Retail construction spending growth to halve by '08

Retail construction spending increased 13% in 2006. However, double-digit growth in retail construction spending is not expected to last for long.

Spending increases are expected to be about 11% this year and about half that—around 6%—in 2008, which is keeping with slower economic growth.

The value of retail construction starts rose 9.1% in 2006, according to Reed Construction Data. This gain was slightly smaller than construction spending gains, indicating that the pipeline of work in progress is starting to decline.

While national retail vacancy rates are relatively low and rents continue to rise slowly, only the most attractive retail projects will be funded and built in 2007-08. Developers now expect better returns in apartment, hotel, and office projects.

Shopping center construction, however, jumped 75% in 2006, and was still rising at year-end, and should continue to do so through 2007. This change will be enough to prevent any decline in inflation-adjusted, job site construction spending. Shopping center projects typically peak very late in a building cycle.

Job site construction spending increased 25% last year for shopping centers and 16% for big-box discount stores. These gains occurred early in the year and showed no expansion beyond summer once the sharp decline in new home construction began. Any increases from current spending levels will only be enough to cover rising project costs.

The Rocky Mountain states will have the largest expansion in retail construction this year. Retail starts jumped by more than two-thirds last year in Arizona, Nevada, and Utah, and by half in Colorado. A similar surge in retail construction starts occurred last year in Virginia and Texas, and in many of the Great Lakes states.

Retail starts fell last year in California, Florida, Georgia, New York, New Jersey, and Maryland.

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