Job growth and household formation powering U.S. retail

Driven by consistent job gains and the lowest unemployment rate since the early 2000s, retail sales remain on an upward trajectory, according to Marcus & Millichap. Job growth remains steady, with gains averaging 174,000 positions per month over the past year. As a result, the unemployment rate fell to 4.4 percent, the lowest level since 2001.

The steady recovery in the labor market has been dominated by advancement in office-using sectors, which combined for more than 734,000 new jobs over the last year, representing the strongest overall sector in the economy.

As a result, household formation has expanded 1.5 million this year creating demand for a broad array of retail products, particularly in the durable goods sector. The momentum has also spilled over into building supplies retailers as the new households remodel existing single-family homes amid a shortage of new construction.

Core retail sales advanced 3.3 percent year over year in July as well, highlighting the strength of consumers. The leading growth categories include e-commerce, building materials and garden supplies, and furniture and home furnishings.

In addition, retail sales, especially necessity stores like drug stores, continue to rise, aligned with the growing number of households across America. The potential for single-tenant assets’ revenue to increase is additionally supported by limited amount of construction of competing properties. Though potential regulatory and tax code changes are raising questions among some investors, buyers are still competitive for assets like these, particularly as stable rates support continued investment in net-lease properties.

As for new construction, net-leased development remains the key driver of overall retail construction, accounting for more than 46 million square feet of the 60.4 million square feet delivered over the past year.

Looking forward to the remainder of 2017, extremely low unemployment will begin to feed into greater gains in average hourly earnings, which rose 2.5 percent in August. Increases in spending power will likely be deployed as the savings rate has shrunk over the past few years, reflecting growing confidence among consumers.