Shop Till They Drop: Retail Construction Keeps Booming

Construction spending for shopping centers of all types and sizes—from neighborhood stores to destination malls—will expand more than 40% this year, and an additional 12% in 2007.

Construction spending for shopping centers is up 50% over the last 12 months, and is currently triple

the low value reached at the bottom of the last building cycle, 2002-03. Similarly, construction spending for larger malls has doubled while spending for stand-alone general merchandise stores has increased 50%. In fact, the shopping center boom is so strong that it is not being slowed by recent construction cost increases, which have stalled most construction markets funded with public money.

There are multiple factors fueling the shopping center boom: several years of strong growth in retail sales, the abandonment of older shopping centers in declining neighborhoods, the need for stores near new housing developments, and market share gains by shopping center-based retailers.

Equally important are the very favorable financial conditions within the commercial real estate market. A capital surplus forced lenders to aggressively market commercial mortgages. Similar to housing mortgages, commercial lenders accepted higher loan-to-value ratios, extended period of interest-only payments, and reduced margins over their cost of funds.

The interest cost for construction loans is especially favorable because commercial lenders that previously only made long-term mortgages, such as insurance companies, are beginning to aggressively offer combined construction loan/long-term mortgages to compete with banks that began offering the combination mortgages in an effort to lock out long-term mortgage lenders.