Rising costs and competition from other property types have slowed retail construction to a crawl, but the nation’s biggest retailers still need room to grow—and that’s creating new kinds of partnerships to get projects built.
JLL reports that as of the third quarter, retail space under construction had fallen to 50.6 million square feet.
“Rising construction costs and competition from alternative property types like multifamily developments have made speculative retail construction less attractive, keeping new supply limited and supporting occupancy levels,” JLL wrote in its Q3 Retail Market Dynamics report.
Ken Carpenter, president and chief investment officer of Madison Capital Group, tells GlobeSt.com that new construction is still critical for many national chains.
“There are tenants now that realize they need to grow,” he says. “They're public companies. They have shareholders. You can't just say, ‘We're closing stores.’ Yes, that can be optimizing, but you still have to grow.”
For developers like Madison, that growth often comes through collaboration.
“We have partnerships with our tenants, generally national, well-known, strong operators,” Carpenter says. “We have partnerships with our investors who ultimately own the finished product. And then, of course, to some degree, with other capital sources, like lenders and so forth.”
Carpenter describes one major retailer—a “well-known household name”—that enlisted Madison to help it expand its grocery business.
“They have laid out for us what it is they're looking for, the types of markets, the types of demographics, the types of traffic, and they have tasked us with, ‘Go find us sites and bring them back to us,’” he says.
Finding them isn’t always straightforward. Madison passed on one land plot in the Charlotte metro area three times because construction costs would have outpaced potential rents.
“Three times they've told us: No, put it back under contract. We'll reimburse you more. We'll pay higher rent,” Carpenter recalls.
The site, located in front of a multifamily property Madison previously developed, ultimately moved forward thanks to a creative site plan that balanced both parties’ needs.
“We might take down a piece of land, put self-storage in the back, maybe some retail strip center, shop space, as we call it, four, five, nothing major, and then some out parcels,” Carpenter says. “We can just be more creative because we are multifamily, self-storage, and retail net lease, an industrial net lease, owner, operator, developer.”
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