SOUTHEAST SNAPSHOT, JANUARY 2009

Washington, D.C., Retail Market

Washington’s retail history was rewritten a decade ago. Historically, retailers had been drawn to the city’s outliers, to comfy spots in Maryland and Virginia, but with the help of Washington’s government, developers started building retail centers in the city. This short history explains why the Washington retail market is fairing better than other markets in the region, says Keith Sellars, senior vice president for real estate and economic development at the Washington, D.C., Economic Partnership.

“People fled the city 40 years ago, and there wasn’t a lot of investment here in the city,” he says. “We’re suffering with this economic downside just like the rest of the nation, but the retailers that are here are doing pretty well because there’s such a gap in retail services compared to the other jurisdictions that surround us.

These developers, with the city’s blessing, focused on building mixed-use developments and stores near metro stops. The city started keeping its retail dollars inside Washington, but still loses around $1 billion a year to Virginia and Maryland.  Investments in the city led to neighborhood development steeped in retail. Barracks Row in Capitol Hill received $12 million in streetscape enhancements, enough to entice shops to the neighborhood. “We’ve seen over two dozen new restaurants come to the area as well as some small unique mom and pop stores,” he says, pointing out that Barracks Row backs up to the Capitol River Front, another thriving retail center. “It’s a true neighborhood that’s being developed by scratch.” The 14th Street Corridor is also becoming a retail hotspot, with the addition of a YMCA building.

Jay Klugh of Chevy Chase, Maryland-based JBG Roesenfeld Retail sees a slowing retail economy with a shift in power from landlords to tenants and the prominence of discount retailers. Vacancy rates, however, are still lower than the national average. “The gold standard tenants were Whole Foods and Starbucks. We’re seeing both of those tenants pull back and either delay openings or close stores. That has really impacted the market,” Klugh says. “We are now looking toward more discount credit tenants who are looking at this time as an opportunity to do deals where they otherwise were blocked out.”

Klugh thinks developers will start looking at Washington a little differently. Where in the past developers wanted simply to bring retail to the area, now they’ll be looking at things a little closer.

“Previously, it was let’s get the most uses on a piece of property that we can. In a place where land is a scarce commodity, they were looking for mixed-use opportunities,” he says. “The trend that we will see in the next year is that there will be fewer mixed-use projects. We’ll see more traditional retail.”

One thing is for certain. With a new administration coming to town, retailers are expecting an uptick in sales that will start January 20 at the inauguration.

“With new folks coming in, they need to set up their households,” Sellars says. “That’s a huge positive for the district.”

North Bethesda Market Brings Retail to Washington, D.C. Whole Foods will delay its opening at the 650,000-square-foot North Bethesda Market. While not inside the city proper, a development in Montgomery County, Maryland, will help bring more retail choices to shoppers in the Washington, D.C., metro area. More than 220,000 square feet of retail is slated for the 650,000-square-foot North Bethesda Market, located on Rockville Pike in the North Bethesda (NoBe) area. Developed by the JBG Companies of Chevy Chase, Maryland, the market is across the street from the White Flint metro station and includes 400 residences. More than half the retail space is reserved for LA Fitness and a 60,000-square-foot Whole Foods. According to Jay Klugh, the grocery retailer has delayed its opening for at least 1 year. Torti Gallas and Partners designed the property, and Clark Construction is serving as general contractor. Current site plans call for six restaurants and two banks. The project’s retail phase is expected to deliver in the second quarter of 2010.

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