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Retail Expansion Potential at 18-Year High

Retail Expansion Potential at 18-Year High

Marcus & Millichap Real Estate Investor Services produced its National Retail Outlook for the third quarter and one chart in particular jumped out at me--something called the Retail Expansion Potential Index.

retailexpansionpotential

That's a straight shot up from the fourth quarter of 2008 to today. In fact, the index is showing its highest reading in 18 years.

So what exactly is the Retail Expansion Potential Index? According to the M&M report:

The National Retail Expansion Potential Index, which compares retail sales less autos, gasoline and items not sold in stores to retail property stock and effective rent, reached its highest level in 18 years in the second quarter. Driven by a modest recovery in sales of store items and a decline in the national effective rent for the ninth consecutive quarter, the rise in the index during the period indicates new-store openings could represent a high-return strategy for retailers.

The report does hedge its bets, however, by also saying that "retailers will lack the confidence to expand aggressively until the economy improves in a more convincing manner."

In other words, some conditions make it a great time for retailers to expand and the index is signaling a bright green light. But the macroeconomic risks that remain will prevent retailers from becoming too aggressive in the short term. It could make for pent-up demand from retailers if they go slow. But the overall message is that at some point we should see major expansion by retailers.

So what do you make of the index? Does that analysis hold water? Is the U.S. retail market truly poised for a big run of expansion?

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