Limon Net Lease Group

Research Brief

What Strong Retail Sales Mean for CRE Investors?

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Consumer Spending Remains Strong Despite Rising Inflation

  • October retail sales were up 16% YOY; core retail sales were up 15% YOY, and up 21% from pre-pandemic
  • Even accounting for inflation, core retail sales are up nearly 11% YOY, and 16% from before the pandemic
  • Elevated pandemic savings and early holiday shopping likely key factors in strong spending

Online Shopping Major Driver, But In-Store Sales Rising

  • Online sales rose 10% YOY, and 40% since pre-pandemic
  • Inflation-adjusted store sales are up 9% YOY & 14% pre-pandemic; August retail foot traffic just off 2019 levels

Retail Sales Support Commercial Real Estate Performance

  • After initial shock, elevated retail spending is providing positive momentum for Retail sector recovery
  • Online shopping and retailers’ need for additional inventories continue to support Industrial performance

Core retail sales exclude auto and gasoline sales
Sources: Marcus & Millichap Research Services, U.S. Census Bureau

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Retail Sales Research Brief | November 2021

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Retail Sales Remain Strong Despite More Shoppers Staying Indoors

  • Consumer spending healthy in October. Core retail sales, which excludes gasoline and motor vehicles, rose 1.4 percent last month.
  • Fear of COVID-19 does not deter consumers. Online spending climbed 4.0 percent last month as more people avoided crowds to prevent exposure to the delta variant.
  • Brick-and-mortar retail fundamentals strong. In the third quarter, retail vacancy dipped 20 basis points to 5.3 percent, indicative that more shops are opening ahead of the holiday shopping season.

Sales Restrained by Headwinds

  • Supply chain issues remain impediment to sales. Although the ports of Long Beach and Los Angeles have taken measures to increase the speed at which cargo ships move through the system, dozens of vessels remain anchored offshore and the average time to unload is still 17 days.
  • Inflation concerns escalate. The rise in prices are increasingly looking like they are less transitory and are unlikely to decrease even when the annual gain returns to historically normal levels.

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; U.S. Census Bureau; U.S. Energy Information Administration

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Is a Bubble Forming in Commercial Real Estate?

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CRE is Outperforming, But Not All Property Types Are

  • Retail prices up only 1.9% from 2019, revenue is up 2.2%; Bargain buy since recovery likely to drive demand
  • Suburban Office price +11.5% and revenue +1.1%; Price growth bet on future demand from migration to suburbs
  • Return-to-office uncertainty driving down urban prices

Record Price Growth Supported by Elevated Demand

  • Apartment price +11.9%, revenues +12.6%, with historically low vacancy; Housing shortage to support high demand
  • Self-Storage prices up 15.5%, revenue +17.2%; Pandemic provided demand boost, tapered supply-side risk
  • Demographic trends expected to sustain demand

Do Outsized Gains Mean Cause for Concern?

  • Supply chain disruptions and eCommerce supporting record Industrial price gains of 22%, with revenues up 11%
  • However, record absorption is being met by record construction; Potential oversupply risk in years to come
  • While no bubbles are forming in CRE, investors should consider the supply & demand outlook several years out

Pre-recession growth period: 2019 through 3Q 2021
Includes sales $1 million and greater; Includes urban and suburban office sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

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Will The Fed’s Tapering Announcement Impact CRE?

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Federal Reserve to Begin Tapering Asset Purchases

  • Fed responded to pandemic by buying $120B/month in treasuries and MBS, boosting liquidity and lowering yields
  • 10-Year fell from 1.5% in Jan. 2020 to 0.7% by March; Stayed below 1% until 2021, now hovers around 1.3%-1.5%
  • Fed now plans to reduce purchases by $15B/month, until fully done in summer 2022, but could adjust as needed

Lower Interest Rates Supported Economic Growth, Inflation

  • Compared to pre-pandemic, core retail sales are up 19%, corporate investment up 12% and home sales up 9%
  • Injection of money also spurred inflation; headline inflation rate is 5.4%, up from 2.3% before the pandemic

How Will Fed Tapering Impact Commercial Real Estate?

  • Fed easing back purchases will likely push interest rates steadily higher
  • Gradual rise unlikely to slow CRE transactions; too much capital looking for yield & CRE good inflation hedge
  • Investors should consider locking in rates or refinancing now, as rates are only expected to climb

* Through September; 10-Year Treasury through November 04
Sources: Marcus & Millichap Research Services, Federal Reserve, BEA, BLS

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Real Estate Delivers Record-Breaking Performance in 3Q

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Office and Retail Defy Negative Expectations

  • Despite return-to-office uncertainty, 26M SQFT of Office space leased in 3Q 2021; vacancy down 10 bps QOQ
  • In 3Q, Retail saw most quarterly space absorption since 2017 with 28M SQFT, dropping vacancies 20 bps YOY
  • Both Office & Retail rents rose less than 1% in 3Q

Housing Demand Bolsters Apartment Performance

  • Over 273K Apartment units were leased in 3Q; About 550K units have been filled YTD, beating any full year on record
  • Vacancy rate fell 100 bps in 3Q to record low 2.8%
  • Rents rose 6.5% QOQ, and are up 11.2% over last year

Long-Term Outlook Remains Favorable

  • Companies boosting inventories and eCommerce drove 364M SQFT of Industrial space absorption YTD, 157M in 3Q
  • Elevated demand pushed vacancy down 60 bps to 4.4%; Rents rose 3% in 3Q and 8% YOY, in line with forecasts
  • Economic performance likely to sustain momentum

* As of 3Q 2021
Sources: Marcus & Millichap Research Services, RealPage, Inc., Costar Group, Inc.

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Why is Commercial Real Estate Outperforming?

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Global Pandemic Has Created Various Headwinds

  • Inflationary pressure and supply-chain disruptions will weigh on economic growth, but recession risk low
  • Labor shortage driving wage inflation and limiting recovery – Retail and Hotels particularly impacted
  • Return to Office remains a big unknown

Despite Disruptions, CRE Maintains Strong Performance

  • Apartment and Self-Storage vacancies sit at record-lows while rents are soaring
  • Industrial vacancies falling and rents on the rise despite elevated construction levels
  • Seniors Housing, ST-Retail and some Hotel segments on road to recovery; Downtown Hotels, indoor malls lagging

Long-Term Outlook Remains Favorable

  • U.S. household savings and wealth up significantly from pre-pandemic – Fuels spending and economic growth
  • Supply-chain disruptions limit new construction and benefit existing commercial real estate
  • Underlying demand drivers to support CRE in long-term

As of 2Q 2021
Sources: Marcus & Millichap Research Services, RealPage, Inc., Costar Group, Inc., Yardi Matrix

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