What It Means for CRE
The most recent personal consumption expenditures (PCE) data delivered the good news that inflation has stabilized at 2.5% and is on track to reach the Fed’s 2% goal. This news, combined with mostly healthy retail earnings, bodes well not just for the likelihood of a moderate interest rate cut at the Fed’s meeting in just a few weeks, but also because healthy levels of consumer spending lower the risk of a recession. Yet behind the latest round of retail earnings reports was an interesting twist. Some big-name retailers like Lowe’s, Target, TJ Maxx, and Walmart saw healthier-than-expected sales growth, while others like Dollar General are lagging. Consumer behavior in today’s choppy economic climate is nuanced, and recent behavior signals a shift in spending habits toward more cost-conscious spending, a change that has implications for commercial real estate (CRE).
Bifurcated Market: Consumers Shift Toward Budget-Friendly Options
The recent summer earnings reports from major retailers were telling because consumers sent a strong signal that while they’re still spending, they’re also seeking value. Walmart, for example, reported a strong increase in sales, particularly in its grocery segment, as consumers sought out lower prices in response to still-high inflation. According to their earnings report, comparable sales rose by 6.4% in the U.S. this past quarter, driven by higher traffic and increased spending per trip. Similarly, Walmart saw a modest 1.8% increase in same-store sales, while Target experienced a 1.2% uptick, reflecting a broader consumer shift toward more cost-effective shopping options during economic uncertainty.
TJ Maxx, another discount retailer, saw a boost, with its parent company, TJX Companies, reporting a 7% increase in U.S. same-store sales. The allure of discounted brand-name merchandise is attracting shoppers looking to stretch their dollars further. Add to the list Five Below, a popular discounter that had a significant 9.4% jump in revenue over the same period last year.
In contrast, Macy’s latest report disappointed, with sales dropping 8.2% year over year, highlighting the challenges faced by department stores that cater to more discretionary spending. Other retailers reporting sales declines last month were Lowe’s (down 2.3%) and Home Depot (down 2%), although their performance is more closely linked to lower-than-expected DIY sales and a weak housing market than a reflection of general consumer spending.
The latest results across the retail spectrum reflect uneven trends in consumer spending, much of which is tied to disposable income levels. “As inflation continues to squeeze disposable income,” Manus Clancy, Head of Data Strategy at LightBox, shared on the CRE Weekly Digest podcast (01:55 minutes in), “consumers are making deliberate choices to trade down, favoring value-oriented retailers over premium brands—a trend strongly reflected in the recent earnings reports.”
Retailers in Expansion Mode Fill the Gaps from Closures
These shifts in consumer spending are more than just retail trends—they’re signals that could impact CRE in several ways. As discount retailers continue to outperform expectations, their real estate strategies could shift towards acquiring or leasing larger spaces or expanding into new markets that are currently underserved due to other retailers shutting their doors.
TJ Maxx’s CEO and President Ernie Herrman discussed the company’s results for Q1 2024 (which ended May 4, 2024) and that he plans to expand the store’s footprint by at least 1,300 stores—a 25% increase in its store count— “over the long term.”
Location, Location, Location
The earnings data also suggests potential shifts in where retailers might focus their efforts. Discount retailers are likely to prioritize locations in suburban areas where consumer traffic remains strong, while high-end retailers might focus more on urban locations that cater to higher-income shoppers who are less affected by economic downturns.
For CRE developers, this means staying attuned to these shifting priorities. Properties that can adapt to these changing needs—such as flexible floor plans, mixed-use capabilities, and prime locations—will likely be in higher demand.
The ripple effects could be particularly pronounced in malls and shopping centers, especially those anchored by department stores like Macy’s. As these stores struggle, the future of malls that rely on them becomes uncertain. On the other hand, discount retailers and grocery chains could become key tenants in shopping centers, driving foot traffic and increasing occupancy rates.
Reading the Retail Tea Leaves
August delivered mostly solid retail earnings reports with a shift toward prudent, cost-conscious spending. This trend is important because it signals a growing divide between discount and higher-end retailers, which is meaningful for the near-term forecast in the retail sector. Demand for retail space will be stronger from brands like Nordstrom Rack, TJ Maxx, and Burlington, all of which are aggressively opening new storefronts. Five Below has been quickly expanding its network of stores, adding 205 locations last year, with plans to open an eyebrow-raising 3,500 stores by 2030. At the same time, weak retail earnings for big names like Macy’s, Dollar Tree, and Walgreens translate into closing unprofitable locations and freeing up available space in what could be promising retail locations. Although store closures by big name retailers make headlines, it’s important to remember that store openings outpaced store closures this year for the first time since 2016.
Discounters are impacting the earnings of other retailers like Macy’s, Kohl’s, and Dillard’s, all of which reported declining sales in the latest quarter. Greg Kaiser, director of strategic accounts at LightBox, attended ICSC’s Orlando conference last week and observed “a growing sense of excitement in the retail sector, fueled by optimism that rents are beginning to stabilize. Attendees were feeling hopeful that retail investment and leasing activity is poised to pick back up later this year and into 2025.”
For CRE investors, developers, and brokers, understanding these shifts is essential to making informed decisions. Whether it’s recognizing the potential for expansion in discount retail or anticipating vacancies in traditional department stores, staying ahead of these trends will be key to navigating the evolving retail environment.
Subscribe To Insights
Be the first to get the latest news, updates and insights from LightBox.
