Consumer spending is up, but maybe not in the way a fan of a growing economy might like. “Inflation is currently driving most of the growth in retail with overall sales increasing by 8.9% over the prior year in June as consumers begin to cut back on discretionary purchases,” says Colliers.
“At the end of the second quarter, consumers began to purchase fewer products but paid more for them, as they increasingly turned to credit cards and savings to support essential expenditure,” the firm wrote. “There is also a shift in what people spend on, with much of the growth being driven by essential products where consumers have little choice but to accept higher costs. Over the last three months, gas spending accounted for 12.8% of the average household’s retail spend.”
The push of inflation has led many to reconsider their spending habits. As JP Morgan Chase noted a couple of months ago, “Facing the most rapid price increases since the early 1980s, many US households are facing difficult choices, including whether to change purchasing habits or dig into savings.” That could ultimately have an impact on retail sales and, so, retail and maybe industrial space leasing, especially as many companies are planning to put CRE spending on the chopping block already.
“There is also a shift in what people spend on, with much of the growth being driven by essential products where consumers have little choice but to accept higher costs,” according to Colliers. “Over the last three months, gas spending accounted for 12.8% of the average household’s retail spend.” Housing continues to climb in cost, as does food. The more people have to put into basics, the less for all the other retail spending they might do.
That’s a potential big redirection from what has been the case. “General retail and neighborhood centers benefited from the strong growth in demand from restaurants, grocers, discounters, and big-box retailers, which led to 19 million square feet of space absorbed in the second quarter,” said Colliers. “Retailers signed nearly 19,000 individual leases spanning 64.3 million square feet, and leasing activity continues to improve as retailers open more stores, with growth being driven by the demand for smaller spaces. The national retail vacancy rate dropped ten basis points during the second quarter and stands at 4.4%.”
The firm says that three-quarters of retail space developed last year was leased to national tenants before delivery. While retail development is projected to continue in active metro areas, increases in new supply are “measured” and no market has seen a 1% increase in new supply over last year. And while nominal rents increased, in real terms after inflation, the national average was -2%.