New Business Openings Currently Outpacing Closings
With increased business openings and projected pick-up in economic output, demand for commercial spaces is expected to continue on an upward trajectory. Positive net absorption will likely continue adding downward pressure on vacancies, leading to improved cash flows.
Economic Output Advances
Economic activity started on a moderate pace early in 2017. Gross domestic product advanced during the first quarter of 2017, with a 1.2 percent annual increase, based on the second estimate of real gross domestic product (GDP) from the Bureau of Economic Analysis (BEA). While the second estimate was an improvement over the initial 0.7 percent, it was far below the average 3.4 percent typical of first-quarter GDP growth over the 1950-16 period. However, the second quarter GDP is expected to show improvement, with a yearly gain above 3.0 percent.
The first quarter moderation in economic activity came mostly from a pullback in consumer spending and, to a smaller extent, a decline in government expenditures. Consumer spending—the main component of GDP—was positive, with a 0.6 percent annual gain during the quarter. While consumers cut back on purchases of cars, clothes, shoes, as well as gasoline, oil, and energy goods, they upped spending on furniture and household appliances, recreational goods and vehicles, and grocery store items. Spending on services rose 0.8 percent on an annual basis, with recreation, transportation, and financial services leading the modest gains.
The corporate outlook—still riding the tidal wave of the presidential election outcome and the promise of less regulation—mirrored gains in the private domestic investment figures. Nonresidential fixed investment increased at a 9.4 percent annual rate, the strongest quarterly gain since the fourth quarter of 2013. Companies boosted investments in equipment and intellectual property products. Investments in commercial real estate jumped at a 22.1 percent annual rate, while investments in residential real estate rose at a 13.7 percent rate.
Payroll employment advanced in the first quarter of 2017, with a net gain of 527,000 new jobs, according to the Bureau of Labor Statistics (BLS). Private service-providing industries continued as the growth engine during the quarter, with 341,000 net new jobs.
In the wake of employment gains, consumer confidence strengthened. The Conference Board’s Consumer Confidence index advanced 22.4 percent YoY, to 117.5, the highest value since the fourth quarter of 2000. The value for April 2017 was 120.3, indicating growing optimism about the 2017 outlook.
Small Business Creation Follows Economic Shifts Mirroring broader economic activity, business creation moderated toward the midpoint of the year. The Business Creation Index (BCI) tracks changes in small business activity. The index stems from a national survey of REALTORS® who specialize in commercial real estate, and who are actively engaged in their economies and markets. The index focuses on changes in business openings, closings, and the net effect between the two, across geographies and industries.
Based on the BCI data, 53 percent of respondents recorded increased business openings in June 2017. The pace was a slowdown from March, when 58% of respondents indicated increased business openings. The rate of business openings was flat however, across the two quarters, with 54 percent of surveyed REALTORS® indicating increases.
The distribution of openings by industry corresponded with the warming seasons and consumer spending patterns. Food and beverages services led the list of industries with the highest share of new businesses, at 61 percent. REALTORS® reported 58 percent more openings in the retail sector, with health care (medical and dental) posting a 40 percent advance in openings.
Regionally, the Central part of the United States witnessed the strongest rates of business creation. The West North Central, comprising Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota, posted a 66 percent increase in new companies, followed by the East South Central region—Alabama, Kentucky, Mississippi and Tennessee—with a 60 percent gain in new firms.
The good news in the index came from the net difference between business openings and closings. During the second quarter, 54 percent of REALTORS® responding to the BCI survey indicated more companies opening than closing, a slight improvement from the first quarter’s 53 percent.
For more details, read the June 2017 Business Creation Index report.