Retail construction will experience winter chill

August 11, 2010

Monthly jobsite construction spending declined 37% from September 2007
to July 2009, and will decline another 6% by early winter.


The recession hit the retail construction market early and hard, but most of the decline in this building cycle has already occurred. Monthly jobsite construction spending declined 37% from September 2007 to July 2009, and will decline another 6% by early winter. The value of retail construction starts is down 40% year-to-date through August, but no further significant decline is expected. Retail construction spending is forecast to rise 10% from the end of 2009 to the end of 2010, and then 12% the following year.




June 2009 was the weakest month for starts in this cycle, with July and August starts showing improvement but remaining at levels below those from earlier this year. The only retail category to avoid the recession is general merchandise stores outside of malls, which are primarily big-box discounters who always gain market share during recessions. The weakest sector is restaurants, where construction spending is down 64% from a year earlier. The decline is 52% for building supply stores suffering from the weak housing market. As always, the decline in demand for retail space is much higher than the decline in retail sales, which are down 2.6% from 2008.

Retail is not an attractive market for construction lenders. Retail construction loan demand is depressed because many retailers have ugly balance sheets from the recession. They are scrambling to cover inventory credit needs in a difficult credit environment.

Looking ahead, monthly construction spending and project starts are expected to start growing early next year, by which time inventory cutbacks will have improved retailers' balance sheets, consumer confidence will be higher, and real consumer incomes will be expanding again. Equally important, the two-year decline in retail starts and construction will have adjusted supply of space with demand.

         
 

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