Retail construction continues its plunge

August 11, 2010

Retail is the weakest commercial construction market, with jobsite construction spending declining 28% since its September 2007 peak. More than two-thirds of the decline occurred in the last six months when the recession deepened and credit availability problems forced an uptick in project delays and shutdowns.

The total decline through early 2010 is expected to be about 40%. The decline through February ranges from 15% for food stores to about 50% for building supply stores and auto parts and service centers. Other weak market segments include restaurants (down 38%), shopping malls (down 30%), and smaller shopping centers (down 24%). The steep drop in retail construction is primarily due to overbuilding in 2006-07, with much of the new space completed in 2008. Credit problems and declining consumer spending contributed to the drop, but a significant decline would have occurred without a fall in consumer spending or credit availability problems.

Consumer spending on goods fell 6% since the beginning of 2008, and will drop another few percent through 2009. Lack of reasonably priced credit stopped or delayed hundreds of projects last fall, but credit is now generally available to developers with solid projections of cash flow to cover their debt payments. Property & Portfolio Research reports that completion of retail space moved above net retail space rentals early in 2008, which pushes the retail vacancy rate from 11% at the beginning of 2008 to about 18% by the end of 2009. Rental rates will drop about 10% over the next two years. Rental vacancy rates are generally higher in the South and the West due to developers failing to foresee the housing collapse there.

Fewer completions through next year will stabilize the vacancy rate at around 17-18% in 2010. The drop in the number of completions results from the sharp decline in the value of retail construction starts reported by BD+C. Retail starts were down 43% over the three months ending in February from their 2007 monthly average; most of the decline occurred since October 2008.

         
 

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