In June, retail sales rose 14.3% year over year. And after a brutal 2020, that was a welcome dose of good news. Many retailers saw their revenue take a major hit when the pandemic first struck. And that, in turn, led to a host of negative events that rattled real estate investors -- sluggish earnings, widespread store closures, and bankruptcy filings.
But unfortunately, July's retail sales numbers did not look good. And now, real estate investors may need to face the harsh reality that store closures could be back on the table.
Poor numbers could tug at investors' nerves
In July, retail sales dropped by 1.1%, adjusted for seasonal swings, according to the Census Bureau. That's a steeper decline than the 0.3% drop economists were predicting. That decline is also coming at the same time a University of Michigan survey showed a dip in consumer sentiment, which is down to its lowest level since December 2011.
Why didn't retailers fare better in July? The delta variant could be a big factor.
In June, things seemed to have turned a corner with the pandemic. Case numbers were down, vaccination rates were up, and it appeared as though the COVID-19 outbreak was finally starting to get under control.
But in July, the more transmissible delta variant took hold, which upended a lot of plans. Many companies pulled the plug on near-term returns to the office. Travelers canceled their itineraries due to COVID-related concerns. And so it's not inconceivable that consumers may have opted to spend more conservatively in light of the uptick in COVID cases, especially given the potential for more jobs to be shed in the wake of new restrictions.
Interestingly, sales at online retailers declined 3.1% in July. Many shoppers turned to digital orders at the height of the pandemic, when the idea of entering a store seemed more daunting. And so it's surprising that e-commerce orders ticked downward. (However, some of this is due to sales evening after Amazon's June Prime Day.)
How worried should real estate investors be?
If retail sales continue to lag in the coming months, it could lead to store closures. And that's the one thing real estate investors don't want.
Right now, shopping center and mall operators are grappling with enough vacancies that they don't need any more. And when clusters of stores close within the same neighborhood, it can bring down property values -- both commercial and residential.
Now the good news is that while retail sales declined in July, so did the national jobless rate. And if unemployment continues to drop, it may give consumers the confidence they need to keep spending and pumping money into the retailers who need it.
It's premature for real estate investors to panic over a single month of lackluster sales. But we'll need to keep tracking that data in the months to come. So will commercial landlords, because if store closures become more likely, those landlords may need to get creative to avoid having their own revenue take a major hit.