In the summer of 2012, fresh out of college and starting my career in retail brokerage at KLNB, a seasoned retail broker-turned-developer warned me to consider other careers.
“Retail is dying,” he said. “Why would people go to stores when it’s so easy to order online?”
Well, it’s been 12 years since that moment, and I’m still waiting for the retail boogeyman to appear. As I write this, I’m happy to report he hasn’t arrived — and the data suggests he’s nowhere in sight.
The Washington, D.C., metropolitan statistical area (MSA) is now in its tightest fundamental position on record due to limited new supply and continued demand from national, regional and franchised concepts.
In the Washington, D.C. market, we have the second-lowest retail square footage per capita among major MSAs, with new retail supply representing just 0.4 percent of total inventory. This places the Capital Region in the bottom quartile of retail real estate inventory growth among national MSAs that have more than 100 million square feet of existing inventory.
The result? Retail availability in the D.C. metro has decreased to 4.8 percent (compared to the national average of 4.7 percent), down from 5.1 percent year-over-year and 5.3 percent in 2019. Among Class A retail properties, true vacancy is down to 4.1 percent.
Here’s what this means: tenants are becoming more aggressive in securing prime space. Landlords with centers that contain any of the recent retailer bankruptcies (Red Lobster notwithstanding) are more likely than not to achieve higher per square foot rents than existing for new vacancy.
Recently, a KLNB team brokered a transaction for a MOD Pizza space in the D.C. metro that received three letters of intent above the landlord’s asking rent. This isn’t due to landlord hesitation; latent demand from grocery, discount, fitness and food-and-beverage brands has reduced availability from a year ago. It’s no surprise, then, that retail rent growth is up 3.3 percent year-over-year.
Still though, there are several property types that have been tough to match with retail’s evolving landscape. A swath of former bank spaces sit vacant on the market for those landlords that missed re-tenanting with a dwindling number of active financial institutions. Converting those banks to another retail type, like fast food, can be particularly arduous in the D.C. market due to the difficulty and expense of entitlements.
Theater spaces and multi-level department stores also present obstacles, often proving prohibitively expensive to redevelop. Lastly, elevated demising costs have compressed some rents as tenants are sometimes pushed to occupy larger spaces than they need.
Consumer demographics are also creating headwinds for our local economy. Terry Clower of the Stephen S. Fuller Institute recently presented to KLNB, noting that “the most concerning finding is that the number of people age 30-39 in the Washington, D.C. region declined between 2017-2022, while the same population group increased nationally over the same period. Furthermore, the youngest cohort, under five years old, shrank from 2017 to 2022.”
High childcare and housing costs are pushing young workers into more affordable regions. We wonder: will regional employers follow?
All that said, tenants continue battling for limited availability despite inflated construction costs, higher costs of capital and labor and rising rents in the metro D.C. area. KLNB has completed a record 580 retail transactions year-to-date — up 7.6 percent year-over-year. Tenants must search harder for off-market opportunities and, indeed, pay more for them. The margin of error feels smaller than ever.
Can sales keep pace, and will latent demand sustain historically low retail availability? We will have to see. So, what about that old friend who warned me about the boogeyman 12 years ago? I recently called him to ask about the doom he predicted. He chuckled and said, “Not yet.”
— By Jake Levin, principal of KLNB. This article originally appeared in the November 2024 issue of Southeast Real Estate Business.