Is Consumer Sentiment Important for CRE?

Do consumer sentiment and confidence matter for commercial real estate?

Do consumer sentiment and confidence—two separate reports by the University of Michigan and the Conference Board, respectively—matter for commercial real estate? The month-by-month trends, maybe not. Those tend to be affected by short-term economic news (often bad, or at least unnerving) that doesn’t really represent a serious setback for the economy or consumers. For instance, consumer optimism declined in early February, according to the University of Michigan’s preliminary sentiment report, which was released on Friday. The prelim report, which includes about 60 percent of total survey results, comes out around mid-month, with the final report coming out around the end of the month.

At 93.6, the U of M mid-February reading, while down from January’s 98.1, is back to December levels, and roughly as high as before the beginning of the recession in December 2007. Transient factors seem to be responsible for the February dip. The decline was more pronounced among residents of the Midwest and Northeast, who had to deal with various winter storms, while residents of the South expressed modest increases in optimism. Low gas prices have helped buoy household spirits in recent months, but now consumers expect that prices will rise a bit, as in fact they’ve already started to. But in terms of the bigger picture, that kind of gyration isn’t especially important.

The index gives investors an idea of how likely consumers are to spend money, which is directly important to retail property owners and indirectly to industrial space owners. Any particular semi-monthly movement’s going to be noise, unless it’s a reaction to a genuine crisis, such as the vast drop in only a few months in 2009. But longer-term trends in the index are more informative, and in that regard, things are really looking up now: good news for retailers and their landlords. The steep drop inspired by the recession—down into the 50s and only slowly rising into the 70s and 80s in recent years—has been recovered.

Moreover, the current level of optimism is roughly back to where it was during the more optimistic times in the U.S. economy in the last 40 years. That is, the mid- to late 1980s and the mid- to late 1990s. Of course, consumer sentiment’s only one metric, but it’s a still a hopeful indication that the late 2010s just might again be a period of growth, especially the kind of growth that benefits ordinary Americans (and fans of a stable social ordinary ought to have their fingers crossed that that’s the case). Sustained consumer sentiment both reflects better times in people’s economic circumstances, and helps inspire the spending that keeps times better: a virtuous circle for the economy, rather than the vicious one we’ve been experiencing lately, with the added bonus of benefiting retail properties.