Retail construction spending parallels economic growth

Commercial retail construction spending has declined slightly recently after a burst of added spending in mid 2004, but overall, a 12% increase is expected through the end of 2006. This growth is slightly higher than for total construction spending, but less than half of that projected for other nonresidential buildings.

This is the usual cyclical pattern for retail buildings. Retail construction recovers with a burst of catch-up spending early in the business cycle, parallel to the early recovery of consumer spending. Then, retail-building activity keeps up with the growth in the overall economy for the rest of the expansion period.

The word "modest" is the best market descriptor for retail spending through 2006 and into 2007. Construction spending growth will be modest in an environment of stable vacancy rates and slowly rising rental rates and building asset values. Real estate investors view the retail market as stable, while they see hotels and offices as growth markets promising higher returns. Most of the added retail space needed will be in the Pacific, Rocky Mountain, and South Atlantic region where population and job growth is highest.

Few giant malls are likely to be built; that era may be past.

Construction spending for warehouses jumped 19% in February from January after four years of decline. This may the beginning of the two to three years of 10% or greater growth that is needed to match earlier expansion in retailing and manufacturing. Don't expect the doubling of warehouse construction that occurred at the same point in the last cycle from 1994 to 1997. That was caused by the adoption of a new distribution model that required the closing of many small regional warehouses and the building of huge distribution centers, mostly in Los Angeles, Chicago, New Jersey, and Atlanta.