Will Waning Consumer Confidence Rain On The Retail Parade?

Nearly across the board, retail landlords celebrated strong earnings to start the year. In calls with investors, executives projected confidence, despite economic fears that spending may soon drop.

Retail vacancy is at an all-time low, clocking in at 4.1% in the first quarter, according to CoStar. Shopping center owners are reveling in the moment — especially since the pandemic caused so many retailers to close up shop just a few years earlier. 

For Kimco Realty, one of the nation's largest owners of open-air shopping centers, occupancy is 96%, just below its all-time high of 96.4%. And the company plans to push it even higher. 

“I wouldn't say there's any slowdown in the deal velocity nor the interest in space. We're actually seeing interest in space in some of our longer-term vacancies now, which is really interesting to see,” CEO Conor Flynn said on the company’s earnings call last week. “The continued conversation that we have with the retailers [is] about where does the next set of inventory come from? They're continuing to try to find their opportunities to hit their market-share targets, their store-opening targets.”

The company’s funds from operations, a measure of REITs' cash flow, reached $261.8M, up from $238.1M during the same time last year, despite $25.2M in charges related to Kimco’s merger with RPT Realty.

The company signed 583 leases in the first quarter totaling 4M SF. Flynn attributed the leasing growth to “the small-shop momentum.” But inflation, along with dwindling savings for consumers, could forecast clouds on the horizon. 

“When they compare it to a year ago and two years ago, of course, everything does look better. Because we were coming out of a pandemic where nobody went to stores or restaurants,” retail consultant Kate Newlin said. “You can't look at quarterly reports. You have to look at consumer needs and desires.”

The Conference Board’s Consumer Confidence Index deteriorated for the third consecutive month in April, indicating pessimism surrounding future business conditions. The organization’s Employment Trends Index has also been ​​on a downward trajectory since its peak in March 2022, signaling job losses in the second half of the year.

Consumer spending, encouraged by stimulus checks and low interest rates, uplifted the economy through the past few years. However, pandemic-related excess savings were largely depleted by the first quarter of last year, according to research by the Federal Reserve.

Meanwhile, credit card debt has increased. Even when adjusted for inflation, the average household’s balance has steadily risen from a low of $8,763 in the first quarter of 2021 to $10,848 in Q4 2023, according to WalletHub data.

Businesses have begun to experience the impacts. More than half of small businesses cite inflation as a threat to their business, and 29% say that revenue is their biggest challenge, the highest proportion since 2021, according to a survey by the U.S. Chamber of Commerce.

Simon Property Group CEO David Simon was among the few retail REIT executives to acknowledge the potential spending shift on a call with investors.

“We are not immune to the macro environment. If it ultimately led to less consumer spending and more retail client stress, we're not immune to it,” Simon said. “Frankly, it's realistic to assume we may go through a reasonable slowdown here coming up.”

The note of caution came despite the company’s FFO reaching $1.3B, up from $1B the prior year. Simon’s net income was boosted to $303.9M, primarily due to the company selling its remaining ownership interest in Authentic Brands Group. 

Meanwhile, Simon’s strip mall peers seemed less vigilant. 

Regency Centers’ FFO for the quarter was $200M, up from $186.5M during the same period in 2023. The company executed 1.8M SF of new and renewal leases, with another 1.4M SF under letters of intent or in negotiation, according to the company’s latest earnings report. 

Regency Chief Operating Officer Alan Roth said the company is making “long-term decisions” for its assets. In the last quarter, the shopping center owner moved three office supply stores out of its portfolio, given the office market. It filled the spaces with Sprouts, HomeSense and a Baptist Health facility.

“I think it’s a really good example of how we look at enhancing the merchandising, providing durability to our occupancy through better tenant credit and getting significant rent growth,” Roth said. 

Brixmor Property Group interim CEO and President Brian Finnegan said the company backfilled an expiring Big Lots with an Aldi at a 50% rent hike at one open-air shopping center. He added that shopping centers have been swapping out McDonald’s for healthier options like Sweetgreen and Cava, as well as adding higher-quality gyms.

“Whether it's Ozempic or something else, what we are seeing is that people are much more focused on their health and their well-being, and we're seeing that come through in the deals that we sign in our centers,” Finnegan said.

Brixmor’s FFO was $163.4M, up from $151.6M year-over-year.

Other developers upgraded their shopping centers with beauty, health and wellness tenants. Federal Realty Investment Trust Executive Vice President Wendy Seher highlighted a “tremendous amount of activity” from tenants in the sector.

The retail REIT's FFO rose to $136.7M in Q1 from $130.3M during the same period last year after experiencing record leasing levels.

Retail landlords have flexed leases with Sephora and Ulta Beauty, sales of which have both skyrocketed over the past three years. Ulta’s annual revenue surpassed $10B for the first time in 2022, and Sephora celebrated the same milestone a year later.

However, comments from Ulta CEO Dave Kimbell at an investor conference caused shares of the retailer, along with other beauty companies like e.l.f. Beauty, Coty and Estée Lauder, to fall last month, The Wall Street Journal reported. 

“Things that are going on in our consumers’ lives has led to a bit slower growth than we had anticipated in the category,” Kimbell said, referring to makeup, perfumes and skincare items.

An economic theory called the “lipstick index” says increased spending on small luxury goods, like lipstick or perfume, in exchange for larger purchases, like hair or clothes, are among the first signals of a softening economy. A slowdown for those retailers could become problematic for retail as a whole.

Other brands have also become more cautious. PVH, which owns Calvin Klein and Tommy Hilfiger, forecasts overall revenue this year will fall 6% to 7% from 2023, based on softening consumer spending.

“If the consumer starts to feel constrained, they can run in the park, they can buy their own dumbbells,” Newlin said. “Go into anyone’s cabinet, and you’ll see they have too much beauty equipment, too many half-used bottles.

“That's the piece that [landlords] never take into account. There's a statute of limitations on the endless appeal of more.”