Sep 09

5 Experts Weigh In on Consumer Spending, Retail Development, and Recession Through the End of the Year

Americans increased their purchases in July, a sign that solid consumer spending is still powering a resilient U.S. economy. Retail sales rose a better-than-expected 0.7% from June to July, according to the most recent report from the U.S. Department of Commerce. The gain was higher than a revised 0.4% increase the previous month and marked four straight months of increases. The sales figure also surpasses July’s 0.2% increase in consumer prices, indicating that shoppers are spending at a healthy pace.

Commerce + Communities Today asked five leaders of companies in the X Team Retail Advisors alliance what will happen with consumer spending and retail development for the rest of the year.

Jason Baker • Dae Cheatham • John Cumbelich • Steve Edwards • Melisa McDonald

What do the latest sales figures mean for retail as we head into Labor Day? Will consumer spending continue rising into the holidays? If so, what does this mean for retail development?

The Edwards Co. founder Steve Edwards: There’s still going to be consumer confidence, and that will be reflected in consumer spending through back-to-school and the holiday season. Economists and analysts have been predicting a recession, whether it be a soft landing or a hard landing, for the last 12 or 14 months. I personally believe we’re still going to have some form of recession, but it’s speculative on my part. The fact that nobody has really been able to solidly predict what’s going to happen has been counterintuitive. I do believe the Fed will raise interest rates again and it certainly looks like there has been containment on inflation, so unless something unforeseeable happens — natural disasters, economic and so on — consumer confidence will remain positive. It probably won’t be bullish, but people will continue to spend money. However, I don’t see an immediate impact on additional retail development since construction costs and the labor shortage are still putting significant pressure on underwriting new retail development.

Velocity Retail Group president Dave Cheatham: With national employment levels near an all-time high, the consumer has cash. While wages continue to increase, putting inflationary pressure on the economy, these increases are driven largely by staffing shortages. Full employment and staffing shortages are not signs of an economy in recession.

John Cumbelich & Associates CEO John Cumbelich: Consumer spending will continue to expand in this full-employment paradigm, and retail development will continue to expand, primarily in essential service categories like grocery, [quick-service restaurants] and home improvement.

The Providence Group principal Melissa McDonald: Consumer spending will continue to increase at the same rate as it has over the [past] 18 months, but consumers are dipping into their savings. Some of this is due to post-pandemic spending, which transitioned from home furnishings to travel, restaurants and apparel/soft goods. As far as retail development, I don’t think you’re going to see much new construction anytime soon because of interest rates and construction costs. This makes it nearly impossible to do new commercial development. In a market like [the Carolinas], where there is little vacancy, it makes it even more challenging.

Baker Katz principal Jason Baker: Consumer confidence is going to be a bumpy ride as we head into the holidays. We will see a slight downtick year over year from last year’s holidays, which could be more of a flat line but at worst a slight downtick. For the near future, [retail development] is going to be a challenging market. I don’t know if it will ever go back to where we were from an interest rate standpoint [of] 2% to 3%. However, I do see those interest rates dropping significantly from where they are right now in the next year or so. The other big issue is the cost of material. It’s just so expensive. I do not see a meaningful amount of retail being added to almost any market anytime over the next year or longer. There is no doubt that there is a need for new retail in this market because occupancy rates and rental rates are as high as I’ve seen them any time in my career, but that’s where we are.

Many economists and analysts now are downplaying a recession. Are you buying it? Do you think the Fed will do one more interest rate hike?

Edwards: I believe there will be another increase in September. There’s been a lot of collateral damage, but the economy is still strong. We still could face some form of recession, and I don’t know what the scope of that recession will be. In addition, the election will start to play a bigger role, particularly in consumer confidence.

Cumbelich: Although interest rates have moved well above the near-zero levels of the past decade, rates are still well within the range of historically normal levels.

Cheatham: The economy is still strong. The residual of inflation is mostly impacted by high gas prices which affects almost all retail categories. Personal debt is still high, which should be a damper on spending. I do believe that we can avoid a traditional recession.

Baker: The Fed will raise [the interest rate] again in September. You can call it a financial crisis or a number of things, but I do believe we are currently in a recession. But this time it feels different. Back in 2007, there was a feeling that predominated the landscape, a feeling of sadness, uncertainty and fear. But today, the people I respect are saying we are not necessarily in a recession but heading into one. Those same people, who have gone through way more of these cycles than me, feel like we’re going to emerge from this in the next year or year-and-a-half and it will be a soft landing. For me, everything that’s happening feels like we’re in a recession, which in my mind asks: Are we in that soft landing now? We are currently in a liminal space that feels a whole lot different than it did a year ago and is headed toward a place that hopefully will feel a whole lot different than what it feels like right now.

McDonald: The rate hikes are not helping at all in my business since it’s making construction and financing more expensive. There are some lenders that aren’t lending on multifamily, office development and, in some cases, retail. As a result, these rate hikes continue to make the market more challenging. It’s not that the retailers don’t want to expand; it’s just that in many cases, there is not the available space or space that fits their parameters. I’ve been through a couple of recessions and all kinds of markets. I’ve never seen it like this. As a result, investors are being a bit more fearful of retail, which is somewhat unjustified. There are strong retailers in the marketplace who have maintained strong comp sales year after year. The market is going to tell you what somebody is willing to pay for a shopping center based on demand, cap rates and cost. It should be noted that the demand for brick-and-mortar is absolutely there and is as strong or stronger than it has been historically. However, there’s just not enough product.

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