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Retail sales rebound after an abysmal January, helping 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-2000s 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 deleveraging 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 0.3% versus expectations of a 0.2% increase. Ex-autos, retail sales rose 0.3%. Ex-autos and ex-gasoline, retail sales rose 0.3%. The control group, which strips out some of the more volatile elements, was up 0.3%. January was revised downward to -0.6%, a terrible number. The Northeast was hit by a lot of snow over the month, so weather did play a factor in the drop.

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. Another way to invest in the REIT sector would be through the Vanguard REIT ETF (VNQ).

To learn more about investing in mall REITs, see the Market Realist series General Growth Properties’ 4Q13 earnings: Is this the end for malls?

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