owners of brick-and-mortar locations. “People are very price-sensitive right now and so they are taking advantage of that channel because Internet retailers are waiving shipping fees and consumers are saving on taxes,” Chandan says.
The Deloitte Research Leading Index of Consumer Spending, which attempts to predict consumer spending trends by tracking consumer cash flow, did register an increase of 1.01% in January. But Carl Steidtmann, chief economist with Deloitte Research, cautions that one month’s figure does not represent a reversal in long-term trends.
“We certainly won’t see a trend reversal in 2009,” says Abigail Marks, economist with Boston-based CBRE Torto Wheaton Research. “We will see more deterioration in availability rates and rents are going to decline. It’s going to be more of the same and a little bit worse.”