2023 Holiday Retail Sales; Impacts and Trends Affecting CRE

Status of the Consumer Heading Into Holiday Season

• Inflation-adjusted retail sales reached an all time high this October, up 21.3% since October 2019
• Reputable forecasts anticipate a 6% to 8% jump in 2022 holiday sales when compared to last year

Why are Consumers Amplifying Spending?

• Record employment levels and strong wage growth are part of what is driving the consumption bounce
• Above-normal savings levels, up nearly $4.4 trillion since the onset of COVID-19, are also aiding the retail sector

Implications for CRE investors

• Expectations for a record-breaking holiday retail spending points toward boosted performance for discretionary vendors
• Diverse tenant rosters are critical for investors, as a potential recession in 2023 would favor necessity-based retail, like grocery-anchored centers

*Core retail sales excludes auto and gasoline sales
Sources: Marcus & Millichap Research Services, BEA, U.S. Census Bureau

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How October Inflation Numbers Impact The CRE Outlook

Is Inflation Coming Down?

• October CPI data came in lower than expected, with producer prices, steel and lumber costs, and shipping expenses falling as well
• Inflation is well ahead of the target level, and an 8% annual rise in producer prices suggests there are still more costs to be passed onto consumers

Federal Reserve Signals Smaller Rate Increases

• Chairman Powell has been clear in his commitment to achieving 2% inflation
• The Fed is expected to raise the overnight rate 50 basis points in December, then adopt a slower pace of rate hikes in 2023

Potential Impacts on CRE

• More stable expectations are likely to alleviate some of the pressure that has forced investors to recalibrate strategies mid-deal
• Diminished uncertainty can help reduce the expectations gap between buyers and sellers

*Through October
Sources: Marcus & Millichap Research Services, BLS

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What The Latest Jobs Data Release Means For CRE Investors

Job Market Sustains Momentum

• The economy added more than 260,000 positions in October, putting the country on pace for the second strongest job growth year on record
• While the Fed has mentioned the need to cool job growth, current wage gains are a small part of inflationary pressure

Nuances in The Competition For Workers

• Small businesses and large companies expanded their payrolls since February 2020, but mid-sized firms shrunk
• Despite high profile layoffs at tech firms, the labor market is gaining in aggregate, supporting CRE space demand

How this impacts CRE Looking Forward

• Small business employment growth is poised to support suburban space demand
• Cooling job numbers in future months may restrain household formation, but the long-term outlook is positive once uncertainty clears

*Through October
Sources: Marcus & Millichap Research Services, BLS

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November FED Rate Increases Impact On CRE Markets

What Action Did the Fed Take?

• On November 2nd, the Federal Reserve raised the overnight rate 75 basis points to the 3.75%-4.00% range
• Inflation remains elevated and the Fed reiterated its commitment to pushing inflation back down to 2%

Forward Looking Expectations Moderate

• The Fed provided forward guidance to expect further rate increases in December and in 2023
• Chairmen Powell indicated that future rate increases will likely be smaller but there may be more depending on upcoming inflation data

What CRE Investors Should Be Considering

• In the past, federal reserve rate increases have translated into higher borrowing costs for investors
• Smaller and slower rate increases, as suggested by chairmen Powell, could help reduce the buyer-seller expectation gap

*Through November 3
Assumes one 50 bps hike at the subsequent FOMC meeting
Sources: Marcus & Millichap Research Services, Federal Reserve

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