Retail construction slows abruptly

February 01, 2008 |

After four years of growth, retail construction spending is stalled, and has been since April. The value of starts peaked during the summer and then weakened more than what's considered seasonally average during the fall, according to Reed Construction Data.

The recent slowdown is likely an exaggerated impact from the disruption of the commercial mortgage market and not the beginning of an extended downturn. Quick action by the Federal Reserve Board to provide temporary liquidity and value and bonds backed by distressed mortgages should improve the cost and availability of commercial mortgages early in 2008. While the mortgage difficulties cancelled some projects, others were only delayed. Nonetheless, the retail construction market is weakening.

Consumer spending growth, excluding gas stations, is slowing, but the retail vacancy rate has stopped falling and rental rate increases are ebbing. The reduced flow of funds into real estate investment trusts and reported drops in asset prices for retail buildings are also evidence that additional retail space has become less attractive to investors. There isn't an abundance of retail space now, but developers are still trimming expansion to prevent any surplus that would sharply reduce values of existing retail assets.

Retail construction spending is up only 14% from a year earlier. Shopping center expansion is average for the retail sector, while activity is shrinking for restaurants and small standalone stores (with the exception of auto parts and service locations).

The good news: standalone, big-box discount stores are a fast-growing segment. Spending is 27% higher than a year ago for general merchandise discounters, and 61% higher for building supply stores.

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