Weak volumes vs strong economy

Retail outperforms other sectors but unable to avoid slow down completely

Preliminary transaction volumes for the third quarter show year-over-year declines across all property sectors. Despite the unanimous drop in activity, multi-tenant retail significantly outperformed relative to the rest of the market with volumes only falling roughly -9.6% over the same period last year. Contrast that to the average decline of -31% across the other major property types. However, not all retail faired equally, single-tenant or freestanding retail saw a -24% decline in transaction volume. Office and industrial suffered the most in Q3, with overall volumes decreasing by -39% and -36%, respectively. 

Perhaps more visible was the immediate impact the rate hikes and market volatility had on retail debt transactions. Early estimates of retail refinancing volumes showed roughly $5.8 billion in total volume for the third quarter, marking the lowest level since 2011. The drop in refinancing activity was primarily driven by the large banks, life insurance companies and CMBS lenders stepping back from commercial real estate. However, it’s unlikely that these levels of activity will be sustainable as roughly $22 billion worth of retail commercial mortgages will be maturing over the next 12 months, over half of which is tied to malls. 

YoY Change in Transaction Volumes
 

The future of the US economy is everything but certain

Over the past two weeks, US strip center investors have found themselves in an unusual position. One in which the US labor market has posted net job gains, retail sales have held steady, and supply chain pressures have continued to ease. Under normal conditions, these metrics would be reason for optimism but in the current inflationary market they all but guarantee more hawkish policy from the Fed. While investors remain nervous about the rising cost of capital, it appears that there has been a minor reversal in consumer sentiment. The University of Michigan reported a “2% increase in the index of consumer sentiment, despite a 23% improvement in current buying conditions for durable goods”. The improvement in buying conditions was primarily driven by an easing of supply chain pressures, evidenced by the average cost of freight declining by nearly 30% month-over-month on a per container basis.

Interestingly, lower-income consumers reported higher levels of confidence in the state of the economy than their higher-income counterparts for the first time in the 25 years that The University of Michigan has been releasing the consumer sentiment report. Combined with the fact that US companies have started onshoring supply chains and manufacturing facilities, the future of the US economy may be not too bad after all… depending on who you ask.

Unemployment rate vs consumer sentiment