Monday Morning Scoop - Retailers, retail landlords cautiously optimistic about holiday shopping season amid inflation, economic worries
Retailers, Retail Landlords Cautiously Optimistic about Holiday Shopping Season Amid Inflation, Economic Worries
Covid-19 concerns are diminished, inflation worries are high. But consumers are ready to celebrate what’s for many the first so-called normal holiday season in three years, which experts say should keep sales relatively strong and ultimately bolster the retail real estate sector.
In fact, despite high inflation and growing concerns about a recession, consumer spending has continued to grow through the fall.
The U.S. Department of Commerce reported Wednesday U.S. retail and food services sales for October 2022 totaled $694.5 billion, up 1.3% from the previous month and 8.3% higher than October 2021. Total sales between August and October 2022 were up 8.9% from the same period a year prior.
The National Retail Federation, meanwhile, forecasted on Nov. 3 retail holiday sales will grow between 6% and 8% from 2021 levels, to between $942.6 billion and $960.4 billion.
Some retailers, though, are bracing for consumers to spend less this holiday season. Big-box retailer Target Corp. (NYSE: TGT) out of Minneapolis posted disappointing earnings results for the third quarter on Wednesday and cut its forecast for the holidays, citing continued weakness in consumer shopping habits.
Broader economic conditions have consumers more cautious this year. A Jones Lang Lasalle Inc. (NYSE: JLL) holiday shopping survey found 49.7% of consumers surveyed that earn less than $50,000 plan to significantly cut their budgets this year, while about 24% of those earning $150,000 will do the same.
Meanwhile, the University of Michigan’s Survey of Consumers declined 8.7% in November, suggesting increased pessimism among consumers about the U.S. economy. Declining real income, dwindling savings, a greater use of credit cards and higher interest rates will affect some households’ ability and willingness to spend during the holiday season, a Cushman & Wakefield PLC (NYSE: CWK) Q3 retail report noted.
Already, those trends have emerged in where segments of the market are shopping in recent months.
R.J. Hottovy, head of analytical research at Los Altos, California-based traffic-analytics platform Placer Labs Inc., said visitation trends in recent weeks show median- to lower-income households visiting specialty retailers less often than they did last year, and instead more frequently visiting value retailers.
“I don’t think it’s shown up in the data but I think there is nervousness about interest rates and what that means for housing payments,” Hottovy said. Other inflation and economic concerns will likely have consumers being judicious about where they shop and spend, including during the holidays.
An analysis of Placer Labs, which does business as Placer.ai, data found traffic at indoor malls, outlet malls and open-air lifestyle centers — the three major categories tracked by the company — are still below pre-pandemic levels, although it’s made up ground since traffic observed in 2021 and 2020. Foot traffic at indoor malls in October was 5.2% less than what was seen in October 2019, down 3% at outlet malls when comparing those same months and 3.3% less at open-air lifestyle centers.
Earlier season, more aggressive sales
The holiday shopping season used to kick off the weekend after Thanksgiving, with blockbuster sales on Black Friday.
The season has trended earlier in recent years but, consistently, those tracking retail say the holiday shopping season in 2022 began more noticeably in October. JLL’s survey found more than half of shoppers — 53.8% — will start shopping before Thanksgiving this year.
That perhaps in part because retailers, which had glut of inventory this summer, started discounting their merchandise earlier this year. In fact, because of persistent high inventory volume and to compete for an increasingly cost-conscious consumer, experts predict retailers will be more aggressive overall in their sales offerings this season. Seattle-based Nordstrom Inc. (NYSE: JWM), for example, said this summer it will have an estimated $200 million in markdowns in the second half of 2022.
Olivia Leigh, executive vice president of portfolio operations and people at Santa Monica, California-based shopping-center owner The Macerich Co. (NYSE: MAC), said foot traffic across the REIT’s portfolio has largely returned to pre-pandemic numbers. She said, in recent months, she’s not sure if an observed uptick in traffic is because of an earlier holiday shopping season or other reasons.
Scott Kingsmore, senior executive vice president and chief financial officer at Macerich, said during the REIT’s recent earnings call the company isn’t expecting the mid-teens growth observed in Q4 2021 but said retailers report feeling optimistic about growth this holiday season — “just not as robust as last year.” Last year’s holiday sales grew 13.5% over 2020, totaling $889.3 billion, according to the National Retail Federation.
David Simon, chairman, president and CEO of Indianapolis-based Simon Property Group Inc. (NYSE: SPG), in Nov. 1 Q3 earnings for the REIT acknowledged there may be economic volatility this holiday season and into 2023 but said he didn’t think growth from existing business will slow because “the demand for new deals and space is there.”
