The outlook for the U.S. retail market in 2012 seems to be that of cautious optimism, tempered with a bit of the unfortunate reality of likely muffled growth caused by outside forces beyond the control of the retail industry.
There are plenty of reasons to be optimistic about the retail market going into 2012. Even though retail suffered roller coaster swings through 2011 – retail started 2011 strong heading out of the 2010 holiday season, sharply dipped after the Japan earthquake, seemingly recovered only to dip again after the debt ceiling/credit downgrade debacle of August and fears of a double-dip recession, and now seems to teeter on potential Eurozone defaults – retail ultimately finished the year stronger than most commentators initially expected.
According to a recent Retail Traffic article, the International Council of Shopping Centers (ICSC) estimates that U.S. chain store sales rose 3.5% this past December. This constitutes an improvement of 40 basis points over the increase posted in 2010. For the combined November/December 2011 period, ICSC reported a same-store sales increase of 3.3%. This figure is slightly lower than the 3.8% increase posted for November/December 2010, but still constitutes one of the best holiday shopping seasons in the past 5 years. This momentum could be an extremely positive influence going into 2012.
In addition, according to some industry analysts, including Craig Johnson (President of Customer Growth Partners, a New Canaan, Connecticut based consulting firm), the level of spending retailers saw during the 2011 holiday season is more sustainable than in years past, because shoppers have been spending money out of their current incomes, rather than relying on credit cards. This means that consumers are likely more financially stable and healthy, bolstering the concept that there is more spending money available to support the retail market on a more long term basis, resulting in a prolonged positive direction.
Furthermore, according to Frank Badillo, Senior Economist with Kantar Retail, “[s]hoppers were feeling a little better through the end of the year than they were in August and September, when there was a lot of uncertainty. . . . So we are seeing some positive signs heading into 2012, but at the same time, there are still reasons to be cautious.”
According to an Associated Press survey of leading economists, the U.S. economy will grow faster in 2012, if it is not de-stabilized by such things as upheavals in Europe. This group of three dozen private, corporate and academic economists expect the economy to grow 2.4% in 2012. In comparison, the economy probably grew by less than 2% in 2011.
Other encouraging factors for retail are that 2011 ended in an upswing in terms of unemployment. The economy generated at least 100,000 new jobs each month for the last 5 months of 2011. This is the longest such streak since 2006. In addition, as of the end of 2011, the number of people applying for unemployment benefits dropped to its lowest level since April of 2008.
Finally, according to a recent Bloomberg article, CBRE Econometric Advisors is forecasting that retail space available for lease in U.S. local shopping centers will decline in 2012 for the first time since 2005, as the growing economy spurs retailer expansion. According to the forecast, the availability rate of space in community and neighborhood centers was 13.2% in the third quarter of 2011 and will probably fall to 11.7% by the end of 2013. In the short term this may not impact rents, but in the long term rents may finally start to increase.
Based on all of the foregoing encouraging signs and information, it would be no surprise to expect a strong and robust retail recovery in 2012.
However, some commentators are more cautious and skeptical about outside forces and their impact on the retail market.
According to another recent Retail Traffic article, some seasoned real estate professionals are expecting only moderate growth in the retail sector in 2012. Much of this can be blamed on the hot and cold capital markets and the uncertainties of the upcoming U.S. elections.
Although there seems to be some increase in leasing in some of the most well-established and largest urban centers, malls and shopping centers in secondary and tertiary markets (and some primary markets) throughout the country are likely to continue to experience high vacancies and stagnant rents in 2012 because of all the space that has been freed up by bankrupt retailers and shuttered stores. Furthermore, even in the larger urban centers, many commentators do not see new development taking root in 2012, except, perhaps, with value-oriented and outlet centers. That said, although new development may not be starting much in 2012, unlike in recent prior years, many developers seem to be starting to talk about and plan new projects that will be built in the next few years.
Other factors contributing to forecasts of moderate or sluggish growth in 2012 are continued high unemployment and concerns over the vulnerability of the economy to outside shocks. Many are concerned that Europe’s debt crisis could cause a global credit freeze, similar to what occurred with Wall Street in 2008. Resurgent episodes of Congressional gridlock, unforeseen global events (such as Arab Spring protests and the Japanese earthquake), rising tensions with Iran over nuclear issues and potential war (not only with Iran), further retailer bankruptcies, emerging online competition and the ongoing housing glut – coupled with volatile capital markets, the natural stagnation associated with election year politics, the European debt crises and ongoing high unemployment – could derail any retail market recovery in 2012.
Therefore, according to many cautious commentators, despite some encouraging signs, the retail sector’s long-awaited rebound will not begin until there is more market certainty in the U.S. and overseas, plus sustained high levels of consumer confidence driven by higher paychecks, a stronger stock market and improved housing market. This, according to many, is unlikely to happen before the third quarter of 2012.
The good news is that, whether one is more optimistic about the prospects for the 2012 retail market or more conservative, both views seem to agree that 2012 will include some growth. The question is how much growth will there be.
Another thing that more optimistic forecasters and more conservative forecasters seem to agree upon is that 2012 does not appear to be a “break out” year for the retail industry.
That said, especially in light of the end of year holiday season boost, declining unemployment and an expanding economy, we do believe that there is good reason to forecast a slow to modest, but incremental continuation of recovery in retail in 2012, with the possibility of volatility relating to prolonged stalemates in domestic politics, coupled with a continuing uncertain European debt crisis and continued high relative unemployment.