Although year-end figures for holiday shopping showed signs of slower growth than in 2006, most large retailers continue to have significant expansion plans for 2008. Retail construction, which FMI Corp., Raleigh, N.C., includes in the broader category of commercial construction, may be the canary in the coal mine for nonresidential building construction as we test the economic waters this year. Although there are some signs of scaling back or closing underperforming stores, not all these events are signs of a slowing economy. There is significant momentum in the backlogs of contractors serving the retail segment and strong fundamental growth will carry commercial construction activity into 2008. Nevertheless, these forward-looking statements are subject to change, and retail construction is a segment to watch as we continue through 2008.
Crunching the Numbers
The commercial construction market includes buildings and structures used by retail, wholesale and selected service industries, including the automotive and food and beverage industries. According to FMI’s “Fourth Quarter Forecast for Construction Put in Place,” the commercial market, which has experienced positive annual growth since 2004, will continue this trend through 2011. Commercial construction will make up 18 percent of the nonresidential construction total through 2011, trailing only the education market. Commercial construction put in place will increase 15.5 percent from $84.7 billion in 2008 to $98.9 billion in 2011.
In 2008, the connection will continue between the commercial construction market and residential building activity. The residential market is a leading indicator of future commercial construction activity with a one- to two-year lead- time. A slowdown in residential construction in 2006 (0 percent) and 2007 (-18 percent) will slightly influence commercial activity in 2008. Expect put-in-place commercial construction to grow 8 percent in 2008, compared to its 10 percent increase in 2007. Positive market drivers, such as decreasing vacancy rates and increasing rental prices, which are up 4 to 5 percent compared with 2006, should help maintain commercial-construction spending.
Residential activity is just one indicator of commercial construction. Another leading indicator is the Washington, D.C.-based American Institute of Architects’ Architecture Billings Index. AIA recently reported a spike in design activity. The December 2007 ABI was 55.4 (any score above 50 indicates an increase in billings), up from the 55.3 mark in November. With an approximate 9- to 12-month lag time between architecture billings and construction spending, the ABI suggests a favorable forecast for commercial construction through early this year.
Commercial construction also is dependent on consumer fundamentals, such as consumer spending, which fuels commercial business and rent. These factors contribute to making multi-retail (shopping centers, malls and general-merchandise stores) the largest commercial segment. The U.S. Department of Commerce, Washington, reports that shopping-center construction spending grew at a year-over-year pace that was greater than 50 percent in every month for 2006. Partly a function of high construction costs, this increased spending also reflects the completion of many projects that were started in previous years.
Within the multi-retail segment, a shift in preferred building type has taken place. Open- air centers experienced above-average growth in 2007 and have replaced construction of regional, enclosed malls. These centers, also known as lifestyle centers, typically have lower occupancy costs than regional malls, nearly $35 less per square foot. In addition, enclosed malls have suffered from declining traffic, loss of tenants and increased competition.
According to the Washington-based National Retail Federation, the expansion of department and big-box stores also will contribute to future commercial growth. Retail giants, such as Plano, Texas-based J.C. Penney, Menomonee Falls, Wis.based Kohl’s and Minneapolis-based Target, plan to open a combined 3,500 stores by 2011. Although this retail category has grown steadily, it remains vulnerable to reduced demand for home-building and -remodeling supplies, appliances, electronics, furniture, and yard and garden supplies.
Green Leads the Trends
One of the drivers of new retail construction is the need for change to keep up with consumers’ desires for new shopping experiences. To stay in front of consumers, chain stores are taking advantage of lifestyle centers, mixed-use projects and green construction. Retail chains, like J.C. Penney; Benton, Ark.-based Wal-Mart and Austin, Texas- based Whole Foods, have made commitments to green construction.
Another trend the industry is watching is the move to smaller, community-based stores. In part, this is related to lifestyle centers and mixed- use movements, but it also is an answer to the growing resistance across the country to building big-box superstores in communities.
Whether it is a sign of an election year or a reaction to a slowing economy, the one thing we can count on for 2008 is change. Retail construction, armed with research on consumer- spending habits and preferences, will strive to stay one step ahead of consumers’ changing desires. In the near term, everyone has growing concerns for the economy, but major retailers and the contractors that serve this market are in business for the long run. As such, strategies will need to reflect the possibilities of a downturn in the economy to position businesses to take advantage of the next growth cycle.
John Hughes, vice president of FMI Corp., Raleigh, N.C., works with national manufacturers of construction products and equipment; distributors; retailers; and industry suppliers in the areas of strategy, channel assessment, customer development, organizational development and training, and market research. He can be reached at firstname.lastname@example.org or (919) 785-9224.