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Retail Development Picks Up Steam, Defying Low Expectations

Retail Development Picks Up Steam, Defying Low Expectations

In spite of retail developers’ predictions that new project pipelines won’t grow until 2014, it looks like the market will see a healthy amount of new construction next year. The CoStar Group, a Washington, D.C.-based research firm that tracks all types of retail properties, forecasts that new retail completions will total 52 million sq. ft. in 2013. The figure would constitute only a third of average annual completions for the 2006-2008 period, but will still be more than double the 20 million sq. ft. expected to be delivered in the current year.

Projections from researchers at Marcus & Millichap Real Estate Investment Services, a Calabasas, Calif.-based brokerage firm, are slightly more optimistic. They expect to see 60 million sq. ft. of new retail space delivered in 2013.

Reis Inc., a New York City-based research firm that focuses on neighborhood and community shopping centers and regional malls, projects that new retail developments will total 16 million sq. ft. in 2013, up from 5.6 million sq. ft. in 2012. The majority of those new centers will be grocery-anchored properties, with limited or non-existent mall completions, according to Ryan Severino, senior economist with Reis.

The dollar volume of U.S. retail construction starts year-to-date is up 29 percent compared to the same period in 2011, reports Reed Construction Data, a Norcross, Ga.-based research firm. In terms of space, new retail starts, not counting additions to existing properties and alterations, rose 33.6 percent from the same period last year, to 82.2 million sq. ft. The increase can be attributed to a combination of more readily available construction financing and catch-up work on projects stalled during the recession, says Bernard Markstein, U.S. chief economist with the firm.

“It’s not much of an improvement, but we had been going down every quarter since 2007,” says Ryan McCullough, real estate economist with CoStar. “In the first quarter of 2012 we saw an uptick and it’s been slightly up since then. Developers are hesitantly getting back to work.”

On the menu

Based on projects currently under construction, general retail properties (primarily single-tenant stand-alone buildings such as department stores, drug stores and restaurants) will make up the bulk of new deliveries in 2013, according to McCullough. In the third quarter, there were 17.5 million sq. ft. of general retail under construction. The next most active property type for new construction was the community center, with approximately 3 million sq. ft. in the works.

On the other hand, the volume of new power centers under construction continued to dwindle for the six quarter in a row, with only 610,416 sq. ft. in the works in the third quarter of 2012, CoStar reports. In contrast, in the third quarter of 2007, there were more than 29 million sq. ft. of power center space under development.

Both McCullough and Markstein attribute the cutback on new power center projects to big-box stores’ vulnerability to online competition.

Marcus & Millichap estimates that of the 60 million sq. ft. in new completions it expects to enter the market next year, mixed-use centers will account for 17 million sq. ft., stand-alone big boxes, power centers will account for 13 million sq. ft. and the rest will be largely made up of neighborhood and community shopping centers. Geographically, New York, Virginia and Texas should experience the greatest increases in new retail space.

This year, a significant number of the largest retail projects scheduled for completion were outlet centers, including the 528,000-sq.-ft. Fashion Outlets of Chicago Rosemont in Chicago; the 450,000-sq.-ft. Paragon Outlets Livermore in East Bay, Calif. and the 420,000-sq.-ft. Paragon Outlets Grand Prairie in Texas, according to the second quarter market report from brokerage firm Cushman & Wakefield. A 700,000-sq.-ft. enclosed regional mall also opened in Salt Lake City.

Cushman & Wakefield estimates that the amount of new retail space inventory in the top U.S. markets rose 0.02 percent in the first quarter and 0.01 percent in the second quarter of 2012.

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