Rose: “It seems like there’s a good feeling in the consumer. We’re pretty safe there for now, but we must watch job growth, consumer confidence and global concerns that could make us reevaluate.” Rose: “It seems like there’s a good feeling in the consumer. We’re pretty safe there for now, but we must watch job growth, consumer confidence and global concerns that could make us reevaluate.”

SAN DIEGO—US economic fundamentals are sound, but consumers are still doing more saving and less retail spending than predicted, Marcus & Millichap executives said in a retail capital-markets webinar Tuesday. Bill Rose, VP and national director for M&M’s national retail group/net-leased properties group; Bill Hughes, SVP of Marcus & Millichap Capital Corp.; and John Chang, first VP, research services, for M&M, gave a retail capital-markets update and spoke about trends to track in 2016.

Big-picture items that are affecting the national retail sector include a lot of economic noise and uncertainty, said Chang. There are headwinds challenging economic growth, but consumer confidence is “close to where it was prior to the recession,” he said. Economic growth, although choppy, is continuing to build, but the pattern has been three to four quarters of steady growth followed by pulling back for a couple of quarters and then growth again. “We can anticipate this cycle going into next year. This allows the economy to grow and then slow down enough not to overheat.”

Chang said GDP is expected to be between 2% and 2.5% this year, and the trajectory is flattening—he is anticipating that growth will stay right about where we’ve seen it for the last couple of years. “The average GDP cycle is five years; this one has been 6.5 years,” Chang said. “While this growth cycle seems long in the tooth, some growth cycles extend up to 10 years, so there is still some opportunity out there.”

Rose commented on a GDP growth chart that Chang presented, noting that there’s “a lot of chop there in the chart.” Chang pointed out that sometimes we get two good quarters, sometimes three. “It’s not like the last growth cycle, where there was a real spike and steady momentum; this one is choppy, and that’s what we can expect.”

Chang: “With the currency devaluation [overseas], Wall Street investors are skittish about the international front. This is creating a lot of uncertainty and risk.” Chang: “With the currency devaluation [overseas], Wall Street investors are skittish about the international front. This is creating a lot of uncertainty and risk.”
 

Hughes asked if we’re anticipating the growth to get overheated this time like in the last cycle, and Chang responded, “No, that’s not the problem. It’s more what’s going on with international issues–slowing growth in China, which is slowing down the consumption of commodities. There’s less of a demand for copper, aluminum and other things used to produce other products. With the currency devaluation [overseas], Wall Street investors are skittish about the international front. This is creating a lot of uncertainty and risk.”

Rose noted that this could be a buying time with all the liquidity in the market. “How do we correlate stock-market fluctuations to real estate?” Chang said, “A lot of people are looking at this a reiteration of the value of getting into real estate. It’s looking good compared to dividends and stock performance, so they’re moving more capital into the commercial real estate side of things, which is positive for values and investors.”

Hughes said he’s hearing that the average consumer has more spendable income because the cost of gas is down. “Obviously, there is some concern in the ears of investors as related to the equity markets.” Chang responded, “We thought [lower gas prices] would manifest in increased retail spending, but it has led more to a savings bump. We still have these risks emerging out of lower oil prices. A lot of companies are overleveraged—junk bonds—which has pushed the bond market up over 400 basis points. As banks take on those risks, it may start to retract liquidity in other parts of the market. We see this seesaw with the stock market and oil prices. A lot people believe the fall in oil prices is due to falling demand, but this is not the case with oil. Oil consumption is just coming off record highs set in November. Consumption is not the problem: supply is. There is a lot of oil coming out of Saudi Arabia, so there’s a huge supply pressure in the market.”

Rose asked how long will oil prices continue to stay low: six months? Two years? “It’s hard to say,” said Chang. “Unless there is a major growth cycle, your demand drivers aren’t going to get there. OPEC is not letting up, and US oil producers will not drop down supply.”

Rose asked if we should be concerned in energy-dependent markets about this glut in supply, to which Chang replied, “Houston, Dallas to some degree, Denver, Oklahoma City and areas down in the Gulf have some risks, but the only place we’ve seen this downturn is Houston. Even Houston has a lot of diversification with medical.” Rose asked if we’re anticipating job growth in these markets—how should a real estate investor interpret these events? “The Bureau of Labor Statistics rewrites in March, but right now it looks like even though they’re facing this problem in the energy sector, they’re still adding jobs in Denver and Houston,” said Chang. “Layoffs could hit Houston again, but we’re seeing more shipment of goods, activity in the ports and medical. Looking at the broader jobs market, there has been a steady pace of growth [in this market].”

