Retail sales improved in June by 8.1 percent over June 2010 and are up 7.7 percent year over year. However, the slight improvement in retail sales is threatened by lackluster job creation and an unemployment rate that still hovers above 9 percent. Both new housing and retail construction are working against high vacancy rates and the overhang of continuing foreclosures. So when will this situation improve? We are still looking at 2012 before significant growth is expected, and that is likely to be slow growth.
Some of the factors that will continue to slow the growth in new retail/commercial construction include growing online sales, trends toward smaller big-box stores, demographic changes from the suburbs to more urban markets, and difficulties acquiring financing for new construction. Some states, like Illinois and California, are passing new tax laws to capture revenue now lost to online purchases. States desperately need the billions in sales taxes lost to online sales, and storefront retailers would appreciate a more even playing field when competing with Internet-based competitors.
Big-box retailers like Walmart and Target already have strong online presences and now plan to increase their profiles in urban areas, building smaller stores in high-density markets. The expectation is that, as people move from the suburbs to smaller multifamily housing to repair their budgets and credit, these new residents still will want to shop at the same brand stores they frequented when they lived in the suburbs. While considerations for green construction and energy use now are secondary to saving money, new stores likely will take advantage of a smaller energy footprint. Volatile stock markets and ongoing recessionary pressures will continue to impact retail as consumers become more frugal and businesses restructure and adjust their strategies to cut costs and retain loyal customers.
Our latest forecast calls for a reduction of 5 percent in commercial construction for 2011. That is on top of a 27 percent decrease seen in 2010. With only $38.4 billion in construction put in place projected for 2011, we are experiencing commercial construction levels equivalent to those seen in 1993. This is a 58 percent drop from highs reached in 2007. The slow market translates into high competition amongst contractors and some of the lowest construction prices retail owners have seen in a decade. Higher material costs are eating into this bargain, but owners with unique market-capture plans and the ability to finance new facilities will be able to position themselves for the next growth period, which should start in 2012 if markets can overcome the current political turmoil.