Market Overview
Unlike most major markets across the U.S., the retail real estate landscape in the Washington, D.C. MSA, which includes the inner-city core as well as Northern Virginia and nearby Maryland, looks quite similar to that of 2006. While most big cities face the issue of too much supply and not enough demand, D.C. is busy developing new centers to keep up with demand.
For example, Hines’ CityCenterDC project in downtown D.C., now under construction on the 10-acre site of the District’s old convention center, is a 2.5 million-square-foot mixed-use project that promises to have a major impact on the East End of downtown. The 1.3 million-square-foot first phase, slated for completion in late 2013, is set to include office buildings, condos, apartments, 185,600 square feet of retail, a park and a central plaza. Upon completion, the retail portion will total about 400,000 square feet. Inside the Beltway, 10-acre sites aren’t easy to come by and, given its critical mass, CityCenterDC has the potential to be a game-changer in this market.
Two of the city’s waterfront areas are also seeing major development. Thanks to the efforts of Forest City Washington and a host of other developers, the Southeast Waterfront will soon be home to 400,000 square feet of retail and restaurants in the shadow of the new Nationals Ballpark. At the Southwest Waterfront, Hoffman and Madison Marquette have partnered with the city in an ambitious project that will eventually include retail, residential, office and hotel.
Chinatown, otherwise known as Penn Quarter/the East End, continues to be the single most sought after downtown market. Its retail core includes the likes of Forever 21, H&M, Zara, Banana Republic, Urban Outfitters, JoS. A. Bank and Anthropologie (currently under construction). The market is the “perfect storm” with the Verizon Center (home to the area’s professional basketball and hockey teams, as well as countless concerts and performances), live theater, cinemas, restaurants, a huge daytime population, a solid residential base and lots of tourism traffic feeding up from the National Mall, coming together to create an enormous amount of demand.
Washington’s MidCity District (centered on 14th and U Street NW) has also become a force in the regional retail market. About 10 years ago, Whole Foods had the foresight to open a store at 14th and P Streets, setting the stage for an epic resurgence. Today, MidCity is home to the highest number of eclectic retail and restaurant establishments in the entire market. A number of other D.C. neighborhoods are similarly growing in popularity, including the H Street Corridor, Capitol Hill and Shaw, where about a dozen projects are on the way.
Outside the Beltway near Tyson’s Corner in Fairfax County, Va., the $542 million, 2 million-square-foot Mosaic project will be a major boost to the Merrifield community. The 31-acre mixed-use development will include a new Target store located on the third level between structured parking and ground-floor retail, along with theaters, a hotel, a gourmet grocer and lots of specialty retail. Initial delivery begins in early 2012.
Stonebridge at Potomac Town Center is a 500,000-square-foot lifestyle center under construction in Woodbridge, Va., where the average annual household income exceeds $110,000. Its leasing program — which stalled when it was first brought to market during the 2008 financial crisis — is now 80 percent pre-leased. In addition to having a 138,000-square-foot Wegmans supermarket as an anchor, a mix of more than 50 retailers including upscale fashion, outdoor cafes, a health club and entertainment venues is planned.
Market Analysis
Overall, vacancy rates for the market stand at about six percent, with most Class “A” real estate fully absorbed. In and around Tyson’s Corner—the original “edge city” with some 46 million square feet of office and retail space—the chaos of the Metrorail’s expansion and constant construction hasn’t soured national chains’ desire to be there. The bottom line is this: whether you’re talking about the suburbs or the city, D.C. is a landlord’s market, with low vacancies and solid rents compared to markets elsewhere. Likewise, we are still seeing top tier, well-positioned real estate sell at six or sub-six caps. Even without grocery anchors, these properties are good investments thanks to D.C.’s strong demand.
By far, the biggest challenge in this market, while we wait on the opening of the aforementioned developments, is the lack of available real estate. Doing deals in D.C. can take creativity — like persuading a retailer to go vertical or go smaller than they’d like. In most cases, the potential sales volumes can make this a fairly easy sell. High barriers to entry also give innate advantages to home-grown developers with strong connections, deep pockets and intimate understanding of the city. Today, these savvy players are following the Metro’s green line north and east into the wealthier parts of the market where there are phenomenal opportunities. They are pushing the entitlements out to these corridors and building residential on top of retail, much to the pleasure of consumers. An outsider would be hard-pressed to compete with them.
While the landscape is similar to that of 2006, there are some slight differences: In 2006, money was cheap and opportunities were easy to come by for everyone, everywhere. Today in D.C., seizing a good opportunity can be capital-intensive, time-consuming and difficult, but well worth the time and energy to be part of this resilient, bustling market.
— Jeff Pollak is an X Team International partner and managing principal
of Bethesda, Md.-based Streetsense.