The retail sales numbers for January were stronger than expected and, as GlobeSt.com reported, was a good news/bad news scenario, with retailers seeing more business. However, the Federal Reserve likely viewed the results as bad inflation news and more reason to keep the benchmark federal funds rate higher than anyone in CRE wants to see it.
Moody's Analytics recently came out with an analysis that presented a similar take.
"In 'normal' times this would be a great reason to cheer, as consumer spending accounts for approximately 70% of GDP, helps provide millions of jobs for a diverse workforce, and boosts industrial CRE performance," they wrote. "But these aren't 'normal' times. The Fed is in a dog fight with inflation, and is looking to ease spending, not heighten it. Hence, these numbers may be welcomed by some, particularly those whose profits or employment is directly tied to consumer activity; but despised by others, most noteworthy those negatively impacted by higher interest rates."
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More to the ultimate point, Moody's noted that the optimistic view was that such numbers point to a possible soft landing of the economy. The pessimistic view: inflation will only continue to run hot, driving up interest rates and making a recession more likely.
In general, the firm reminded, the advance retail sales numbers delivered by the Department of Commerce "have little correlation with current retail CRE performance. The correlation that does exist is to near-term industrial real estate performance. Specifically, the movement of retail sales shows a close alignment with the warehousing and distribution rent growth.
In other words, the more retail growth there is, the more need for warehousing and distribution, which gets back to physical space. Goods need to be stored and staged somewhere to eventually land in a store (or in an e-commerce facility).
On the bad side, retail sales and more inflation in the wrong places than many people expected and the atmosphere is ripe for the Fed to fix something. "Capital market participants are still looking for clarity and hopefully the March FOMC meeting will provide a clear path forward on how high the terminal rate will be and when the Fed expects to decrease interest rates," Moody's wrote.
A more important signal to watch, they say, is pricing in housing and rent changes. "Overall, our multifamily rent growth data exhibits a positive correlation with the shelter inflation rate and this correlation tends to increase further when lagged by three-to-six months," they said. "Giving a bit of hope to inflation hawks, our data has indicated the presence of rent declines in late 2022 and preliminary data promotes only subtle growth to begin this year."
Perhaps some patience will bring the type of bad news that many might cheer on, if it leads to lower interest rates.
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