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HFF Research Update for April 14, 2016: Retail Sales

Thursday, April 14, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

On this day in 1912, a very large British passenger vessel bound for America scraped an icy formation. Thought unsinkable from the time of its conception, completion and until shortly after midnight that fateful evening, the breaching of five compartments proved one too many. With lifeboats sufficient to carry only half the passengers and none of the crew, more than 1,500 people died, making it one of the largest peacetime maritime catastrophes in modern time.

They say history doesn’t repeat itself, it merely rhymes. Unsinkable ships descend to the depths of the ocean. Unbreakable objects whither into dust. Incidents of “Titanic” proportion can still surprise us. Conventional wisdom can be challenged.

Analysis of National Retail Sales and Economic Indicators

Before making an abrupt transition, let’s review the algebra of GDP because it’s so much fun.

GDP = C + I + G + (X – M)

A key tenant in my argument for optimism has been the American consumer (C). After all, corporate investment (I) has been significantly undermined by contraction in capital expenditure within the energy sector, and exports (E) are being undermined by imports (M) due to a strong USD. It is for this reason I have paid close attention to consumer sentiment in periods of market volatility. For the attentive, government spending (G) is the last part of the equation.

So it is with caution that I share Morgan Stanley’s analysis of March's disappointing retail sales, which were released yesterday – the results are far from titanic but definitely challenging convention.

“Weakness in March retail sales was offset by upward revisions to February and January to marginally boost the outlook for Q1 consumption, but the trajectory into Q2 is now significantly weaker,” Morgan Stanley reported.

The drop off was driven by a decline in auto sales, which Goldman Sachs is attributing to an exhaustion of pent-up demand leftover from the global financial crisis. Gas sales rose 0.9 percent, which is sufficient enough to offset the aforementioned decline in energy sector capex. But people are investing in their largest assets, with a 1.4 percent gain in home improvement store sales.

“We need to let the data play out and see if the weakness that we saw in fourth-quarter GDP and first-quarter GDP are an aberration or a trend,” Philadelphia Fed President Patrick Harker said Tuesday. Harker said it’s still possible the Fed could raise rates three times this year, though many of his colleagues expect only two. The Fed meets in less than two weeks’ time.

As we have said in the recent past: Mind the consumer, they can turn the tide. There is still reason to be optimistic, but we must be mindful of risks to an otherwise promising outlook.

Investors didn’t take the news too hard on Wednesday with the yield on the 10-year UST finishing the day at 1.76 percent. Up two bps as of this writing.


About Jimmy Hinton


HFF Jimmy HintonMr. Hinton serves as Managing Director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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