This year got off to an interesting start, considering it ushered in the longest government shutdown in U.S. history. The 35-day shutdown — spanning from Dec. 21, 2018, to Jan. 25, 2019 — caused The Conference Board’s U.S. Consumer Confidence Index to fall from 136.4 points in November 2018 to 128.1 in December 2018. This 8.3-point drop represented the largest single-month dip since July 2015. The index fell another 6.4 points to land at 121.7 in January.
In February, the index rebounded, rising to 131.4 and approaching its 18-year high of 137.9 — which it achieved in October 2018 — before dipping back down to 124.1 as The Conference Board announced on March 26.
The Health of Wealth
Richard Chichester, president and CEO of real estate investment advisory firm Faris Lee, believes that consumer confidence will remain healthy and optimistic for the remainder of the year.
“Consumer confidence is critically important from the standpoint that consumer spending represents approximately 70 percent of the U.S. economy,” he notes. “If the consumer is feeling confident in the economy and confident in their own position within the economy, they’re going to be more willing and compelled to spend. We rebounded quickly after the shutdown and I expect that consumer confidence is going to stay at historic levels throughout the balance of the year.”
In addition to studying relevant indexes, Chichester considers many other factors when evaluating the potential in any retail investment market. Obvious factors include housing prices — which have hit highs in many markets across the U.S. — and the stock market. He notes that the S&P 500 is only about 4 percent behind its record high of 2,930.75 from late September 2018.
Then, there’s the behavioral economic theory known as the wealth effect.
“There is a psychological effect associated with rising asset values,” Chichester explains. “If consumers are invested in the stock market and the market continues to go up — even if they haven’t monetized their investment — they feel like they have more. If the housing market goes up — even if they haven’t pulled any money out of their house — they feel like they have more wealth.”
The wealth effect is one of three additional factors Chichester and his team monitor to determine just how loose or tight the nation’s purse strings may get in the near future.
“There are other psychological telltales regarding how people think about the economy and their position in it,” he continues. “The other two are income and opportunities. Do consumers feel confident with regard to their income and about their employment opportunities going forward? Do they feel a level of satisfaction and confidence that, going forward, their income and wealth will remain the same or expand?”
The newly constructed 3,593-square-foot DogHaus Restaurant & Brewery property is located in downtown Vista, California. The property sold for $1.55 million, or a 4.78 percent cap rate.
The answers to these questions help Chichester determine whether the retail investment pendulum is swinging closer to necessity-based consumption trends, such as grocery-anchored centers and discount retailers, or toward service- and convenience-based wants, such as luxury gym memberships or Instagrammable cocktails at the newest dining hotspot.
Want vs. Need
Chichester is quick to point out that the spectrum of purchases ranging from necessity-based “needs” to experience and convenience-based “wants” has not changed, but he notes that the manner and mechanism of purchase have changed. The rise of today’s technologies has certainly influenced the manner of purchase: in-store, online, home delivery, curbside pickup, locker drop-off, etc. Meanwhile, technology is key to the mechanism of purchase: standard point-of-sale system, smartphone, tablet, laptop, cashier-less checkout, etc.
Like many retail real estate experts, Chichester believes the omnichannel approach will likely lead to a continued increase in online sales and retailers redesigning and expanding their cross-channel capabilities and offerings.
“Omnichannel provides a convenient and often lower-cost option of shopping,” he explains. “This is not just absolute lower cost by dollar, but in terms of time and transportation costs associated with going to a physical store. If consumer confidence moderates at all, you’ll see e-commerce expand for those reasons. As consumer confidence maintains historic levels, however, e-commerce shopping simply means there’s more disposable income and that the consumer is likely to use that income for cross-channel shopping, including in-store.”
For these reasons, Chichester doesn’t view e-commerce as a threat to bricks and mortar — as long as retailers utilize all their channels to extend their consumer touchpoints.
For example, Chichester notes, “Walmart announced a 43 percent increase in e-commerce sales in 2018. The retailer expects 35 percent of its revenue to come from e-commerce. But the customer can order online and come to the store for pickup. When retailers can get the customer in the store, they have a very high probability of converting additional sales, in addition to the item purchased online.”
Potential Concerns
Though Chichester is confident consumers will continue to spend at a healthy rate, he does see some headwinds.
“Asset pricing for the stock market and housing have been inflated through the Fed’s role in both monetary and fiscal policy — accommodative easing and stimulus,” he says. “Housing has begun to show signs that it’s not appreciating at the rate it has been in the past. If housing appreciation rates decline, it will put some pressure on spending.”
Aside from the shutdown, the political turmoil in Washington and abroad also causes some concern. “The biggest challenge impacting consumer spending is not the economy,” Chichester continues. “It’s the current state of affairs in the political environment. It’s the trade war with China. The global economy is very fragile even though the U.S. economy is very stable. There’s Brexit, there’s Japan and the uncertainty with Venezuela. If those economies are substantially negative, it will create some concern for the U.S. economy and for consumers.”
Still, when push comes to shove, Chichester believes the consumer will continue to reign confident through at least 2019. “In general, consumers are still giving a positive forward look as to what they think the market will do in the near term,” he says.
— By Nellie Day. This article was written in conjunction with Irvine, Calif.-headquartered Faris Lee Investments, a content partner of Shopping Center Business. For more articles from Faris Lee, click here.
Editor’s note: The Conference Board’s Consumer Confidence Index (1985=100) is based on a probability-design, random sample survey conducted by Nielsen for The Conference Board.