Should REIT investors fear a drop in retail sales?
Over the past couple of months, we’ve seen a drop in retail sales. Part of this is due to falling gasoline prices, but even stripping that out, sales have been lackluster. This is surprising, given that consumer confidence remains strong. If gasoline prices continue to fall, however, that will provide a stimulus for consumers and the holiday shopping season could be better than expected. That said, households are still de-leveraging and aren’t feeling confident enough about the labor market to really spend the way they did before the crisis.
You can attribute some of the slowdown we’ve seen in retail sales to a few things. First of all, autos and other durables increased this year, which may have drawn consumption from other discretionary spending. Since the average age of a car on the road is at a record high of about 11.5 years, consumers are finding it makes more sense to buy a new car rather than keep fixing the old one. Second, taxes increased for everyone at the beginning of the year—and particularly on high-income earners, who were hit by the payroll tax break expiration and all the new Obamacare surtaxes.
It’s important to recognize that while shopping center REITs are affected by retail sales, the sales of companies in their own portfolio can be higher or lower. For example, retail sales increased 2.2% last year, but sales at General Growth Properties’ portfolio of stores increased 3.6%. Shopping centers require more than simply stores to draw in the consumer, and restaurants or other entertainment options are an important draw.
Location is also a key driver of occupancy rates. General Growth Properties (GGP) has malls in attractive locations across the country. Initial rents are 14% higher than expiring rents, which shows the power of strong locations. Location is one of the things that separates the different retail REITs like Simon Property Group (SPG), Kimco Realty (KIM), and Taubman (TCO). Investors who would prefer to invest in the sector as a whole should look at the Vanguard REIT ETF (VNQ).