The latest growth in construction spending forecast from the American Institute of Architects (AIA) was just released July 31 and there is some good news. While the overall message is that the slower-than-expected economy is leading to lower growth projections, the good news is that the projections in the Retail segment remain strong. AIA’s Consensus Construction Forecast projects 8.2% growth in retail construction in 2013 and 11.7% growth in 2014.
The AIA forecasts, conducted twice each year, are derived from a survey of the nation’s leading construction forecasters and their methodology is solid. But is this lone key performance indicator enough for us to feel good about our growth potential for the retail environments industry in the coming year?
I went to the U.S. Census Bureau to answer that question. First, I wanted to know if there is a macro-measure tracked that relates to retail construction. I found ‘Value of Private Nonresidential Construction.’ Next, I wanted to know if there is a measure that is a strong predictor of the first measure. I found ‘Retail and Food Service Sales.’
I assumed that strong retail sales leads to retailers investing more in their facilities. But you know the old saying, ‘when you assume…’
The best way for me to feel good about retail sales as a lead indicator to retail construction was to apply the statistics. Calculating the correlation (+1= perfect relationship, 0= no relationship) between retail sales and retail construction since January 2010 resulted in 0.599. This is a strong relationship, but this alone does not enable us to forecast. So I lagged the retail construction data 6 months behind the retail sales data and the resulting correlation was a stronger 0.619. I repeated this exercise lagging retail construction by 12 months and the results were even stronger at 0.684. The 12-month lag was the strongest correlation in the multiple scenarios that I tried. This led me to conclude that current retail sales growth is a strong predictor of retail construction in the following 12 months.
So how does this support the AIA forecast for growth in 2013 and 2014? The most recent 12-month retail sales growth tracked by the U.S. Census Bureau has grown 5% over the prior 12-month period. If we believe the statistics, we can expect growth of retail construction in the next 12 months.