Retail construction: a mixed bag

While retail construction spending is 15% higher than a year ago, it's experienced no spending increases in the four months through July. That's in contrast to other nonresidential projects, which have continued to expand at a 15% annual pace.

Plunging housing starts and softening growth in consumer spending have combined to reduce the demand for retail space and reduce profit expectations in the retail sector for commercial real estate investors.

The different retail environment at the mature end of the economic expansion is reflected in the altered mix of retail construction spending. The growth in new space for neighborhood stores that quickly follow the development of new residential neighborhoods has slowed sharply after booming in 2005-06, while developers have sharply stepped up construction of stores that draw from a wider area, which typically occurs a year or two after a once-booming residential construction market starts to falter.

Standalone big-box stores have become the fastest growing retail sector in the last few months with construction spending up 50% from a year ago. Similarly, construction spending for shopping malls rose 40%, and spending for building supply stores increased 29%. By contrast, construction spending for smaller shopping centers is only 6% higher than a year ago, with spending progressively declining since last August. The weakest retail sectors with declining construction activity are neighborhood service food stores, restaurants, and auto parts and service shops.

The value of retail project starts, according to Reed Construction Data, is up 22% year-to-date through July with much of this gain in destination shopping malls or shopping at tourist destinations. These projects are not directly impacted by the housing market collapse, and are instead driven by several strong years of economic growth and rapidly rising foreign tourism in the U.S.