The retail construction market is near its cyclical low point after a 55% decline from the February 2008 peak. A slow sluggish recovery is expected to begin within a few months. This is the market situation based on the latest data for September or October. Retail construction spending continues to inch lower each month but the year to date value of retail starts, through October, is off only 0.9% from the same period last year. This is a small volume gain with building costs falling a few percentage points from a year ago. The pipeline of future works is being gradually refilled. Commercial construction spending (retail, warehouse and parking) is forecast to rise 10% from the end of 2010 to the end of 2011.
Commercial (retail) Construction Spending
$ Millions, sea. adj. annual rate
Source – Historical: Census Bureau; Forecast: Reed Constuction Data
The key drivers for this turnabout have all recently stabilized or turned positive. Retail space demand growth has exceeded new supply growth in the last three quarters of 2010. Property & Portfolio Research reports net retail space absorption during the summer in every major market except Ft. Lauderdale. The retail vacancy rate is now falling but remains above 18%. Rental rates began to stabilize during the summer although a few more quarters of slim declines are possible. Retail sales have risen for four months are now 7.3% above a year ago (5.2% excluding cars and gas). Consumer confidence remains stalled at a deep recession level but is 25% higher than the worst readings early in 2009.
The retail construction recovery is being restrained by slow job and income growth in the overall economy and by the lingering credit constraints on consumers, retailer s and developers. Employment growth has averaged 71,000 jobs/month over the last year. But the current hiring pace is over 150,000 jobs a month and will gradually rise. Real income has risen faster with a burst of federal transfer payments.
The destruction of assets and credit ratings in 2008-09 has left has forced consumers to increase savings (often debt repayment) causing the savings rate to soar from near zero to about 5%. This is money that does not get to the mall. A large share of small retailers have had to defer investment plans due to inadequate equity participation to get a loan or the exit of their usual lenders from commercial mortgage lending. Many chain retailers and developers had to pause their expansion plans while they recapitalized to become credit eligible again.
The credit constraints are gradually easing. General Growth, which owns 182 regional malls, has recapitalized and just emerged from 19 months of bankruptcy. The commercial mortgage backed securities market also shows initial signs of recovery. CMBS bond issues peaked at $234 Billion in 2007, collapsed to $11 billion last year and are now expected to be over $30 billion in 2011. This results from a turnabout to lower delinquency rates on CMBS loans.
The pace of the retail construction recovery will vary widely regionally. Property & Portfolio Research reports that retail vacancy rates vary from near 10% in New York, Los Angeles, San Francisco and Washington to over 25% in Austin, San Antonio, Charlotte, Denver, Jacksonville, Las Vegas, New Orleans, Memphis, Nashville and Orlando.
There is also considerable variation in vacancy rates within individual metro areas. In metro areas near the national average vacancy rate (18% +), a large number of viable shopping centers have vacancies in the 8-12% range while some troubled shopping centers have 40% plus vacancy. This high rate is not attractive to either new tenants or lenders so many of these centers will not survive. This means that retailers looking to expand will absorb the available space in viable centers by the time the national average vacancy rate falls to about 15% late in 2011.
Currently, the expanding retailers are restaurants, grocery stores, building supply stores, misc. stand alone stores and big box discounters. Construction spending for shopping centers picked up at a 6% annual pace in the last quarter but fell at nearly a 50% annual pace for the larger shopping malls.