Current Economic Expansion Could Become Longest Yet, Says Nadji

LAS VEGAS — The reinvention of the retail sector now underway is getting a boost from a U.S. economic expansion that is nearly a decade old but which still has legs, says Hessam Nadji, president and CEO of brokerage services firm Marcus & Millichap.

Meanwhile, demographic shifts have altered the retail landscape in profound ways and will continue to do so, Nadji believes. Every day, 10,000 Americans turn age 65. An even greater number, 12,000, reach the age of 21 on a daily basis. “It is the most incredible dual demographic movement of any developed country on the history of the planet. That has a lot to do with why the economy is doing well and why retail is reinventing itself.”

The longest U.S. economic expansion on record spanned a decade, from 1991 to 2001. The current expansion is poised to surpass that high-water mark this July.

The economy has added 21 million jobs since 2009, a modest 16 percent increase during that span, according to Nadji. Meanwhile, inflation has been held in check. The PCE (personal consumption expenditures) inflation rate has fallen 190 basis points since 2007 to 1.5 percent.

The 10-year Treasury yield, the benchmark for long-term, permanent financing in commercial real estate, stands at about 2.4 percent, which is 170 basis points lower than it was in 2007, the height of the last economic cycle.

Add to the mix a healthy American consumer. Core retail sales, excluding auto and gas sales, are up 39 percent from the peak of the last economic cycle.

“Think about this: 21 million jobs with no inflation. That’s why interest rates have been so low, which is the lubricant for the business world and which is the lubricant that allows you to take some risk in the midst of this retail reinvention,” Nadji told several hundred retail professionals gathered at the Renaissance Las Vegas Hotel early Monday evening for “Retail Trends 2019” hosted by Marcus & Millichap.

“The 21 million jobs that we created since the bottom of the recession came at a very slow pace,” says Nadji. The slowness of the growth has ensured its durability.

In addition to Nadji, who was the featured speaker at Retail Trends 2019, the event included a panel discussion on the retail real estate investment market. Moderated by Scott Holmes, senior vice president and national director of retail for Marcus & Millichap, the panel included Beth Azor, president of Azor Advisory Services; Bill Lenehan, president and CEO, Four Corners Properties Trust; and Jami Passer, chief investment officer for Edens.

The Marcus & Millichap event occurred in conjunction with RECon, the three-day show hosted by the International Council of Shopping Centers that brings leading developers, owners, brokers, retailers and lenders all under one roof to do deals at theLas Vegas Convention Center. The RECon show attracts more than 30,000 attendees.

Illuminating findings

E-commerce, which is one piece of the vast and rapidly changing retail landscape, accounts for 14.8 percent of core retail sales nationally, according to Nadji. While online sales is the fastest growing retail segment, it’s noteworthy that the mobile commerce share of total online sales rose from less than 10 percent in 2011 to about 25 percent in 2018, stated Nadji.

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Consumers are also increasingly relying on their smart phones to place orders. For example, mobile ordering at Starbucks accounts for 15 percent of transactions, up from eight percent two years ago. At Home Depot, 37 percent of online shoppers make an additional, unplanned purchase when picking up an item in the store.

Digitally native brands are expanding their footprint. Casper, which sells mattresses and sleep products, plans to open 200 stores in the next few years. Men’s clothier Bonobos currently has more than 50 stores and plans to open 100 stores by 2020. Footwear retailer Allbirds plans to open eight stores in the next year.

The growing consumer demand for some online retailers to offer brick-and-mortar stores isn’t the only change that’s occurring, says Nadji. “The in-store experience is also changing. Allbirds has a hamster wheel so that you can try on your new shoes,” he said with a chuckle. And Casper encourages shoppers to take in-store naps.

Retail construction slows

While demand for brick-and-mortar stores has ticked up, construction activity has slowed dramatically, which has helped drive down the overall vacancy rate from nearly 8 percent a decade ago to under 5 percent today, the Marcus & Millichap data shows.

The single-tenant retail sector serves as an example. In 2007 and 2008, developers delivered 266 million square feet of single-tenant retail space nationally. In a sharp contrast, Marcus & Millichap projects the total space delivered in that retail segment from 2014 through 2019 will be 263 million square feet

“We are not overbuilding retail anymore,” concludes Nadji. Instead, the industry is adapting and reinventing as necessary to meet changing consumer tastes.

— Matt Valley

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