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Facing Headwinds, Retail Real Estate Development Activity Remains Muted

Retail development remains at about half the pace of the previous market peak.

Swamped by a deluge of retail bankruptcies, restructurings and resizings over the past two years, and experts contending that the U.S. is over-retailed, retail development remains at a pace well below historic highs.

Approximately 81 million sq. ft. of retail space is forecast to be completed in 2017, according to CoStar. While that represents a healthy 35.8 percent increase over the 2016 figure of 52 million sq. ft., it’s less than half the pace of construction posted at the last market peak. In 2007 and 2008, 175 million sq. ft. and 168 million sq. ft. of retail space were completed, respectively, CoStar data tabulates.

Costar forecasts the development figure to reach 82 million sq. ft. next year, and then hover around 89 million sq. ft. from 2019 to2021. “We don't see a big ramp-up in 2020 to 2021,” says Suzanne Mulvee, director of retail research at CoStar. “Construction remains relatively muted. Demand is relatively weak, with limited absorption.”

The vacancy rate in the retail sector is expected to be at 10 percent by year-end and to trend a bit upward heading into 2018, according to Barbara Byrne Denham, senior economist at real estate research firm Reis. Net absorption for 2017 should be lower than 2016, she notes.

Reis, which tracks neighborhood and community centers, forecasts 10 million sq. ft. in new construction of these asset types in 80 metros, not including New York or Washington, D.C. The figure for last year was 10.3 million sq. ft.

“In 2018, we are forecasting a bit less than that,” Denham says. “Reis continues to see reduced retail construction levels through 2019. This reinforces the trend of being over-retailed, and that we just don’t need more retail space.”

For comparison, Reis recorded 33 million sq. ft. of new retail real estate construction in 2007. By 2010, the figure had plunged to 4.5 million sq. ft.

Among the markets forecast to deliver the most space are Atlanta, Dallas/Fort Worth, Houston and New York City, according to Marcus & Millichap’s 2017 Retail Investment Outlook.

Retailers are now building smaller stores than they did historically, and are concentrating more in metro areas, according to Mulvee.

“We are seeing less square feet on a per capita basis,” she says. “Retail store sizes have started to come in. Developers are going into more urban locations, and must be nimble with smaller footprints.”

As retailers demand urban locations, it elucidates the bifurcation in retail real estate, with the best quality retail in the best markets performing well, Mulvee notes.

For instance, Target and Walmart are among retailers to pursue smaller concepts this year. Walmart continued expansion of its 40,000-sq. ft. Neighborhood Markets offshoot, and Target unveiled a smaller footprint and store type for urban infill. 

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