SOUTHEAST SNAPSHOT, MAY 2006

Washington, D.C. Retail Market

Kate Howarth, Managing Director, Investment Sales Group,
H&R Retail

The Washington, D.C. regional retail market continues to be white hot. From urban mixed-use to ex-urban strip centers and everything in between, investors and tenants are standing in line to get in on the phenomenal success of this market. Growth in high paying jobs has led to a surge in new home construction of all types. Residential growth means an increased need for goods and services; retailers need a platform to display their wares and the result is seemingly endless demand for new shopping centers.

Like the rest of the country, the trend here is to redefine and redesign unanchored strips centers into lifestyle centers. Lifestyle centers and town centers are much sought after by area jurisdictions, however, very few true lifestyle centers have progressed past the planning stages, due in part to extremely high barriers to entry and competition for prime sites from higher density developments. Anti-big box legislation is a hot topic, however these retailers continue to secure locations by becoming a bit more flexible and creative with their designs, such as Target considering two-story stores with structured parking.

Mike Gorsage, Principal, Investment Sales Group,
H&R Retail

At long last, downtown Washington, D.C. is alive and vibrant. Gallery Place near the Verizon Arena (until recently known as the MCI Center) and the planned DC USA project are just two of the retail developments capitalizing on the renewed interest in city living and the attendant residential/condo boom. The Southeast waterfront area, home to the new baseball stadium for the Washington Nationals, is expected to be the next hot urban neighborhood for retailers. The trend of recycling existing commercial properties, especially in D.C. and older, close-in Maryland and Virginia suburbs, should continue as entitlements become more time consuming and expensive. These existing centers will be replaced with higher density projects, with retail on the first level and residential /office above.

New retail development continues apace in the growing suburban markets. Properties such as Peterson’s Harbor Place on the Potomac River in southern Prince Georges County and Penrose's Rockspring with Canyon Ranch in the heart of affluent Montgomery County are getting under way, catering to a young, mobile, and highly educated shopper that is typical of the D.C. market. Towns like Leesburg, Culpeper, and Fredericksburg, Virginia, once considered outer suburbs, are becoming vibrant employment/residential/retail centers. Consequently, savvy developers are tying-up sites in West Virginia to the west and areas once thought of as suburban Richmond to the south.

The most active tenants in the market include: Target, Harris Teeter, Bank of America, Commerce Bank, PNC, and the Raving Brands restaurant concepts such as Moe’s Southwest Grill, Doc Green’s Salads and Shane’s Rib Shack (with 18 locations open or in various stages of development).

Giant continues to be the grocery market leader, but Whole Foods, Wegman’s and Harris Teeter are aggressively eating into Giant’s once formidable market share. Food Lion, also active in Northern Virginia and suburban Maryland, is going through a re-branding exercise — splitting their stores between the higher end Bloom concept and the more budget conscious Rock Bottom concept.

Rising interest rates is on the lips of every investor as they try to convince sellers and their brokers that cap rates are moving up, which is incorrect. Despite the recent increase in interest rates, cap rates continue to compress especially for the A quality assets which are trading for sub-6 percent cap rates. This is a reflection of investors’ hunger for quality product.

The biggest challenge facing any seller in today’s market is where to re-invest their profits. Product is scarce and many long time owners have such low basis that if they can find a replacement property to trade into, they opt not to sell rather than take a substantial tax hit. Owners still have attractive re-financing alternatives. Even with an up tick in interest, owners can lock in rates sub-6 percent — add to that a couple of years of interest only — and the argument for keeping an asset can become compelling. 

Conventional wisdom is that with the explosive growth of the D.C. market, good properties today will be great properties tomorrow. Despite the fact that the retail industry has been saying for years “It can’t go on like this much longer,” the positive trends in the D.C. area continue.

— Mike Gorsage is principal, and Kate Howarth is managing director for H&R Retail Investment Sales Group in Chevy Chase, Maryland.



©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.




Search Property Listings


Requirements for
News Sections



City Highlights and Snapshots


Editorial Calendar



Today's Real Estate News