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Retail Update

July 1, 2006
In the past year alone, the value of retail construction starts grew by nearly 25 percent, according to Jim Haughey, director of research and analytics

In the past year alone, the value of retail construction starts grew by nearly 25 percent, according to Jim Haughey, director of research and analytics for Norcross, Ga.-based research firm Reed Construction Data. Showing a steady increase in commercial retail construction since 2003, Raleigh, N.C.-based market research firm FMI projects that commercial put-in-place construction for 2006 will increase by 9 percent over 2005 and will continue to increase by at least 7 percent for the next four years.

But despite FMI's rosy outlook, Haughey predicts retail construction starts will peak somewhere near the beginning of 2007. “People are running out of money,” he says. “Go to a gas station, and you know why.”

Growing worldwide demand, particularly from China, has dramatically increased the price of materials heavily used in retail construction over the past two years — materials such as concrete, copper and plastic. According to the Bureau of Labor Statistics, ready-mixed concrete's price index increased by 5.2 percent in 2004 and 12.2 percent in 2005, while copper ore experienced a 67.5 percent increase in 2004 and a 31.7 percent increase in 2005. “Electricians buy a lot of plastic-derived materials and a lot of materials with copper in them, so they're probably facing a bigger price increase than the other trades working in the building, except for the cement contractors,” Haughey says.

Ken Simonson, chief economist for the Arlington, Va.-based Associated General Contractors of America (AGC), agrees copper prices seem to be accelerating this year. And besides the materials themselves, he says shipping costs have also gotten much higher due to demand. “If a ship does reach the U.S. port, there's congestion at the port and on the rail line, so all of those things mean that the delivered cost of construction materials is much higher,” he says.

All of these factors combined mean the cost-per-square-foot increases. According to Reed Construction Data's RSMeans cost service, the national average retail cost-per-square-foot increased from $90.75 in January 2004 to $105.80 in January 2006. Most analysts don't expect these costs to slow much in the near future. “It looks like the cost-per-square-foot is going to go up almost as much this year as last year, with much of it sort of front-loaded in the early part of the year,” Haughey says.

Another result of the rising cost of natural resources is that retail buildings in the next few years are likely to respond to rising energy costs with more energy-efficient designs. For example, buildings currently under construction were designed for $50-a-barrel oil, but future designs must take into account at least $60- or $70-a-barrel oil, “which means more energy-saving lighting [systems], as well as energy-saving design of the building,” Haughey says.

Other factors cited by New York-based McGraw Hill Construction (MHC) that will affect retail construction are an anticipated decline in housing starts and the consolidation of large U.S. retail companies. MHC expects a 5 percent reduction in total square footage of retail starts this year alone — from 297 million square feet last year down to 283 million square feet.

“There continues to be a lot of consolidation in ownership — big stores buying little stores or big stores getting bigger and smaller ones going out of business,” Haughey says. “For the big electrical contractors, there's more buildings, but there are fewer customers.”

Big-box discount stores such as Wal-Mart, Lowe's and Home Depot have experienced the strongest retail construction growth over the past few years. According to Simonson, shopping-center construction as a whole during the first quarter of 2006 was up 62 percent over first-quarter 2005.

On the flip side, “grocery stores have been struggling to fend off the competition from those big-box stores,” Simonson says.

With general merchandise stores like Target and Wal-Mart now offering groceries as well, traditional grocery stores have taken a hit. “A lot of the food chains are heavily unionized, and then their costs are higher than a nonunion Wal-Mart/Kmart kind of operation,” Haughey says.

Most major retail construction is occurring, and will most likely continue to occur, in suburban areas. “You have continuing expansion of metropolitan areas to outer suburbs as land costs keep getting higher and higher,” Simonson says.

Analysts also predict a slight pickup in urban retail construction due to the current in-fill housing trend in many cities. “There's a renaissance in some of the urban areas as wealthier people move back into town. That means high-rise multi-floor spaces and very expensive construction areas,” Haughey says.

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