Approximately 72.1 million square feet of retail space was under construction nationally during the second quarter, barely changed from the first quarter and up less than 1% from one year earlier.
According to data from CoStar Group (NASDAQ: CSGP), the amount of new store space under construction during the second quarter was below the 10-year average of roughly 78.9 million square feet.
Brandon Svec, national director of US retail analytics for CoStar Group, pointed out the second quarter total was also well under the levels seen in the mid-2010s when the quarterly pipeline averaged more than 100 million square feet.
“The limited construction activity reflects the economic conditions that make it difficult to justify new construction in most markets,” Svec said. “The sharp rise in land prices, construction costs and interest rates over the past several years pushed the rents required to cover development costs well above prevailing market levels for many retail formats. Even in markets with strong population growth and leasing demand, achieving returns that justify ground-up construction remains challenging.”
During the second quarter, general retail formats accounted for roughly 50.4 million square feet, or nearly 70% of all space under construction, down by about 1% from one year earlier. Neighborhood centers – properties that are traditionally anchored by grocery, drug stores or other essential service tenants – accounted for represent roughly 10.7 million square feet of retail space under construction, down more than 3% year-over-year.
Strip centers accounted for nearly 4.0 million square feet of space under construction, down more than 9% year-over-year. And the regional mall sector accounted for nearly 3.9 million square feet under construction, up about 55% from the previous year. However, Svec noted that much of that activity “is tied to redevelopment, expansions or nontraditional uses rather than new enclosed-mall space.”
Geographically, the Texas markets Dallas, Houston and Austin collectively accounted for more than 15 million square feet of retail space under construction in the second quarter, which was just over 21% of the national pipeline. Roughly 7.7 million square feet is under construction in Dallas alone, followed by Houston at 4.2 million square feet and Austin at 3.3 million square feet. Other large retail construction pipelines were recorded in Phoenix, Las Vegas, Chicago, Charlotte, Atlanta, Miami and Denver.
“Taken together, second-quarter construction data reinforces the view that retail supply growth will remain limited in the near term,” Svec observed. “Elevated development costs and market rent constraints are unlikely to ease quickly, and most retailers appear content to expand selectively rather than aggressively.”
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