High Construction Costs Hamper Retail Development

Development in the retail market was hampered by high construction costs during the second quarter, prompting retail developers to favor high-rent or high-growth markets to get the price down, according to CBRE’s Q2 retail report. Construction costs for new retail range from $400 to $500 per square foot, and few markets command rent sufficient to justify that expense.

Construction completions slowed by 35% quarter-over-quarter to 4.5 million square feet, the lowest level in more than a decade. Rolling four-quarter retail completions totaled less than 30 million square feet, down from 32 million square feet during the first quarter, according to the report.

Power centers and malls and lifestyle centers delivered just 36 and 26 percent of their 10-year average quarterly totals during the second quarter. Rolling four-quarter deliveries of new single-tenant properties totaled 19.4 million square feet, about two-thirds of the 10-year quarterly average.

Phoenix was the top market for Q2 construction completions at 669,000 square feet, while Houston was the top market on a rolling four-quarter basis at 2.7 million square feet.

Overall the retail availability rate was unchanged during the second quarter at 4.7%, according to CBRE, Lifestyle centers and malls showed a 10-basis-point decrease in availability quarter over quarter to 5.6%. Availability in power centers also dropped 10 basis points to 4.9%, and neighborhood, community and strip center availability remained at 6.5%.

Net absorption in the retail sector remained relatively low, although it improved by 21% from the first quarter to 5.4 million square feet. That is about one-third of the 10-year quarterly average of 18 million square feet. Year-to-date, retail absorption stands at 9.8 million square feet. Of the 69 markets CBRE tracks in the retail sector, 30 recorded negative net absorption, putting this year on trend to have the lowest level of demand since 2020.

Texas markets did well in terms of retail absorption during the quarter, with Houston and Dallas occupying two of the top 5 spots on CBRE’s list. Together with Austin and Fort Worth, these markets recorded net absorption of 2.2 million square feet driven primarily by street retail and power center leasing. The top five markets also included Boston, which had the most net absorption and one of the nation’s lowest retail vacancy rates, as well as Phoenix and Central New Jersey.

Asking rent grew half a percent quarter-over-quarter and 2.3% year-over-year. San Francisco, Manhattan, Jacksonville and Albuquerque all posted quarter-over-quarter rent growth above 3%. Miami led the nation in year-over-year rent growth at 7.7% followed by Baltimore at 6.4% and Columbus at 6.3%.