Construction Costs Force Retailers to Examine Deals More Closely

 

Retail projects are not immune to the increased cost of construction. In 2004, the estimated cost of a new 30,000-sq.-ft. retail building was $2,674,800 (excluding land). Construction materials and labor costs pushed the project's 2006 price tag to $3,092,700—a 15.1% increase over 2004. Within this increase, the price for the shell jumped 16.5%, and tenant improvement costs rose 8.4%.

 

Ned Rukavina, vice president - Retail Brokerage at United Properties, says increasing construction costs are forcing retailers to scrutinize deals more carefully to see if they can make their models work.

 

"A retailer, for example, may look at several sites and run their model," he says. "They’ll tell the landlord, 'Here's what we can afford in rent and tenant improvements (TIs).' It might not be enough, so they walk away from the deal. The high construction and land costs are pushing some retailers from certain markets, because they simply can’t afford it."

 

Average retail land costs in the Twin Cities can vary from $6 or $7 per square foot for raw land to as high as $18 to $21 for pad sites. Meanwhile, Rukavina says tenant improvement costs for retailers are all over the board. For a high-end women’s apparel store, for example, tenant improvement costs can be as high as $75 per square foot above shell costs. This would include a drywall ceiling, an upgraded lighting package and dressing rooms, and restrooms with high-end finishes.

 

In contrast, a discount store that has concrete floors, painted walls and very basic restrooms can keep tenant improvement costs much lower.

 

 

Rukavina says the higher costs of construction and materials may make developers and builders value engineering more as they consider different building methods to stay within budget.

 

"If they create a budget and run a pro forma, they have to figure out how to make the budget," he explains. "How do you make the project work? Do you change building materials?"

 

Rukavina also says the overall development process today is more time-consuming. Developers are finding that the entitlement process for projects is taking significantly longer than it once did.

 

"More community groups are involved," Rukavina says. "There are new zoning regulations. Cities are taking more of a stake in influencing what they want on someone's property. There's more wrangling. This slows down the process, so that adds to developer costs because time is money."

 

 

 

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