The upward revision of GDP in the third quarter from 3.8% to 4.3% and the creation of more than 215,000 jobs in November offer the best evidence yet that the national economy continues to hum, according to economist Hessam Nadji of Marcus & Millichap. Those rising indicators — even in face of devastating hurricanes and rising energy prices — also bode well for the retail sector.
“You hear a lot of gloom and doom about jobs. Last month’s job numbers were pretty good, above 200,000. What you don’t hear is that we’ve added 4.5 million jobs since the trough of the recession. Roughly 45% of those jobs have been in professional services, health care and education, which are well-paying industries,” says Nadji.
“The myth that the employment market is not doing well, and the myth that we’re only adding low-paying jobs is something to consider as basically wrong information [in the general press],” emphasizes Nadji, whose remarks came before an audience of investors and brokers in New York on Tuesday evening. They were gathered at the Sheraton Hotel in New York for “Retail Trends 2006,” a program sponsored by Marcus & Millichap, the Encino-Calif.-based investment sales specialists.
What’s led to the misperception and the general gloom and doom? Normally, it takes 11 months to restore the job losses stemming from a recession. In the case of the recession of 2001, which resulted in the loss of 2.7 million jobs, it took 23 months to get back to recover those losses. During the past two years, job growth has been steady but not spectacular. “We never had the typical post-recession jump in jobs because of pent-up demand. There was no pent-up demand. People were buying houses and cars throughout the recession,” emphasizes Nadji.
Other positive signs for the retail economy in the near term:
• U.S. homeowners continue to enjoy a windfall via refinancing. “We will take out $125 billion to $150 billion of refinancing money out of our home equity this year alone,” says Nadji. “Forty percent of that is spent right away in the economy.” U.S. home prices have risen 55% nationally over the last five years, and have climbed 74% in the Northeast during that same period.
* 76 million baby boomers are entering their peak earning years, and their children — the so-called echo boomers — number 70 million strong. Not only are the baby boomers buying second homes and luxury goods, says Nadji, they also are helping their echo-boomer children buy homes and condos. The median age of a first-time homebuyer has dropped from 36 to 32 over the last five years.
The big question in 2006 is whether there will be a pricing bubble in retail. At the moment, cap rates continue to compress: multi-tenant properties trade at a cap rate in the low to mid-7s, while cap rates for single-tenant properties are in the mid to high 6s.
Nadji expects cap rates will move up, but not dramatically. “We think pricing will basically stagnate or stabilize, while net operating incomes (NOIs) continue to improve. That will result in higher cap rates than where they are today, but not reverting all the way back to historical norms.”