LAS VEGAS — The economic recovery “is happening sooner and better than expected” given the one-two punch of a cyclical recession and a financial crisis led by the collapse of the housing market, says Hessam Nadji, managing director of research and advisory services for Marcus & Millichap. He cautions, however, that the growth of the economic expansion will be hampered by record U.S. debt.
“When you have a crisis like we had, you are going to end up with a lot of public debt because of the stimuli that was required to reignite the system,” remarked Nadji during his presentation as part of “Retail Trends 2012,” a market outlook hosted by Marcus & Millichap at the Renaissance Las Vegas Hotel on Monday in conjunction with RECon 2012.
“In every other recovery, we had some 30 percent to 60 percent of economic activity being generated and spurred by for-sale single housing. In this cycle, there is no contribution. Housing pulled us down much more severely than most recessions, and it’s not helping us continuing forward,” said Nadji, who set the table for the one-hour program that included a panel discussion.
Featured speakers were Wayne Brandt, managing director of real estate capital markets for Wells Fargo; Paul Freddo, senior executive vice president of leasing and development for DDR; Mark Miller, vice president of real estate for CVS; and George Tomlin, president and CEO of GBT Realty Corp. Bill Rose, director of the National Retail Group at Marcus and Millichap, served as moderator.
Despite the headwinds caused by the Euro debt crisis and mounting U.S. debt that now stands at $15.4 trillion, the American consumer has proven to be resilient, emphasized Nadji. “The U.S. consumer, who was expected to go hide in a cave and not come back, is actually propelling the economy quite nicely. Year-to-date, retail sales are up over 6 percent on a year-over-year basis.”
The U.S. economy has regained 4 million of the 8.5 million jobs lost during the Great Recession, said the veteran researcher. “Another very positive thing about the economy that is not discussed very often is the broad nature of the job creation we are seeing. We added almost 2.1 million private sector jobs in the last 12 months. That’s not a bad number when you think about it. In a [more robust] recovery, you should be at 3 million, maybe a little bit more.”
There has been a healthy uptick in several job sectors, ranging from professional and business services to leisure and hospitality (see chart).
Clicks and bricks
Online sales, which have been growing 15 to 20 percent annually, make up about 10 percent of total retail sales, according to Nadji. “E-commerce is an obsolete term. It’s really mobile commerce.”
Nearly three out of four smart phone users (74 percent) indicate they use the device to shop. Of that group, 71 percent use a smart phone when they are in a store to research prices and options. “The whole idea of Best Buy becoming a showroom for Amazon and now having serious problems, even after it was the only one standing after Circuit City folded, is real and here to stay,” said Nadji.
While the growth of online shopping has been dramatic, many traditional brick-and-mortar retailers continue to prosper based on year-over-year same store sales growth. “You have Costco, Ross, Whole Foods, Nordstrom, CVS, Neiman Marcus and plenty of other traditional brick-and-mortar retailers that are showing 6 percent to 10 percent year-over-year gains on sales,” says Nadji (see chart).
The worst performing retailers in terms of same store sales growth on a year-over-year basis include Best Buy, Toys R Us and Big 5 Sporting Goods.
It would be incorrect to say that online retail is killing brick-and-mortar retail, said Nadji. “It really is a matter of drilling down to the specific retailer and making sure that there is a strategy to address the tenant mix at each center.”
Don’t underestimate the importance of a powerful brand, which can defy recession, pointed out Nadji. He cited Forever 21, which sells stylish clothing and accessories for young girls, women and men at affordable prices. The retail chain continued to expand aggressively through the recession because of its loyal customer base.
Retailers were incredibly nimble and quick to respond to the Great Recession by correcting their inventory-to-sales ratio, said Nadji. DDR’s Freddo concurred with Nadji, adding that he sees the strong retailers continuing to get stronger as they improve their business model.
“There are winners and losers,” emphasized Freddo. “The job we have on the landlord development side is to bet on the winners.” There are some clear examples of retailers who have continued to grow market share and provide surprises to the upside on earnings results, added Freddo.
More encouraging signs
The U.S. retail sector has recorded eight consecutive quarters of positive net absorption, including 3.1 million square feet in the first quarter of 2012. “Retail is the second best performing area of commercial real estate next to apartments. Most people don’t recognize that,” said Nadji.
A dramatic pullback in new construction is expected to lead to a healthy drop in the vacancy rate through 2013. The vacancy rate for neighborhood and community shopping centers stood at 10.9 percent in the first quarter of 2012, according to New York-based real estate research firm Reis. Retail construction completions currently range between 40 million and 50 million square feet per year compared to the long-term average of 200 million square feet, said Nadji.
Most of the pain on the vacancy front has been concentrated in the newest built centers that came on line in the midst of the recession, said Nadji (see chart). “Product that is three years or newer has vacancies in the high teens, but the more stabilized product has much lower vacancy rates.”
— Matt Valley