Retail Demand Faces Struggle

Economist's Commentary: Retail Demand Faces Struggle

October 15, 2009

By George Ratiu, Research Economist

While signs of economic recovery are slowly cropping up, the retail sector continues to struggle with slow sales, amid consumer concern over job losses. The retail sales figures had received a boost over the months of April-August from motor vehicles sales, due to a combination of high inventories, factory and dealer incentives, as well as the government's "cash for clunkers" program. However, excluding auto sales, retail sales were down 9.4 percent in July compared with the same month a year earlier. The same-store sales data for August pointed to a 2.9 percent decline, with department stores posting the largest drops.

It is hardly surprising that consumers continue to be tentative about spending when considering the rising levels of job losses. Based on ADP's national employment survey released for August, payrolls declined by 298,000 between July and August 2009. The declines in employment have been pressing the number of people receiving unemployment benefits upwards, reaching 6.2 million last month. For the time being, based on several indicators of confidence, consumers are cautious about prospects for an upcoming recovery. The University of Michigan index of consumer sentiment declined 5.1 points from June to August.

The declining level of retail inventories provides the silver lining in the retail sector. Businesses have been in the process of slashing inventories in order to avoid drastic price reductions. Lower inventories should provide some relief from the deep discounting that characterized last year's holiday sales season.

Looking at commercial real estate, demand for retail space is projected to decline by 4.9 million square feet in the third quarter of the year. The negative change in net absorption follows a drop of 16.2 million square feet in demand for the first half of 2009. On the supply side, completions of new retail space declined in the first quarter of the year, but picked up during the second quarter, closing at three million square feet.

As a result, availability rates continue to rise. Retail vacancy is expected to reach 12.2 percent in the third quarter. By the end of the year, the retail vacancy rate is estimated to hit 12.6 percent.

Regionally, Midwestern metro areas are taking the brunt of the consumer mood. Topping the list of high vacancies are Detroit, Columbus, Indianapolis, Cincinnati and Cleveland. With the exception of Nashville, coastal and Western markets continue to post lower availabilities. For the third quarter 2009, San Jose has the lowest vacancy rate, at 6.9 percent. Las Vegas, Orange County, CA and Honolulu are tied in second with a 7.1 percent vacancy rate.

Tied to rising vacancies, average retail rent is dropping. Rent is expected to decrease 2.4 percent in the third quarter 2009. For the year, rent growth will likely fall 6.1 percent.

The road ahead looks difficult for the retail sector. Employment is likely to continue to decline. Consumers are constrained by shrinking credit availability. And while improvements in housing have provided a welcome sign, consumer confidence has yet to turn a decisive corner.

 

Lowest Retail Vacancy Rates

2009.Q3 Estimates

San Jose, CA

6.9%

Las Vegas, NV

7.1%

Orange County, CA

7.1%

Honolulu, HI

7.1%

San Francisco, CA

7.2%

Miami, FL

7.3%

Long Island, NY

7.4%

Nashville, TN

8.0%

Salt Lake City, UT

8.1%

Los Angeles, CA

8.2%

National Averages*

12.2%

 

Source: NAR / TWR

*Not all markets are represented

 

For the most up-to date-analysis of retail sales data, see the Daily Forecast Update for October 14 >

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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