Retail development carries more market risk than any other commercial development category, a reality that the sector’s structural transformation over the past decade has made impossible to ignore. The closure of department store anchors, the contraction of national apparel chains, and the transfer of commodity purchasing to e-commerce have rendered whole retail formats economically obsolete. At the same time, specific retail formats, neighborhood-serving convenience retail, food and beverage, health and wellness, and service retail that e-commerce cannot replace, have been actively expanding.
Developers and lenders considering retail development in 2024 need to understand which formats are growing, what those formats’ construction requirements are, and how the economics of retail development compare to multifamily and industrial at current construction costs.
The Formats That Are Working
Small-bay neighborhood retail and strip centers. Neighborhood-serving retail, quick service restaurants, personal services, medical and dental offices, urgent care, and convenience retail, has been among the most resilient retail formats through the e-commerce disruption. These uses serve daily needs that require physical presence: you cannot get a haircut or a teeth cleaning online. The small-bay strip center (2,000 to 6,000 square foot bays, 15,000 to 30,000 square feet total) serving the surrounding residential community is the format that has performed most consistently.
The economics of small-bay neighborhood retail development are driven by the density of the surrounding residential population and the quality of the traffic pattern. A strip center on a major arterial serving 20,000 households within a three-mile radius is a fundamentally different investment than a strip center on a secondary street serving 5,000 households. The surrounding residential density is the primary demand driver, and it is the variable most important to verify before committing to site acquisition.
Quick service and fast-casual restaurant pads. The outparcel or pad site, a freestanding building on the perimeter of a larger retail development, or a standalone site on a high-traffic corner, has been the strongest-performing retail development format in the markets Innergy Integral serves. National QSR and fast-casual brands (Chick-fil-A, Dutch Bros, Raising Cane’s, Chipotle) are aggressively expanding and will commit to leases or ground leases on well-located sites. The construction requirements for these buildings are relatively simple, single-tenant, purpose-built shells with drive-through configurations, and the tenants’ long-term lease commitments (15 to 20 years) provide the income stability that supports clear permanent financing.
Grocery-anchored neighborhood centers. Grocery-anchored retail has been the most stable format in the larger retail center category. Regional and national grocers, H-E-B, Kroger, Albertsons, WinCo, continue to expand in growing markets and are willing to execute long-term anchor leases that bring foot traffic benefiting the inline tenants who pay higher rents on a per-square-foot basis. The anchor’s credit and the foot traffic it generates are what make grocery-anchored center development bankable.
Construction Requirements by Format
Strip center and small-bay retail. Tilt-up concrete or masonry construction for the building shell, with individually metered utility connections for each tenant bay, is the standard construction approach for small-bay retail. The typical configuration: a concrete slab on grade, CMU or tilt-up exterior walls, steel roof structure, and individual storefronts. Construction cost for a standard small-bay strip center shell runs $85 to $120 per square foot in the Southwest and Texas markets, lower than multifamily, faster to construct, and less technically complex.
The tenant improvement (TI) contribution complicates the construction cost picture. Landlords typically contribute TI allowances to help tenants build out their spaces, a real cost that ranges from $40 to $120 per square foot depending on the tenant type and the condition of the base shell. Restaurant tenants require the largest TI investment because their buildouts are the most expensive.
QSR and drive-through pad buildings. Single-tenant pad buildings for QSR and fast-casual brands are typically tenant-designed and built to the tenant’s prototype specifications. The tenant (or their preferred contractor) is often directly involved in the construction, either as the owner-builder under a ground lease or as the specifying party whose prototype documents the landlord builds to. Construction cost for a standalone QSR pad of 2,500 to 3,500 square feet runs $500,000 to $900,000 depending on the fit-out complexity and the drive-through configuration.
Grocery-anchored centers. The anchor grocery store is typically built to the grocer’s proprietary specifications, often with the grocer directly contracting for their own construction. The developer builds the shell of the inline tenant bays and the parking infrastructure. Construction costs for the inline bays run comparably to small-bay strip, while the parking and site work costs are significantly higher due to the large paved area that grocery-anchored centers require.
The Market Context in Innergy Integral’s Service Area
Texas is the most active retail development market in Innergy Integral’s service area, driven by the DFW and Houston metros’ population growth and the sustained expansion of Texas-based and national retailers into new trade areas. H-E-B’s aggressive expansion into the DFW market, the grocer has been opening new stores at a pace that has disrupted the established grocery competitive landscape, has been a significant driver of new grocery-anchored development across the metroplex.
The Pacific Northwest’s retail development is more constrained, Seattle and Puget Sound markets have higher construction costs, longer entitlement timelines, and a tenant mix that has been more affected by the work-from-home shift than Texas or Arizona markets. Small-bay retail serving the Puget Sound’s residential neighborhoods has remained active, while larger format retail development has been more limited.
Retail development in the western US requires developers who understand not just construction delivery but tenant-specific build-out requirements, lease-up timing relative to the overall project delivery, and the ground-floor activation strategies that make commercial space viable in the specific pedestrian environments where they are building.
Innergy Integral provides these services in Dallas, TX and across our six-state footprint.
Related: Commercial Development Services · Mixed-Use Development Retail Leasing · Commercial Construction Management Dallas · Development Advisory Guide
Markets: Commercial Development Dallas TX · Commercial Development Houston TX · Commercial Development Austin TX