“… (T)he lower-income consumer is tightening their belt, and we do have a few brands that are affected by that,” Simon said. “But even with that said, we have an unbelievable return on investment after tax from the earnings that those businesses throw off, and we’re also making investments … in those businesses. So I expect those investments to pay for future earnings growth, but the macro is concerning.”
Meghann Martindale, head of retail research at Washington, D.C.-based Madison Marquette Property Investments LLC, in an interview said all of the fourth quarter is now considered the holiday season in the retail world. Sales have pulled forward even as early as September, she added.
Martindale said she expects consumers this year to be looking for deals and, to find those savings, may trade down in the number of items they buy, brands they purchase or stores they shop in.
“I would say spending is still going to be relatively strong,” she continued. “I think you’re going to see … more sustained spending and a tradeoff in value component, and where you’re getting the best deals.”
‘Leaner’ retail real estate market
Those who track the retail real estate world note the sector is better positioned now than it’s been in a long time.
Between 2010 and 2019, there were 338 retail bankruptcies, according to data from German consumer data firm Statista Inc. That resulted in tens of thousands of store closures, acutely impacting real estate landlords’ occupancy and net operating incomes. The Covid-19 pandemic hollowed out more retailers in 2020, with 52 reported retail bankruptcies that year.
Last year, there were 21 announced bankruptcies in retail, according to Statista. As of June 16, there’ve only been four in 2022.
During the same period, very little new retail inventory on a relative basis has been added to the national real estate market, and underperforming retail space has been demolished or redeveloped into other uses.
Tenant demand from retailers has grown in the wake of retail’s recovery from the pandemic, but space — especially for the most desirable retail — has become more challenging to find. That, in turn, has driven up rental rates and occupancy at centers.
In Q3, asking rents for shopping centers rose nationally by 1.4%, to an average of $22.77 per square foot, while the vacancy rate fell to 5.9%, according to Cushman & Wakefield data. Leasing volume totaled 24.6 million square feet, a slowdown from the past several quarters.
The availability rate of retail real estate was 5% at the end of Q3, according to CBRE Group Inc. (NYSE: CBRE).
Most retail fundamentals are in a balanced position today, said Brandon Svec, national director of retail analytics at Washington, D.C.-based commercial real estate data firm CoStar Group Inc. (Nasdaq: CSGP). The 2022 holiday shopping season isn’t perceived as a make-or-break for retailers or center owners on a broad scale, he added.
And there’s nothing to suggest retail real estate will be significantly disrupted in 2023 if there’s a slowdown or small recession. The retail environment today is “leaner, meaner and stronger,” Svec said, in part from the bankruptcies and store closures that were hallmarks of the 2010s and into 2020. Retailers who survived the global financial crisis, the 2010s fallout and the pandemic have finessed their strategies, including omnichannnel, to attract customers.
But a strong Q4 performance will be necessary to help shore up select retailers. Svec cited as an example Union, New Jersey-based Bed Bath & Beyond Inc. (Nasdaq: BBBY), which said in August it was closing 150 stores nationally.
“Retailers with weak balance sheets that specialize in home goods, electronics and hobby goods really need to have a strong Q4,” he said.
Bed Bath & Beyond’s announced closures actually contain a silver lining not generally associated with mass store closures in recent years. Brandon Isner, head of retail research for the Americas at CBRE, said many of the stores Bed Bath & Beyond is closing are in well-located shopping centers and will be attractive for tenants looking for big-box space.
Isner said not only have there been a lot of new lease deals in 2022, but there’ve been fewer move-outs, likely owed in part to less new retail space added in recent years.
“(Retailers) are going to renew in place more so than before because, pre-pandemic, availability was a bit better,” he said. “We’re at record low levels of availability right now.”
Looking ahead to 2023
Observers in the space say there are no signs yet that retailers are pulling back on store expansion plans for 2023 yet. Leigh said Macerich hasn’t seen retraction yet from retailers on what she called fairly ambitious and robust expansion plans for 2023.
Still, a lot isn’t known, and it may not be until after the holiday shopping season that pain points become more apparent for the retail sector, Martindale said.
She said a lot of forecasts are normally completed by this point in the year but, because of how uncertain the economy is, and consumer spending being such a big component of the nation’s GDP, it’s become more difficult to predict what’s coming.
“Even with interest rates and inflation, the other economic indicators are strong, so I’d like to think we can finish Q4 strong,” Martindale said. “I definitely think we’ll have further headwinds when holiday spending wears off, and we’ll see how retailers’ earnings fare … there might be some pain coming but hopefully we can ride the wave we’ve been on for 2022.”
By: Ashley Fahey
Source: Austin Business Journal