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Thirty years of retail construction trends

By Michael Baker

This article provides an overview of 30 years of retail construction, based on data collected by F.W. Dodge, a unit of the McGraw-Hill Construction Information Group. The data cover both freestanding stores and shopping centers, and update a previous review of retail construction data conducted by ICSC several years ago. (See ICSC Research Quarterly, Vol. 3, No. 1, Spring 1996.) Both articles are part of an ongoing effort by ICSC to monitor the growth of retail space. This has become particularly important because of the commonly accepted argument that there is a significant mismatch between supply and demand.

This article doesn't attempt to advance either side of that argument. Rather, it aims to provide relevant facts at a highly aggregated level, but with the benefit of a lengthy historical perspective -- Lexington, Mass.-based Dodge has been collected retail construction data since 1967, which enables us to look back a full 30 years.

Back to stores

While stores edged out shopping centers as the dominant retail construction format during the 1970s, the 1980s unquestionably belonged to shopping centers. In the 1990s, the pendulum has swung back toward stores once again. Since 1990 Dodge data indicate that store construction has amounted to more than 1.2 billion square feet, or the equivalent of about 460 Malls of America (see chart, page 106). By comparison, shopping center construction has totaled about 467 million square feet. [It should be noted that the shopping center number refers to building area -- not gross leasable area (GLA) -- so that the actual amount of new retail space is somewhat less than 467 million square feet.]

Each year from 1984 to 1989, shopping centers added well over 100 million square feet of new space, with a peak of 127.6 million square feet in 1985. Since 1989, 100 million square feet have not been exceeded in any year; in fact, the annual pace of new shopping center construction has averaged just 53 million square feet (See table, above).

Store construction accounted for slightly more than 75% of the total in the first three quarters of 1998, approximately the same as for 1997 (See table, above). This figure is lower than the peak of 79% reached in 1993, but well above the levels of the 1980s, when it was normal for stores to account for about 45% of the total.

Shrinking stores

A key feature of the increase in the amount of store construction space during the latter years of the 1990s is that it has been achieved mostly through an increase in the number of projects, since new store size declined from 26,540 square feet in the first quarter of 1994 to 19,700 square feet in the fourth quarter of 1997. The decrease was attributable to two main factors:

1. Strong growth in the number of new projects in smaller size categories -- the number of new stores under construction in the 5,000- to 25,000-square-foot size range increased from 1,914 in 1994 to 3,522 in 1997 and to 2,574 in the first nine months of 1998;

2. In 1996 and 1997, a sharp drop in the number of new stores being built in the 100,000-plus-square-foot category; the count decreased from 503 in 1994 to 413 in 1997.

Source: F.W. Dodge, a unit of McGraw-Hill
Construction Information Group.
*1998 data through third quarter only.

The second of these two trends led to a reduction in total new store construction square footage in the 100,000-plus-square-foot size bracket in 1996 and 1997. However, it would be premature to declare that the surge in stand-alone big-box construction that has been a feature of the 1990s is beyond its peak, since new store construction in the 100,000-square-foot category -- in terms of both numbers of projects and total square footage --headed up again in the first nine months of 1998.

A subset of this size category -- stores 200,000 square feet and above -- saw 35 new construction starts in the nine months through September 1998, which exceeded the total for the whole year of 1996 and almost equaled that for all of 1997. Average store sizes within this subcategory also seem to be holding the line, despite indications that retailers like Wal-Mart are experimenting with scaled-down store formats that shoppers find less overwhelming.

Growing centers

Meanwhile, the average size of new shopping centers under construction continues to increase, reaching 101,700 square feet through the end of September 1998. Apart from 1995, this level has not been exceeded since 1971. It is almost twice the average of 55,520 square feet reached in 1984, before new shopping center sizes embarked on their steady upward trend.

The average size of new centers under construction has increased in virtually all size categories above 100,000 square feet. The trend is attributable to a number of factors, including the need for a larger number and variety of retail tenants to attract shoppers to traditional malls; the rise of the entertainment component in shopping centers, particularly multiplex cinemas; and the development of ever larger power centers, which now proliferate in size ranges that were once the preserve of regional malls -- that is, 400,000 square feet and above.

Although the average size of centers over 100,000 square feet has been increasing, the total number of these centers being built has been declining, which accounts largely for the decrease in total shopping center space added in this decade. If not for a significant increase in the number of small centers less than 100,000 square feet (1,638 new projects from 1994-1998), the amount of added space would have dropped far more precipitously.

Center renovations

The other piece of the shopping center construction story is renovations. The rate of construction of new shopping center space has stabilized around 45 million square feet per year since the late 1980s (See table, page 104). Meanwhile, in the first few years of the 1990s, the number of renovations to existing centers -- other additions and alterations -- continued to increase. They reached a peak of 70% of all shopping center construction projects in the first quarter of 1994 and 65% of all projects for the year. Renovations then plateaued for several years before dropping off sharply since the end of 1997. Despite the recent decline in renovations, they are still well above the level of previous decades in terms of both numbers of projects and contract value (See chart at right).

The vast majority of renovations continue to be alterations without addition to building area. As the U.S. economy emerged from recession in the early 1990s, the number of alterations increased from 601 in 1992 to 812 in 1994. It had continued to hover around that level until 1997.

However, through the end of the third quarter of 1998, the number of alterations was running 35% below the first three quarters of 1997, so it appears that the 1998 total may be lower than 1997 and well below the average for the 1990s as a whole. However, the alteration projects undertaken in 1998 carried an average contract value of just over $900,000, making them more expensive than those in any previous year since the 1991-1992 recession.

Meanwhile, the number of additions to existing centers has averaged 90 projects per year during this upswing in the business cycle, at an average value of $4.7 million. The number of shopping center additions has been significantly boosted in the 1990s by the need for regional centers and factory outlet centers to expand the number and variety of their tenants to compete against newer super-regional centers. Building projects in a series of phases has been a particular hallmark of factory outlet centers.

Conclusion

The Dodge data show a remarkable slowdown in shopping center new construction in the 1990s, accompanied by a increase in the average size of new centers and a significant repositioning of existing centers to make them more competitive. Meanwhile, construction of stores continues to rise, now accounting for about 75% of all retail construction in the United States.

The data presented in this article are, of course, aggregated to the United States level. The reader can obtain data at more disaggregated levels directly from F.W. Dodge.