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PANEL: GAS PRICES, INFLATION WON’T HURT RETAIL

BY STEVE McLINDEN

Escalating gas prices, anticipation of rising interest rates, inflation pressures — none are enough to slacken U.S. retail momentum. At least, that is the consensus of a number of financial experts who addressed the Spring Convention’s “Capital Markets Perspective in Retail Real Estate” session.

“The U.S. economy really kicked into high growth as of summer of last year,” said Michael P. Niemira, ICSC’s chief economist and director of research. “If history is a guide, we have at least two more [such] quarters ahead of us in the business cycle.”

Sustained retail confidence is evident in retail inventory, which is at its highest point since 1983–’84, and vigorous consumer spending, Niemira said. But the consumer price index is climbing, particularly the Northeast, he added.

Further, the financial markets have been reflecting concern over rising gasoline prices, Niemira said. But he noted that while the spring gas-price increases have added between $7 and $10 a week to the typical consumer budget, average weekly earnings have risen too, about $13 since last year.

“Unfortunately, we are seeing other worries,” Niemira said. “Food prices are also up.” Historically, the costs of gas and food have maintained an inverse relationship, he noted. “When food prices have gone up, gas prices have gone down and vice versa. But [now] both are rising … We are not only worrying about inflation, we are seeing it.”

REITs, meanwhile, took some second-quarter lumps along with the overall securities markets; the composite REIT index fell 15 percent in April and about 18 percent in May, noted Martin J. Cicco, a managing director at New York City–based Merrill Lynch & Co. and an ICSC trustee. Although that’s cause for concern, “the REIT business is not a very big marketplace” compared to the overall market cap of the real estate investment market.

“The great debate out there is when interest rates are going to move and what that’s going to do to the market,” said Cicco.

Ten-year government notes are likely to jump to 5.5 percent sometime this summer, said Niemira.

Private fund flows into real estate are still “extremely high,” noted Charles Grossman, a managing director at ING Clarion Partners. There is a “phenomenal proliferation” of mezzanine money, said Cicco, who has seen “a lot more product rumored to be coming to the marketplace, but that [will be] somewhat contingent on what happens on 10-year Treasuries … [W]e’re at an inflection point. There is a lot of money out there ready to be put to work.”

Cap rates are rising too, said Grossman. But “I don’t think we will see anything soon like the type of cap rates we grew up with,” he speculated. “Even if the cap rates go up, the [property] income will offset it. … [T]he Leasing Mall was packed.”

Niemira said he has yet to see signs the U.S. economy will slow as a result of the various inflation and interest rate pressures. “We may have a good Christmas and some surprises on the positive side.”