Traditionally, a slowdown in the housing market is a bad sign for retail since shopping center development trails residential. The current downturn, however, has provided an unexpected upside. After years of steep inflation on construction materials because of the dizzying pace of residential construction, prices on items such as gypsum, plastics and ceramic tile have fallen back while those for cement and pre-cast concrete have posted only moderate gains.
That means retail developers won't have to break the bank on new project construction. The downside? Sustained concerns over the housing slowdown also mean that retail spending may drop, which might make any further retail development extraneous.
The "biggest financial bubble in history," cited by The Economist, fueled by rampant overbuilding and liberal mortgage lending practices between 2001 and 2006 has burst. In the first six months of 2007, new housing starts were down 27 percent compared to the same period in 2006 according to Reed Construction Data; with single-family starts falling 28.5 percent and multi-family starts down 18.5 percent. And, with just 1.49 million units having broken ground since October 2006, Reed researchers characterize the country's housing market as being in its worst shape since 1997.
As of July, costs for commodity construction materials were up 0.5 percent from a year ago, but down 0.4 percent since June, according to Reed. During the second quarter of 2007, the price for constructing a shopping center remained flat, says Brian Smith, chief investment officer with Regency Centers, a Jacksonville, Fla.-based REIT with $1.3 billion of new projects under construction.
Kenneth Simonson, chief economist with the Associated General Contractors of America, projects that over the next 12 months construction prices will increase an average of between 3 and 5 percent, compared to annual increases of 6 and 9 percent realized during the past three years
So far, according to Reed data, the most dramatic price change has been the decline in gypsum products, used for drywall in both commercial and residential projects, which has plunged 17.3 percent compared to a year ago. Also down are prices for engineered wood products which fell 9.4 percent from last year; softwood lumber dropped 5.3 percent and plastics slipped 2 percent.
However, the other key construction materials, such as concrete, continue to hold up. Jim Haughey, chief economist with Reed notes the price of pre-cast concrete grew 4.9 percent compared to last year while the cost of cement rose 4.7 percent and sheet metal climbed 2.3 percent. However, those increases are modest compared to jumps in prior years. In 2005, for example, prices of concrete products jumped 17 percent.
Haughey cautions, however, that some of those decreases are being offset by higher wages for commercial building contractors. "Wages have gone up for non-residential sub-contractors because their skills are different" than residential builders, he says.
Although the slowdown in the residential sector has freed up subcontractors who can be used for site work, laborers who specialize in retail development are still hard to come by, according to Walter Bagley, director of construction with Edens & Avant, the Columbia, S.C.-based retail developer with a $1 billion pipeline. And, according to Haughey, the wage rate for subcontractor labor has risen 4.2 percent compared to last year.
Labor prices are not the only thing worrying retail developers. The rule of thumb is retail follows rooftops, so the decrease in the number of new residents means a slowdown in retail construction and, possibly, scrapped projects. This year, overall spending on retail job sites is projected to swell 14 percent compared to 2006, according to Reed. However, in 2008, that figure is expected to fall back to 6 percent. "That is just a little more than the construction cost increases," says Haughey, who anticipates the pace of new retail development to slow.
The good, according to Regency's Smith, is that while the slowdown in the residential sector is likely to affect developers of neighborhood and community shopping centers in up-and-coming areas, those whose pipeline is concentrated in primary markets with established populations should emerge unscathed.
"As home building slows, it will slow down retail," says Steven Rivers, senior vice president with Hardin Construction Co. "But the Southeast is still pretty active, and out West places like Arizona and Nevada still have a large influx of population so, I think they will keep up. Where we are, in Orlando, we had such a large inventory of new homes come in that the retail is still catching up to the new rooftops."