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Retail Construction Outlook Remains Optimistic

May 1, 2007 12:00 PM, By Stefanie Kure, Senior Associate Editor

Despite dire predictions that retail construction would stumble in the wake of the lackluster U.S. residential housing market, McGraw Hill Construction, New York, reports that retail construction grew 1% in March — a welcome surprise for many electrical contractors across the United States. “The value of retail construction starts, which includes shopping centers, smaller stores, parking lots, and auto dealers, was up 6% last year,” says Jim Haughey, director, research and analytics, and chief economist for Norcross, Ga.-based Reed Construction Data. “So far this year, through the first three months of 2007, its 28% higher compared to the same period last year. So the trend is picking up on retail spending.”

According to FMI Corp., a management consulting and investment banking firm headquartered in Raleigh, N.C., this growth will continue for the next several years. In its “2007 U.S. Markets Construction Overview” report, FMI forecasts that commercial construction put in place — including retail — will increase 32% from $78.9 billion in 2006 to $104.3 billion in 2010. Spurring retail growth are positive market drivers such as decreasing vacancy rates and increasing rental prices. “Over the past year, retail rents are up 4% to 5%, which is the biggest jump in a number of years,” says Haughey.

When it comes to new construction versus retrofits, Haughey says the vast bulk of growth is new space. “Commercial real estate developers see they can make money renting shopping centers,” he says. “They also see they can build one cheaper than they can buy one.”

In contrast to many other construction markets, such as education and office, the South and West will not enjoy the biggest slice of the retail pie. Instead, the Rocky Mountain States, which include Colorado, Idaho, Montana, Nevada, Utah, and Wyoming, are poised to experience the largest expansion in retail construction in 2007. According to Reed Construction Data, retail starts jumped by more than two-thirds last year in Arizona, Nevada, and Utah — and by half in Colorado. Similarly, Virginia, Texas, and the Great Lakes states saw an increase in starts in 2006. Reed Construction Data says this surge likely reflects previous under-building as opposed to an increased need for space. On the other hand, over-building in California, Florida, Georgia, New York, New Jersey, and Maryland has caused retail starts in these states to flounder.

Regional shopping malls — enclosed and open air — continue to be the darlings of the retail construction market. In 2006, shopping mall construction soared 75%, and growth is expected to remain well above average throughout 2007. According to McGraw Hill, open-air malls, also known as “lifestyle centers” typically have lower occupancy costs — $40 to $50 per square foot versus the $70 to $90 per square foot cost of regional malls.

According to Kathy Grannis, spokesperson for the National Retail Federation, Washington, D.C., the expansion of department and “big box” stores is also fueling growth. Last month, retail giant J.C. Penney, Plano, Texas, announced plans to open 250 new stores over the next five years, including its first-ever store in New York City's Midtown Manhattan. In addition, Kohl's, Menomonee Falls, Wis., said it expects to operate more than 1,200 stores by the end of fiscal year 2010, while Minneapolis-based Target anticipates it will have 2,000 stores by 2011.

In spite of these encouraging signs, the weak housing market could still adversely affect future retail construction. “The housing market is important to consumers,” says Grannis. “Year-over-year sales for certain stores, such as home furnishings, building supplies, and gardening equipment, have seen gradual decreases in sales over the last couple months because of the slowing housing market.”

Haughey agrees, although he believes smaller retail centers will bear the brunt of the residential decline. “If a new housing development is cancelled, the local shopping center gets cancelled too — not the one people drive 20 miles to and bring the kids,” he says.

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© 2012 Penton Business Media, Inc.

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