Retail construction activity retrenches
By Daryl Delano -- Industrial Distribution, 1/1/1999
Unfortunately, 1998 was a bad year for the retail building sector of nonresidential construction. This sector is widely perceived to be overbuilt in many key subsectors. In addition, many geographic areas are now clearly over-stored.Following double-digit gains in 1994-1996, and solid 5.3% growth last year, spending for new retail space will decline in 1998 and show little if any gain in 1999. January-September 1998 spending for new retail buildings was running 5% below the level for the first nine months of 1997.
Traditionally, housing starts activity has been seen as a good leading indicator of demand for new retail space. Housing starts have been booming this year, so why isn't the retail sector showing gains of a similar magnitude?
The logical relationship between new homes -- and population growth --and retail development still holds up reasonably well at the metropolitan area level of review. Retail construction has certainly been strongest the past several years in those areas (primarily, but not exclusively, in the South and West) that have seen the largest gains in residential construction activity. Even in these dynamic areas, however, retail construction has sometimes gotten ahead of demand, particularly given the structural changes taking place within the retail sector of our economy.
For several years now, the growth of catalog and TV shopping network retailing has been identified as a significant competitive challenge to traditional at-the-mall/main street retailing. It's been impossible to quantify how many consumer dollars that would have been spent on-site/at-the-store have instead gone to the remote "800" number virtual stores of catalog companies and TV conglomerates. Quantifying this impact on demand for retail space is even more problematical. Add to this challenge -- particularly within the last 12-18 months -- the phenomenal growth of Internet-based retailing, which has important implications for the demand for brick-and-mortar retail space.
There will still be plenty of "big box" buildings put up by the "category killer" retailers like Wal-Mart, Best Buy, Staples, etc. However, this consolidation of sales to bigger retailers is, of course, another trend that the retail construction sector has dealt with, and on balance benefited from in recent years. However, despite the expectation of continued good numbers on the housing starts front, spending for new retail space will stagnate for at least the next couple of years.
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