Retail Demand Improves as Retail Sales Make Modest Gains

Economist's Commentary: Retail Demand Improves as Retail Sales Make Modest Gains

December 10, 2009

By George Ratiu, Research Economist

With the economy posting moderate signs of improvement, retail sales have been showing some signs of life. However, based on the data, it is obvious that consumers are cautious and looking for discounts. The third quarter retail sales received a lift from motor vehicle sales and the 'cash for clunkers' program. However, data for Black Friday (the day after Thanksgiving) retail sales showed a slightly positive advance, but from a more restrained consumer.

Based on data collected by the National Retail Federation, Black Friday sales were up only 0.5 percent this year compared with 2008. The number of shoppers was 13.4 percent higher this year, at 195 million. But on average, each shopper spent less-$343.31 per person, compared with $372.57 a year ago. Department stores were the main focus for this year's holiday shoppers, with almost half of shoppers visiting at least one. Considering that Black Friday sales are an indicator of sales activity leading into the holiday season, retailers may have to work hard to bring shoppers back, and will likely have to entice them with discounts.

One encouraging sign is the low level of retail inventories. Businesses have been cutting back inventories quite aggressively over the past 12 months in anticipation of lower sales. Based on September's data, the level of inventories ticked up slightly, indicating a possible bottom. The weeks ahead should provide a clearer view of how inventories and consumer demand are likely to impact retail sales and prices.

The positive change in sales activity is a welcome sign. However, the scale of it points to the remaining concerns for consumers, the economy and commercial real estate. The main issue continues to be the elevated level of unemployment. Payroll employment changes continue to hover in negative territory. While the decline in employment has been in a slowdown since August, the unemployment rate is still at 10.0 percent. This week's unemployment insurance claims moved up by 17,000, with the total number of people receiving unemployment benefits reaching 5.2 million.

With the job picture still cloudy, consumers continue to be wary about the prospects and length of the economic recovery. The University of Michigan index of consumer sentiment has been declining every month since September, to reach 67.4 in November, with most of the contraction due to downwardly revised expectations about future economic conditions.

In light of these factors, demand for retail space is projected to decline by 4.4 million square feet in the fourth quarter of the year. The downward change in net absorption follows a steady improvement in demand during the first three quarters of the year, as net absorption moved from negative 10.7 million square feet in the first quarter to negative 1.3 million square feet in the third quarter.

The supply side has been more problematic, with completions of new retail space steadily rising throughout 2009. The first half of the year witnessed 5.9 million square feet of new retail space, followed by another 3.5 million square feet in the third quarter. Based on projects in the pipeline, the fourth quarter will add another 3.3 million square feet, bringing the total for the year to 12.7 million square feet.

While the supply will taper off in 2010, for now availability rates continue to rise. Retail vacancy is expected to reach 12.6 percent in the fourth quarter, 15 basis points higher than the first quarter. Meanwhile, rent for retail spaces-while still negative-has been making incremental improvements during 2009. However, the addition of new space will likely drive rent down 1.3 percent during 2009, with the expectation for 2010 of an additional 3.0 percent decline.

On a regional basis, coastal markets are faring much better than Midwestern metro areas. Of the top ten markets with the lowest availability rates, six are in California. For the fourth quarter, San Francisco is expected to post the lowest vacancy rate, at 6.5 percent, followed by Long Island and Las Vegas, both at 7.2 percent. With regional economies still affected by employment losses, the Midwest is finding higher vacancies. The top five markets in this category for the quarter are Columbus (18.8%), Indianapolis (18.4%), Detroit (18.2%), Cleveland (18.1%) and Cincinnati (17.5%).

Depending on the outcome of this year's holiday shopping season and near-term employment changes, 2010 may prove somewhat difficult for the retail sector. In addition to a rocky 2009 economy, consumers have also been faced with shrinking credit availability.

Based on the Federal Reserve's latest report on consumer credit, monthly data registered a 1.7 percent decline in the annual rate of consumer credit in October 2009. More specifically, revolving credit, such as credit cards, decreased 9.3 percent during October, on the heels of a revised 10.5 percent drop in September. While the decline in consumer credit seems to be slowing down, the contraction in credit over the past six months has been noticeable, particularly for revolving credit, as average credit card interest rates have increased from 11.94 percent in the third quarter 2008 to 13.71 percent in the third quarter 2009.

Until consumers feel more secure with the economic conditions and also more able to find jobs, it is likely that retail activity, and in turn, demand for retail space will continue to remain muted.


Lowest Retail Vacancy Rates

2009.Q4 Estimates

San Francisco, CA


Long Island, NY


Las Vegas, NV


Honolulu, HI


San Jose, CA


Orange County, CA


Miami, FL


Los Angeles, CA


Ventura, CA


San Diego, CA


National Average*



Source: NAR / CBRE-EA

*Not all markets are represented


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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