Despite six months of intense economic volatility, American consumers surprised economists by increasing their spending this spring. The Commerce Department reported that the value of consumer spending rose in April and May year-over-year instead of falling as predicted. Bloomberg attributed the upward trend to bigger-than-expected purchases in nine out of ten retail categories.
Christopher Rupkey, the chief economist at FWDBONDS in New York, told Reuters. “[R]ight now the economy is miles and miles away from the cliffs of recession.”
After years of saving during the pandemic, people are finally going on vacation and making big purchases. And that trend will continue this summer, which is good news for commercial real estate, specifically mixed-use and retail submarkets.
Here’s a closer look at why this summer will be the summer of sales and how property owners can benefit from the revival.
Why Consumer Spending Exceeded Predictions
After a challenging first quarter, most experts predicted that consumer spending would decline this past spring. A Bloomberg survey found that most economists believed Americans would hold on to their savings amid historic inflation and market volatility. But after years of living under pandemic restrictions, a case of spring fever hit the United States.
According to the Commerce Department, consumer spending on retail and food service sales hit an estimated $684.2 billion in April and $686.5 billion in May, annual increases of 1.23% and 1.6%, respectively. In addition to those slight increases, spending on clothes, restaurants, and healthcare products reached their highest level in months.
Americans reacted to warmer temperatures and fewer travel restrictions by vacationing, partying, and shopping.
The "spring economic rebound” saw increased business activity and factory production even though unemployment numbers remained high. As consumer spending represents two-thirds of America’s GDP, the upward trend suggests that commercial real estate is moving toward a recovery phase.
In addition, large mixed-use development projects are moving forward across the country. Steelwork began on a 14-story, 360-unit building in one of Philadelphia’s coolest neighborhoods in mid-May. Maryland’s Montgomery County hosts 32 active development projects, including a 102-unit complex delivering 4,351 square feet of commercial space.
That level of development activity isn’t indicative of a recession; it represents the start of economic recovery. In other words, the widespread predictions that the sky would fall were overblown.
However, for a return to growth to happen, the spring revival needs to continue through the third quarter, and there are indications that 2023 will be a summer of sales.
How New Car Purchases Will Drive the Summer of Sales
Economic forecasting is complicated, but American consumers love good deals regardless of external factors. Economists were caught off guard by a 2% year-over-year increase in car purchases because they predicted ongoing headwinds would prompt a decline. After all, gas station transactions fell by 10.1%, suggesting that the public became more frugal when refilling their gas tanks.
So, what accounts for the discrepancy between gasoline and vehicle sales? A greater appetite for next-generation cars.
Forbes reports that automobile purchases surged in May, climbing nearly 20 percent from the previous year. LMC Automotive and J.D. Power estimate that consumers bought around 1.3 million new cars last month. The data analysts determined that a 48% increase in supply supported the sales boom, with the average transaction price reaching a record $45,838. With the pandemic-era supply chain issues in the rearview, dealerships saw a lot of traffic this spring. And with Ford, America’s leading automaker, ramping up production of its most popular electric vehicle, that trend will continue this summer.
Because of the economic rebound, the nation’s sprawling car dealerships won’t sit idle this summer, especially as local leaders in affluent, driver-friendly regions like New York have taken steps to become more affordable and livable.
Rochester recently issued a $32 million grant to build a 76-unit mixed-income apartment building with a first floor with dedicated commercial and support services. Similarly, Tupper Lake granted $39 million to an adaptive reuse project to transform a former factory into a bustling 90-unit complex that will house health and wellness facilities, co-working space, self-storage facilities, and a brewery.
America’s wealthiest state invested serious time and money into attracting and retaining young professionals this spring by changing its infrastructure to suit the needs of young professionals. With the recession averted, New York is sending a clear message to young families and professionals this summer: drivers wanted. That message is good news for owners interested in launching new projects on the East Coast.
How Real Estate Owners Can Benefit From the Summer of Sales
The relationship between the economy and commercial real estate is clear; a strong economy is conducive to developing new projects. And right now, commercial real estate, especially the retail and mixed-use submarkets, are standing strong.
More capital is available, property values rise, and large development projects get the green light. During periods of economic recovery, real estate owners who aligned their holdings with the priorities of the American consumer culture have thrived. And those who rely on experts who create forecasts based on incorrect assumptions have not.
However, because real estate is a highly localized and fast-moving business, owners and owner’s representatives need better market intelligence to make the right decisions. Relying on the received wisdom of America’s economists doesn’t always lead to positive outcomes.
You and your team can make smarter purchasing, development, and leasing decisions with data-back insights into a challenging marketplace. Instead of being saddled with negative value assets, you can harness the power of proactive intelligence to take a deeper look into the factors impacting your portfolio and project planning.
That way, you can spend the summer soaking up the sun rather than worrying about all the money you left on the table.
Want more insights on how to navigate this cycle? Download our Maximizing Returns - A Real Estate Developer Recession Guide today.
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