Chang pointed out that we have to look at the bigger picture when it comes to unemployment and job growth. “If you look back at the last several years, we may have one bad month followed by two good months. We’ve been averaging 200,000 jobs per month nationally for several months. It’s been very steady, consolidated and moving along at a solid pace—not overheating.”

Hughes: “Retail is kind of the new darling; it has really come around, and lenders are more comfortable with it.” Hughes: “Retail is kind of the new darling; it has really come around, and lenders are more comfortable with it.”

Rose asked what investors should be thinking about with future job growth—what is a good barometer to watch? Chang said you really have to stick with the quarterlies. “The first Friday of every month, the jobs report comes out, and everyone gets excited, and then the next month something different happens. You take the volatility out when you look at it quarterly—it’s much easier to see.”

Chang said retail has been doing very well, with a big lift in retail employment. He also said that 67% of our economy is tied to consumption, which bodes well for the retail sector.

When Rose asked if there is another recession on the horizon, Chang said, “The fundamentals are sound. Retail sales are off a bit, they’re a little below the long-term average, but still pretty good. Things look sounds, but the problem is what’s happening on Wall Street. Wall Street is a predictor of economic growth, and it is saying the economy may go into contraction. If people get worried, they stop buying and hiring.”

Hughes asked, “We’ve seen great job growth and recovered very well from the recession, but where is the wage pressure? How does that impact future job growth?” Chang said wage growth has bumped up 2.5%, unemployment is back down under 5%, and seeing the employment market tightening creates wage pressure and starts to lift this factor up. Hughes pressed, “But could we see a recession?” and Chang replied, “The risk is spawning internationally; there’s a risk of getting dragged down by the tail by China and Brazil.”

Rose pointed out that we’re still showing growth, and Chang agreed. “There are a lot of international markets on shaky ground, and that’s the risk. The risks are coming from somewhere else. The risk of concern by consumers is higher.”

Rose summed up, “It seems like there’s a good feeling in the consumer. We’re pretty safe there for now, but we must watch job growth, consumer confidence and global concerns that could make us reevaluate.”

Chang said that consumer confidence is a big thing to watch. However, most markets—even smaller ones—are seeing job growth, which is a good sign. “Core inflation is right around 2.1% without the gas effect. If you add gas back in, core inflation is at 0.7%, which is a positive outlook.”

Rose asked about minimum-wage’s effects and wage growth in retail. Chang said, “We’re really struggling to lift that wage growth back to what we have seen in the past. You have a lot more wage pressure in the skilled workforce and white collar than at entry-level and lower-wage jobs.”

With oil prices below $30 per barrel, inflation should remain low, said Rose, so could we get into a deflationary cycle? Chang said we’re bouncing on that line, and the Fed doesn’t want to go below 0. “The fed doesn’t want to get into a deflationary spiral.”

In terms of retail sales, Chang said we have core retail pushing up, with 21% higher overall retail sales than in the last peak. “Even though we have pressures, at the end of the day, retail consumption is remaining pretty solid.”

Hughes said the cost of capital into the sector has been stable. “We were predicting the 10-Year Treasury yield to be around 1.85% to 2.6%, but now we’re not sure we’ll get to that level; we’re now at 1.75%.”

Rose asked, with so many loans maturing over the next year or two, what guidance can be given to investors? Hughes said, “Things are looking pretty good. Not too many years ago, we were all concerned about this massive amount of maturities, but not now.” He said many investors are selling, and while there is a lot of debt coming due this year from that 2006 debt surge, “I don’t see a problem in the marketplace with most of that being refinanced, and the cost of debt is going to fall.” Rose pointed out that in the retail space, these maturities are not expected to be much of a problem.

Regarding lender availability, Chang said he is seeing good availability from the banks. “Overall, there is some really good momentum and a wide range of lenders. “LTV has really been contained; we’re staying close in on the long-term average.” Rose said that in 2007/2008, CMBS almost evaporated, but is now strong again.”

Hughes said, “Retail is kind of the new darling; it has really come around, and lenders are more comfortable with it.” He added that everybody plays a different niche.  “All of these lenders tend to fulfill the full spectrum of needs: primary, secondary, tertiary, anchored retail, shadow-anchored retail. As long as they maintain their underwriting standards—and they are.”