Retail construction recession to end later in 2010

The recession reduced retail construction spending early and deeply, but now most of the decline should be behind us. Construction spending is down 48% over the last two-and-a-half years, and the value of retail construction starts reported by Reed Construction Data fell 41% in 2009 vs. 2008. Construction spending is expected to drop 5-6% more by late 2010; the decline will be close to 10% after adjusting for project cost inflation. Retail construction starts are expected to be unchanged early in 2010 and then begin rising quickly later in the year.

The reasons for the steep construction declines differ for developers, large retail chains, and smaller retailers. Shopping center and mall developers cut construction spending before the September 2008 credit freeze because they saw declining returns for commercial real estate investments. With recovery, prospective returns will be rising again by the end of the summer.

Construction spending in 2009 fell 50% for shopping centers and 40% for shopping malls. Retail chains, which slowed spending in late 2007 and cut more deeply when the credit freeze began, have maintained steady spending in recent months. Building supply centers cut spending 57% in 2009. Smaller retailers continued to expand construction spending until just a few months before the credit freeze, then sharply slashed spending when they lost access to credit and suffered a drop in their ability to offer lenders collateral and equity participation. Construction spending for standalone stores fell 70% in 2009. Spending declined about 45% for auto dealers, auto parts/service facilities, and restaurants and bars. —Jim Haughey, BD+C economist