The second of a series focused on retail’s 10-year transition, and featuring insight from industry leaders.
The retail sector has been robust, but will it remain so? Experts discuss demand, supply, and consumer spending with Connect CRE in this second of five articles. The first article in the series, “Understanding the Retail Sector: Where We’ve Been and Where We Are,” is available to read here.
By Amy Wolfe Sorter | July 11, 2024 | As published by Connect CRE
During the COVID-19 shutdown, physical retail was considered at death’s door, even as online sales expanded.
What a difference four years makes. Bricks-and-mortar centers are benefiting from higher foot traffic (and expanding sales). This is prompting retailers to seek out new space to meet that consumer demand.
However, 2Q 2024 metrics from Colliers reported continued reduced retail supply, leading to 4.1% vacancy and increased rent growth. Experts in the sector supported the statistics, telling Connect CRE that retail space across most usages remains tight. “Retail demand and retailer demand are outstripping retail supply, which remains very low,” commented Darrell Palasciano, a broker with The Providence Group. Added Providence Group Colleague and Principal Melissa McDonald: “There are multiple LOIs on most spaces. The lack of vacancy is seen across all of the size categories, including shop and anchor space, as well as outparcel space”…
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Consumers are Still Spending – But for How Long?
According to the Bureau of Economic Analysis (BEA), consumer spending in May 2024 increased by 0.5% from the previous month, a slight bump from the 0.3% reported in April 2024. While this doesn’t suggest massive buying sprees, it does mean that people continue to spend.
Still, the experts sounded notes of caution. “The biggest threat to retail owners today is a potential consumer recession, driven by the Fed’s commitment to slowing the economy, continued higher interest rates and ongoing inflation in construction costs, labor, cost of goods and energy,” Wilson said. Primestor Director of Leasing Rhiana Lindsey agreed, pointing out that inflation and interest rates can erode purchasing power and spending. “This could cause consumers to shift their spending to prioritize essential purchases over non-essential ones,” she observed.
Another concern is the rise of consumer debt, even as consumer spending supports today’s retail sector. Matthew Hammond, Coreland Companies principal, stressed the need to monitor credit card debt; in Q2 2023, credit card balances surpassed $1.12 trillion as credit card APRs increased 30% in 18 months. “This, coupled with rising inflation, will adversely affect consumer spending and start to play out in the marketplace in various ways,” he said.
In addition to the above, Providence Group’s McDonald pointed out that “consumers are uncertain about the upcoming election and the economy, despite the positive performance this year.” This could also stall consumer spending in the future.
Palasciano explained that some debt forgiveness and other programs are providing consumers with a false sense of security, which is encouraging them to spend more. Though retailers like the notion of more spending, it’s not a good thing over the long term.
“It will increase inflation or continue to contribute to it,” Palasciano said. “Eventually, those dollars will stop flowing, and consumer spending could take a nosedive in the next couple of years.”
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