Development of Retail Strip Centers: North Carolina Case Study

Retail strip center development in North Carolina has become an attractive opportunity due to the state’s robust economic growth, population expansion, and favorable market conditions. Using Raleigh, North Carolina, as a case study, this article examines the feasibility of developing retail strip centers and offers insights into local market trends and project costs.

Market Overview in Raleigh, North Carolina

The Raleigh retail market, as of the third quarter of 2024, remains highly competitive, with limited availability and rising rental rates. This market is driven by a rapidly growing population, substantial demand for retail space, and constrained supply, making it a prime location for new retail development.

Key Market Data:

• Vacancy Rate: The vacancy rate in Raleigh's retail market stands at 2.9%, which is significantly below the national average of 4.7%. This low vacancy indicates high demand for retail space, particularly in suburban areas experiencing population growth.

• Net Absorption: The past 12 months saw 370,000 square feet (SF) of net absorption, reflecting steady demand for retail properties.

• Construction Activity: Despite the demand, retail construction activity has been limited due to high construction costs and elevated interest rates. Raleigh has approximately 740,000 SF of retail space currently under construction, but about 75% of this space is pre-leased.

• Rental Growth: Retail rents in Raleigh have increased by 5.9% over the past 12 months, placing the market among the top five in the country for rent growth. This contrasts sharply with the national rent growth average of just 2.2%.

The combination of strong demand and constrained supply makes Raleigh an attractive market for retail developers. Strip centers, in particular, present an opportunity to meet the needs of both national retailers and local businesses seeking space in a competitive market.

When considering the cost of building a retail strip center, multiple factors contribute to the overall project budget, including land acquisition, construction costs, and financial reserves. In this case study, we analyze the cost of developing a 35,500-square-foot retail strip center, providing a breakdown of the total expenses involved in the project.

Total Project Cost: $10,657,948

The total estimated cost to build this retail strip center amounts to $10,657,948. This figure includes land acquisition, construction costs (also referred to as hard costs), site improvements, and financial reserves to cover unexpected expenses. Below is a detailed breakdown of each component:

1. Land Acquisition: $1,700,000

   • Acquiring the land for this project is one of the first and most significant costs. In this case, the land purchase is priced at $1,700,000, which translates to $47.89 per square foot (SF) for the total buildable area of 35,500 SF. The location and size of the land heavily influence this cost.

2. Hard Costs (Construction): $8,471,365

   • Hard costs cover the core expenses related to the physical construction of the retail strip center. These costs average $238.63 per SF and include:

     • Base construction costs: $3,438,175

     • Exterior walls: $871,880

     • Heating and cooling systems: $397,955

     • Additional construction-related costs: $3,763,355

   • The hard costs represent the bulk of the budget and are driven by labor, materials, and the complexity of the build. Increases in material costs and labor shortages contribute significantly to these figures.

3. Site Improvements: $336,583

   • Essential site improvements, such as parking lots, decorative finishes, paved areas, and lighting, add another $9.48 per SF to the total cost, amounting to $336,583. These elements enhance both the operational efficiency and aesthetic appeal of the strip center.

4. Financial Reserves and Fees: $150,000

   • It is crucial to allocate funds for financial reserves to cover potential overruns or unexpected expenses. For this project, $150,000 is earmarked for financial reserves and lender fees. This ensures liquidity and coverage of borrowing costs, an important consideration when managing a construction budget.

Financing Assumptions

To finance the development of this retail strip center, we assume an 80% Loan-to-Cost (LTC) ratio, meaning $8,526,358of the total cost is financed through a loan, while the remaining $2,131,590 comes from the developer’s equity. The loan carries an interest rate of 7.00%, with a 25-year amortization period. This financial structure allows the developer to effectively leverage the investment, reducing the upfront capital required.

Conclusion: How Much Does It Cost to Build a Retail Strip Center?

Based on this case study, the cost to build a 35,500 SF retail strip center totals $10,657,948, or approximately $300 per SF. The majority of this budget is dedicated to construction (hard costs), while land acquisition, site improvements, and financial reserves make up the remainder. Developers must carefully consider these components when planning a retail strip center project, as fluctuations in material costs, labor, and financing rates can significantly impact the final budget.

Feasibility of Strip Center Development in Raleigh

The Raleigh retail market presents a compelling case for strip center development. High demand for retail space, driven by population growth and a strong local economy, supports the need for additional retail infrastructure. Additionally, rising rental rates make the investment financially attractive, as developers can expect strong returns.

However, challenges such as high construction costs and competition for limited land parcels mean developers must carefully assess potential projects. In this context, strategic location selection, tenant mix, and long-term market trends become critical factors in ensuring the success of a strip center development.

Conclusion

The Raleigh retail market’s low vacancy rates, robust demand, and significant rent growth provide a strong foundation for developing retail strip centers. Despite challenges posed by rising construction costs and limited available land, developers who can navigate these complexities are well-positioned to capitalize on the market’s favorable conditions. With careful planning and financial management, strip center development in Raleigh, North Carolina, represents a viable and potentially lucrative investment opportunity.

Source: Retail Feasibility Study