The Retail Market in 2013 – Poised For Recovery

January 2013
News & Publications
Retail and Commercial Development 2013 Forecast

The future of the U.S. retail market in 2013 appears to be something of a “mixed bag of goods”. Continued political and other pressures may work to hold back retail and economic progress. However, strong, rejuvenated fundamentals should prevail, resulting in a year in which retail will grow, particularly in the second half of the year.

As in past years since the recession, there is good momentum in the retail industry coming out of the 2012 holiday selling season. Although early reports were somewhat more conservative to glum, a recent article in Commercial Property Executive reported that the Census Bureau’s report of U.S. retail sales were up 0.5 percent from November to December last year, and the year-over-year retail sales increase in December was 4.7 percent. According to the article, if automobiles and fuel are removed from the equation, then the annual increase grew 5.1 percent. These are larger percentages than originally predicted and reported.

The holiday season growth in retail spending is even more significant when considering much of this spending took place during the recovery from Superstorm Sandy. A significant number of consumers, covering a large portion of the Northeast were out of commission during peak spending periods as a result of the storm. In addition, the holiday period was hampered by the federal government’s “Fiscal Cliff” stand-off. Undoubtedly, many consumers were more conservative and cautious as a result of the uncertainties and concerns of potentially going over the “Fiscal Cliff”. Without these powerful negative forces, one could speculate that the holiday sales period would have been even more successful.

In addition to good momentum coming out of 2012, the economy is starting to show signs of re-establishing some of the strong, core fundamentals that many believe are necessary to long term retail growth.

A significant reason to be optimistic about retail in 2013 is about a sector of the economy that led us into the recession initially, and, according to the 2013 ChainLinks Retail Advisors U.S. National Report (the “Report”) will likely lead us out – housing. Housing usually leads our economy out of recessions, but for the past several years the housing sector has been absent.

The change in 2013 is that housing appears to have started to rebound. According to the Report, new home starts are at their highest level since before 2008. Permits remain high – which means that this trend should continue for at least the foreseeable future. And, new sales are at their highest level in over 2.5 years. If these statistics continue, and housing is back, 2013 should be a year in which gradually improving housing fundamentals continue to grow and accelerate and begin to drive economic growth. It is estimated that over 2 million construction jobs were lost in the recession. As housing comes back, so too should construction jobs – but gradually, not all at once. In addition, as more jobs and products are created, the overall national economy should grow, since more money is filtering into the economy through jobs and more consumer spending. Many predict that this growth will be seen in the latter half of 2013 and beginning of 2014.

In addition to new home starts, according to a recent Article in Commercial Property Executive, home prices in general (including existing homes), are on the increase. According to the article, all but six states are experiencing year-over-year price gains on pending home sales. Nationally, home prices appear to have increased approximately 7.4 percent from November, 2011 to November, 2012. These increases are predicted to continue to trend higher in the near future.

These developments in housing are significant. As more families and people invest in homes, a greater demand will be created for home improvement, décor, furniture and related goods, which should benefit the growth of those stores that sell these products and suffered during the recession. This should not necessarily work to the detriment of the stores that did well in the recession, such as grocers, drug stores, health clubs, sporting goods stores, pet supply stores, restaurants and discount-oriented stores. The good habits learned during the recession, especially with respect to buying at discounts, will be hard to forget. However, as home wealth returns (in the form of equity), some of the types of stores that were squeezed out due to higher price points, should start to make a come back.

Another major fundamental on the mend is unemployment. According to the Report, over the course of 2011, the U.S. economy created approximately 1.84 million jobs, and in 2012 (through October), approximately 1.569 million jobs. This appears to be a modest pace of job growth for a recovery. Of course, job growth could be worse, and the economy could be growing fewer to no jobs. On the other hand, it is somewhat reassuring that jobs are/were being created at a rate of approximately 157,000 positions per month, while there were so many outside negative forces potentially working against growth. Over the past two years, the political and economic landscape in the U.S. had to endure, among other things, a hotly contested presidential election, a lame duck Congress, crippling bi-partisanship politics, a “Fiscal Cliff” stand-off, a debt ceiling stand-off and a national credit downgrade. Many of these obstacles were self-imposed or self-created. Some may say that it was remarkable that so many jobs were created despite the negative environment, or that we have a growing economy fighting to get out. In any event, now that the presidential election is over and a new Congress has been sworn-in, perhaps all sides can work together to expand job growth to its greatest potential in this recovery.

Of course, job creation is a core fundamental to retail growth. More jobs, means more consumer spending, more stores, more rent and more retail development, and it has a spiraling effect.

Consumer confidence is also on the rebound. According to the Report, the Conference Board’s Consumer Confidence Index (CCI) reached 73.7 in November of 2012. This was the highest level of consumer confidence recorded since 2008. The relationship between consumer confidence and consumer spending is a loose one. However, eventually, consumer spending almost always mirrors the CCI. This is further reason to be optimistic about retail growth going forward.

Notwithstanding all of the good news and metrics, not everyone sees retail the same way. According to a recent Wall Street Journal article, some experts saw only slight growth in U.S. malls and strip centers in the fourth quarter of 2012, and point to a lackluster 2013 for retail landlords. These experts seem to be concerned about perceived weak job growth, Federal budget cuts and tax increases and their affect on consumer confidence. That said, there does seem to be some acknowledgement for continued retail success in some of the top markets – the markets with the lowest vacancy rates (some of the more affluent suburbs in California and New York and other high density areas with strong income demographics).

Some of these concerns are very valid. Indeed, the “Fiscal Cliff” was averted at the beginning of the year in terms of avoiding various tax increases for the majority of Americans. However, later this year, Congress and the President will square off over major budget and spending cuts. Will this lead to another stalemate or crisis? Will the cuts affect jobs – reduce jobs? How will the cuts impact taxes? To the extent these questions are answered in the negative, they will have a negative impact on the retail economy and retail development.

In addition to working through spending cuts, Congress and the President are also scheduled to come to an agreement later this year on another debt ceiling compromise. The same questions could apply to the outcome of this debate.

As the Congress and President did before, will they again play a game of brinksmanship? Will the country and the economy be left guessing how these issues will be worked out until the bitter end, and will this affect our economy for the worse?

* * *

A foundation has been laid for a good recovery in the retail market. Some strong fundamentals are taking hold and helping to create real growth. There is good reason for optimism in 2013, especially towards the second half of the year as housing is predicted to pick up. There is also reason for concern about sources that could derail this growth. However, it is our hope that the roots of core fundamentals have grown deep enough to sustain these potential strains.

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