Retail Contractors Expect Business to Remain Slow in 2010.
Jan 25, 2010 4:25 PM, By Elaine Misonzhnik
As Steven B. Rivers, senior vice president and general manager with Hardin Construction Company LLC, an Atlanta-based general contractor, looks over the firm’s forecast for this year, he expects the volume of retail projects Hardin constructs to be down significantly from both 2008 and 2009. For the past two years, Hardin has completed between $150 million to $170 million in retail work, a lot of it comprised of large projects that began construction back in 2007. In 2010, as that backlog is completed, the firm’s volume will likely shrink to just $30 million to $40 million and will take the form of smaller work orders: expansions and store conversions rather than multi-tenant outlet and power centers.
The reasons for the cutback on retail work are manifold and include developers’ continued difficulty in obtaining construction financing, as well as low demand for new retail space. After all, the vacancy rate for regional malls in the fourth quarter of 2009 reached 8.8 percent—an all-time high, according to Reis, Inc., a New York City-based research firm. The vacancy rate at neighborhood and community centers was at an 18-year high of 10.6 percent. In other words, there’s a lot of slack in existing projects that needs to be filled before there is enough demand to justify a wave of new construction.
As a consequence, many contractors find themselves in the same boat as Hardin. For example, William DiSanto, president of Englewood Construction, a Schiller Park, Ill.-based general contractor, notes that in a normal cycle, by the middle of a given December, 40 percent of Englewood’s work in the coming year would be locked in. In December 2009, however, many of Englewood’s retailer clients couldn’t confirm whether they would green light new stores. Some were uncertain they could secure the necessary financing to fund construction. In addition, most were waiting for the final holiday sales numbers before committing to new projects, DiSanto says.
According to industry insiders, the outlook for retail construction will begin to stabilize this year, but it will likely be a long road back to the volume contractors completed in the mid-2000s. In 2009, spending on commercial construction, comprised primarily of retail, totaled approximately $58.2 billion, according to Reed Construction Data, a Norcross, Ga.-based information provider. In 2010, spending will likely fall 21.3 percent, to $45.8 billion, Reed forecasts. It won’t be until 2011 that commercial construction spending might post a moderate gain of 5.2 percent, to $48.2 billion. By contrast, in 2007, spending on commercial construction totaled $89.2 billion.
This is putting pressure on both general contractors and sub-contractors, who survived 2009 largely through a combination of aggressive cost-cutting and backlogs of projects left over from the boom years. To deal with the low demand for retail, many traditional retail contractors are now trying to broaden their scope to other property sectors. Hardin, which has always done work in other sectors, has made more bids for student housing and healthcare projects, as well as competing for government building contracts. Other firms are looking into multifamily, as that sector is expected to recover more quickly than other commercial property types.
"I think 2010 is going to be very, very slow for retail development," syas Rivers. "That's not to say there won’t be any retail projects built there are certain locations that are just ideal sites and some tenants are still out there looking to open new stores in new markets. But instead of opening 40 stores a year, some of the larger big-box retailers are looking to open five. Domestically, we could be in for several years of a retail drag. I don’t think it’s going to come back to the way it was two or three years ago for maybe seven to ten years.”
The good news is that, as is the case with other real estate indicators, construction statistics are beginning to look less devastating than they did for most of last year. In November, construction spending in the commercial sector, comprising retail, warehouse and farm projects, declined just 1 percent from the month prior, according to the Associated General Contractors of America (AGC), a national trade association. (Year-over-year spending declined 41 percent).
In December, the Bureau of Labor Statistics (BLS) recorded 53,000 construction jobs lost, but the number was still a vast improvement over the 117,000 in average monthly job losses the sector recorded during the first half of last year. The unemployment rate among construction and extraction workers reached 22.5 percent, but was down from the high of 22.8 percent in February 2009. Overall, since the start of the recession, the construction industry lost 1.6 million jobs, the BLS reports. Through the first half of 2010, the market will likely remain in this “slow mode,” according to economists, but by the end of the year, it should start improving.
“It’s going to be another ugly year, but it will be the last one. 2011 will be better,” says James Haughey, chief economist with Reed.
Downscale me
The lingering fallout from the downturn is becoming evident in every aspect of the retail construction process, from pared down staff to lower job pricing to much smaller projects. Rivers notes that during ICSC’s CenterBuild conference in December, he encountered some architecture firms that had cut staffs down from 70 people to 10. In the course of 2009, Hardin has reduced its own staff by...
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