That was a recent headline posted by ICSC, the leading retail real estate industry group. That got my attention. Anyone that has paid attention to retail real estate the last few years will know that there has been a generational dearth of new construction since the great financial crisis. So, I jumped on this bit of “clickbait”.
While perhaps empirically accurate, that headline is, well, a bit misleading. The second paragraph of the story did include “…though much of that is pre-leased, freestanding, build-to-suit”. For those of you not familiar with those terms, “preleased” and “build-to-suit” typically implies that the new construction investment is low risk. The tenant is committed, and generally the construction cost or investment has limited risk. Hence, the headline implying health for new retail real estate development is not exactly true. The story highlights four specific examples of landlords or specific projects reflecting fairly robust construction.
A bit of closer reading paints a different picture. Three of the four examples cited are actually stories about redevelopment and adding density to existing assets. Don’t get me wrong, these projects are typically a great investment and do usually net in additional retail space. However, again they do not speak directly to the idea of “new development”. The key takeaway can be found just after the examples in comments from Kimco Realty Corporation CIO Ross Cooper. He points out that with development costs north of $400 per square foot and rents in the $35-40 per square foot range it is hard to justify new construction. That challenge is emphasized by looking at the underlying research report that ICSC used for its story. United States Retail Outlook published by international real estate services firm JLL. On page 6 of that report, JLL shows market rents for 5 retail property categories. They range from $22.68 per square foot to $33.35 pers square foot. Only one category, malls, exceeded $30 per square foot. The disconnect between required investment and rents is even worse than noted by Cooper.
The JLL report does a great job of describing the healthy demand for space, especially in key sunbelt markets of Texas, Florida, North Carolina, and Georgia. No surprise that demand for retail space and resulting rent growth is occurring in the markets with the healthiest underlying economic and population growth. So, the great news continues to be that owners of existing retail properties are generally thriving. No surprise that demand growth, with severely limited supply growth leads to rising prices.
I am no editor, but it seems to me a better headline would have been: “It’s still happening, despite millions of retail square feet under construction the market is out of balance”. But what do I know?