Moody’s Analytics forecasts total non-farm employment to rise by
nearly 8% between 2012 and 2017.
Despite their general reluctance to expand in the US, Vitou
adds, demand from luxury and fashion retailers is high on Union
Square. What makes the Union Square area so hot, among other
things, is international tourism, which is doing well and expected
to rise. San Francisco International Airport expects passenger air
travel to rise consistently over the next five years and leisure and
hospitality services in 2013 will be bolstered by the hosting of the
America’s Cup races, according to Moody’s Analytics.
Overall, reports and forecasts suggest that the San Francisco and
Silicon Valley areas of California may be bright spots in retail
despite what happens elsewhere. Craig Killman, SVP of JLL, notes
that given the increasing levels of venture capital investment in the
high tech community from San Francisco to Silicon Valley,
“Consumer confidence in those markets is on the rise, tenant per-
formance is following suit and vacancy factors are virtually nonexis-
tent in ‘A’ properties.” He points out that “the Bay Area’s retail
market is very healthy and while there are many barriers to entry,
there are several mixed-use projects planned in infill locations in
primary trade areas, which will relieve some of the pressure for
retailers demanding space in this dynamic market.”
According to the firm’s outlook for tenants, retailers are focus-
ing their expansions on the periphery of the CBD as well as in sur-
rounding residential areas. In addition, the firm points out the
there will be a booming rent recovery—a product of low vacancy
rates and lower construction. “Rent growth should be highest from
2013 to 2015, then start to decelerate as more space is delivered.”
Top-tier markets like San Francisco and the Silicon Valley often
buck the general trends within an industry, however, so a big ques-
tion that remains is how the overall national retail market will fare.
Despite the importance of consumer confidence in the scheme of
things, the outlook for the industry also depends on some hard facts
about the incomes of US workers. For example, Layne of Stan
Johnson Co. points out that the dollar has lost 10% of its value in
four years and the average middle class worker’s take-home pay has
declined by more than $4,000 since 2000. At the same time, the costs
of goods at the supermarket have increased dramatically. The price
of milk, for example, is up 23% in a year in California, and gasoline
prices have climbed exponentially over that time. The Federal
Reserve doesn’t include food and energy prices in “core inflation,”
but Layne points out their importance to the average consumer:
“People feel the real effects of inflation in their pocketbook.”
It feels like
consumers are
very cautiously
optimistic and
would like to see
government trim spending vs.
additional tax hikes that hit
them in the wallet.”
Before we
see renewed
confidence and
increases in
spending,
consumers will need to feel
stable on two fronts: their job
prospects and income.”
GREG MALONEY, Jones Lang LaSalle Retail
Some of the other factors that might seem at first glance to bode
well for the retail market are not the sure-fire signs of improvement
that they might seem to be, according to Layne. For example, he
points out that the coupling of a rising stock market and rising
home values has created a perceived ‘inflated wealth’ phenomenon much like the perceived wealth increase of 2005–2007, when
many Americans felt that they had more wealth than they actually
did, thanks to inflated home values. The perception of wealth
boosted consumer confidence because it led Americans to feel
confident in spending more, but the subsequent crash wiped out
that wealth and dashed consumers’ confidence. Layne says that
jobs numbers reflect accurately what is going on in America: a
shrinking work force, fewer quality jobs and insecurity about one’s
job. He adds that a recent Reuters poll showed 40% of workers are
worried that their jobs may be eliminated or scaled back.
“We have small businesses, the core of our employment base,
who are not hiring due to costs related to Obamacare and other
regulatory measures that have a direct impact on job creation,”
Layne says. “Regulatory measures are also directly affecting the bot-
tom line for these businesses.”
Small business is either reducing headcount, cutting hours or
simply not hiring due to uncertainty and these burdensome regula-
tions, Layne notes. “The jobs reports are abysmal if one actually
looks at what is occurring in our country,” he says. “Most hiring is
being done at low-wage positions.”
Media and government reports that focus solely on the unem-
ployment rate only tell part of the story, Layne says. Such reports
fail to point out that the labor force is at its lowest point since 1979
and low-wage positions are mostly what make up the positive
employment numbers. For instance, while recent reports said that
88,000 jobs were created in March, those reports failed to mention
that 496,000 workers either dropped out of the labor force or
stopped looking for work. Consumer spending is up, but Layne
says that, ironically, it has less to do with an improving job market
or higher wages and more to do with the “inflated wealth” phe-
nomenon he describes.
These analyses by Layne and others suggest that, ultimately, how
the retail market will fare will depend on whether consumer spending continues to rise. The likelihood of that hinges on whether
consumers’ confidence is founded on fundamentals or based on
unwarranted optimism, as well as the effects of government policies on those fundamentals. ◆
