The outlook for commercial construction spending—mostly retail—has improved from our earlier forecasts, which had closely matched expected inflation. However, a recent surge in shopping center starts requires a revised forecast where commercial construction spending is expected to increase 10.3% this year, and another 6% in 2007.
Although there is no shortage of retail space, many retailers are aggressively expanding and upgrading to capture market share in a low-margin business. Commercial developers are eager to accommodate retailer requests for new stores, and are willing to borrow money because investment returns for retail projects have improved to slightly above historical averages. As a result, older retail space is being abandoned and entering the market.
Retail starts jumped 36% between the first and second halves of 2005, with December's starts double those recorded a year earlier, according to information compiled by Reed Construction Data, sister company of BD&C.
Shopping malls and shopping centers are solely responsible for the gains from 2004 to 2005. Combined, construction spending on these projects is nearly 50% higher than a year ago.
Construction spending is unchanged over the last year for the balance of the commercial sector. Spending increased about 10% from a year earlier for both warehouses and restaurants, but that was offset by declines for auto dealerships, auto parts stores, and stand-alone retail stores.
About 90% of the multi-store projects added since the end of 2004 are smaller shopping centers—rather than regional shopping malls—that serve new neighborhoods created during the housing boom. Starts for these building types will remain strong through mid-year, but are expected to begin slowing in accordance with the downturn in housing starts. However, projects put in place mean that construction spending will keep growing well into 2007.