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Must-know: Why a jump in retail sales is good for mall REITs

Brent Nyitray, CFA, MBA

Retail sales data gives analysts insight into the strength of the consumer

Consumption is the biggest driver of the U.S. economy and it accounts for 70% of GDP. Consumption has been relatively subdued since the recession began, as Americans have boosted their savings rate and spent only on essentials. The real estate bubble drove consumption in the mid-’00s as people took out cash refinances and spent the extracted home equity. This increased the cost basis for many people’s homes and left them vulnerable when house prices collapsed. As a result, they’ve focused more on paying down debt than spending. This de-leveraging process has been going on for a while, but consumers are still indebted.

The Census Bureau releases retail sales data monthly. The report received is the advance retail sales estimate. It’s based on incomplete data. The data is subject to revision, and the final sales data will be released next month.

Advance retail sales come in better than expectations

The headline retail sales number rose 0.2% versus expectations of a 0.1% gain. Ex-autos, retail sales increased 0.7%. Ex-autos and ex-gasoline rose 0.6%, which was much higher than the 0.3% expectations on the Street. The control group, which strips out some of the more volatile elements, was up 0.7%. This means things are a little better than the headline number suggests.

The big question people will be focusing on is whether the huge jump in interest rates over the past month flows through to the economic data. So far, it doesn’t appear to have affected spending, but increases in consumer net worth seem to be making the consumer feel a bit better. At the end of the day, consumers don’t start spending after recessions because they want to. They do it because they have to. Eventually, the car becomes too expensive to keep fixing, and they finally decide to buy a new one. Right now, the average age of a car is pushing 12 years—an all-time high.

Implications for mall REITs

Mall REITs like Simon Property Group (SPG), Taubman (TCO), Macerich (MAC), Federal Realty Trust (FRT), and Realty Income Fund (O) are indirectly driven by consumer spending in that more spending drives more stores and lowers vacancy rates. At the moment, mall vacancy rates are still elevated, considering how far along we are in the recovery. Increased consumer spending has been one of the weakest points of the recovery, and perhaps this is finally easing. This would be good news for mall REITs.

To learn more about drivers that are affecting mall REITs and other commercial REITs, see Jobs report shows hiring is picking up—good for commercial REITs.

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