Retail fundamentals robust heading into holiday season

Retail fundamentals robust heading into holiday season

The U.S. economy may be sailing some stormy seas, but retail property fundamentals are healthy going into the holiday season, according to Marcus & Millichap.

According to a recent report from the real estate brokerage and advisory firm, consumers are showing resilience even in the face of rampant inflation that has hurt their wallets. Healthy job creation in October helped to counterbalance the effect of higher prices as consumers kept spending, with overall retail sales growing by three times the pace of inflation, as measured by the Consumer Price Index, during the month.

The strong spending numbers come on the heels of a third quarter that witnessed robust demand for retail space. Tenants absorbed 15 million square feet from July through September, pushing the national retail vacancy rate down to 4.8% — just 10 basis points above the record low.

And Marcus & Millichap reported that preliminary figures for October suggest more of the same on the way. More than 5,400 new leases were signed to fill approximately 17 million square feet in October, a strong level of activity that bodes well for the 80 million square feet of retail space currently being constructed.

Meanwhile, Americans seem to be disinclined to tamp down on eating out and socializing at food and drink establishments. Despite higher food prices along with a rising threat of new COVID-19 variants, spending across restaurants and bars grew by 1.6% in October. That’s the largest month-over-month gain among all core retail segments, outpacing building and gardening materials, a subsector that has seen heightened interest as homeowners opt for improving their current residences due to weak home affordability.

The uptick in restaurant and bar traffic has encouraging implications for single-tenant demand, as does the record food and beverage sales volume that heightened patronage has helped drive. Restaurants may see a further attendance boost this week, with Thanksgiving on the way and the cost to feed 10 people at home projected to increase by 20% year over year.

Marcus & Millichap’s report, however, does include a potential indicator to watch as the new year starts to come into view. With forecasts calling for an increase of 6% to 8% in holiday spending in November and December, many households are expected to backstop these purchases by using credit or dipping into savings.

Dependence on both of these sources is likely to dent the already-low U.S. personal savings rate and increase household debt. Each of these shifts could have negative repercussions on consumer purchasing power in 2023, a development that could hurt retail fundamentals.

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