Big boxes rescue retail subsector from bargain bin

August 11, 2010

Retail vacancy rates nationwide have risen slowly but steadily during the past two years, and there is evidence of overbuilding in several large metropolitan markets. But continued healthy levels of big-box and grocery-store-anchored strip mall development have tempered the overall losses in construction activity in the retail subsector, keeping it well out of range of the double-digit declines recorded in both the office and lodging subsectors of the commercial market.

Through the first five months of this year, an estimated $23.2 billion was spent on retail buildings — commercial development other than offices and hotels/motels. This total represented a modest 2.3% decline from total spending recorded during January-May 2001. Recently revised numbers for 2001 show that retail construction spending last year was essentially unchanged (-0.1%) from the year-2000 total.

The market, though, gradually weakened through the first half of 2002. From April to May the seasonally adjusted annualized rate of retail building construction work completed declined by 2.9%. And the spending pace in May was about 3% lower than it had been during May of last year. Demand for new retail space will probably weaken further before it improves sometime during the first half of 2003.

There is no evidence that the market nationwide is overbuilt to the degree that it was a decade ago when retail construction spending plunged 26.7% from 1990 to 1991. Although some of the underlying dynamics of the market have changed during the past 10 years with the emergence of online retailers and the continued expansion in catalog retailers, population growth remains the single most important driver of retail building construction. In most Southern and Western markets, population gains are strong.

Yet, the retail sector probably will become more selective in new development projects. Some planned spending on remodeling/renovation of existing properties probably will be postponed. But although retail sales growth has weakened and shopping center vacancy rates are up, retail property market development has not declined nearly as sharply as other commercial construction. The majority of metro markets nationwide see supply and demand remaining in or near balance, with new and expanding retailers replacing those that have closed or downsized — the mark of a stable, but by no means dynamic, market sector.

Consequently, retail construction spending should end the year a modest 3.1% below the full-year-2001 total. Although the market should improve by early 2003, retail construction spending for the year is expected to be up a modest 3.5% over this year's disappointing level.

Retail construction may decline for second consecutive year
(annual % change, not inflation-adjusted)


Year % Change
(f) = forecast
Source: U.S. Department of Commerce


1991 -26.7%
1992 -0.5
1993 +11.1
1994 +15.7
1995 +13.6
1996 +13.0
1997 +7.5
1998 +3.5
1999 +6.2
2000 +6.1
2001 -0.1
2002 (f) -3.1
2003 (f) +3.5

         
 

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