Leading Indicators: Is the retail rebound underway?

Around the world, savers look ready to unleash some serious pent-up spending power – good news in the world of retail. But structural and behavioural changes that have long dogged the sector are unlikely to go away as the pandemic recession eases. 

The economic re-opening underway in many parts of the world is easing some of the pressure on the beleaguered retail sector. This is particularly true of physical retail space, as an acceleration in consumer spending begins to drive the macro recovery. One result has been a flurry of somewhat more positive news headlines about the outlook for the sector. Some commentators have gone so far as to suggest that we are about to enjoy a rerun of the “roaring twenties” – a reference to the free-spending hedonism that followed the Spanish flu epidemic of 1918-19. Driving this shift in tone is the fact that households (in aggregate) have significantly added to the value of their assets over the past year or so. Many are now beginning to let go, running these balances down as confidence gradually returns.

Estimates by the credit ratings agency Moody’s suggest global excess savings during the height of the pandemic period amounted to around US$5.5trillion, or 6% of global GDP. Inevitably this is heavily concentrated in certain economies, with the US leading the way. There, excess savings are estimated to be in the region of US$2.6 trillion or 12% of national GDP. For the UK, second in the pecking order, the equivalent figure is closer to 10% of GDP. Only slightly lower numbers are estimated for Canada (9.5%) and Spain (just over 8%). 

Such potential firepower is unprecedented in scale. The IMF’s latest World Economic Outlook Update paints a broadly positive picture, projecting global growth of 6% for this year and 4.9% for 2022. However, the authors note that a quicker than expected unwinding of COVID-19 savings has the potential to provide a further upside tilt to this already encouraging outlook.

But, before getting too carried away with the good news, I would point to two reasons for some level of caution. First, the distribution of wealth gains has been predictably skewed. In the US, it has been suggested that 80% of the benefit has been accrued by the top 20% of households. A remarkable 42% has gone to the top 1%. Given what we know about marginal propensities to consume, this might mean that the impact on spending will be less marked than had savings been more evenly distributed. It should also provide a few clues as to how that spending might be directed.

Second, recent developments in both Australia and New Zealand emphasise that a straight-line trajectory for recovery shouldn’t be taken for granted. Consumer confidence may be on the mend but there is a degree of fragility about the improvement. While more lockdowns in those countries with high levels of vaccine coverage seem unlikely, the reintroduction of some restrictions remains possible as new strains of the virus develop. It is noteworthy that Oxford Economics, generally upbeat in their forecasting through the pandemic, scaled back growth expectations for this year in their August global report. The quick global spread of the Delta variant seems to be sowing new seeds of doubt.

How this will play out with respect to demand for retail space over the next few years remains to be seen. There is little expectation that the pandemic-inspired boost to e-commerce will be reversed. A recent report from Insider Intelligence suggests that the share of retail sales completed via digital transactions will continue to rise. Last year, digital made up 18% of the whole, up from 14% in 2019. That figure is expected to reach 22% by 2024. This trend has prompted the investment bank Morgan Stanley to conclude that: ‘the new normal for mall rents post-COVID will be lower than before.

Against this backdrop, it is worth reflecting on some of the feedback provided by respondents to the 2021 Q2 RICS Global Commercial Property Monitor (GCPM). The first thing to note is that overall sentiment was somewhat less gloomy than in previous surveys. The headline retail occupier demand indicator recorded a negative net balance reading of -28% for the quarter – the least negative number since the fourth quarter of 2019. Meanwhile the investor enquiries metric showed a broadly similar picture with the latest result coming in at -26% as compared to an all-time low of -73%.

However, these aggregated results masked significantly divergent patterns at a more localised level. For example, in the US, the occupier demand indicator rebounded from -98% to -11%. Meanwhile, in Germany and France the respective results for Q2 were somewhat less encouraging at -59% and -61%. These numbers are consistent with a further material drop in appetites for space among retail occupiers. China was one of the few countries to actually see a positive reading over the period, albeit only marginally so at +2%.

Looking forward, there does appear to be some sense from the GCPM that investors can visualise opportunities emerging particularly around some prime sites. The global headline projection for retail capital values over the next twelve months is now pretty flat for better-quality space and, significantly, only marginally negative for rents at the higher-end. This is a far cry from what we were being told at the height of the pandemic. But the divergence between prime and secondary is stark. When it comes to the less sought-after sites, there is a good deal more caution. Prices are still projected to decline on average by a further 4%, while rent projections are down by 5%. And, inevitably, rather larger falls are still anticipated in some markets. We are, for example, being told, rightly or wrongly, that rents in many European markets may continue to decline – perhaps by as much as 10% over the coming year.

This is, if nothing else, a timely reminder that while a retail recovery may be coming, it will not mean a return to the pre-pandemic norm. As a result, the retail estate of the future will look rather different to how it did previously.