MARKET HIGHLIGHT, OCTOBER 2009

WASHINGTON, D.C., CITY HIGHLIGHTS
Cary A. Judd, Ramon Kochavi

D.C. Retail market

It is good (again) to be a developer and owner of retail space surrounding the Washington metropolitan market, and key indicators suggest the picture is about to get as bright and colorful as the apple and cherry blossoms for which our Nation’s Capital is so famous.

The combined Baltimore-D.C. market consistently performs far above the national average when it comes to annual retail sales figures, expansions and new construction starts. The region was certainly not immune to the general lethargic retail conditions that have enveloped the country for the past 18 months, but this area typically enters a recessionary period last and emerges from any economic slow-down ahead of the rest of the country.

The combined fundamentals of strong employment — as buoyed by the large and encompassing shadow of the federal government — a diverse industry base and a highly educated population are the reasons for this continued success. With each passing day, we are seeing promising and optimistic reports that will set the stage for a new wave of retail expansions and entries into the D.C., suburban Maryland and Northern Virginia area. We predict the next 6 months will further validate why this is considered the best retail trade area in the United States.

Development in the retail sector is still doing well. In the area locally referred to as NoMa (north of Massachusetts Avenue), the multi-faceted Constitution Square, which consists of approximately 1.6 million square feet of space, is under construction; its retail section is anchored by a new urban Harris Teeter grocery store. The first delivery of space is expected to occur at the end of 2010. Forest City also is building The Yards adjacent to Nationals Park. More than 400,000 square feet of retail space and 2,800 residential units are planned. In the suburbs, rising soon is the 1.8 million-square-foot Merrifield Town Center in Fairfax County. The nearby parking lot serving the Dunn Loring Metro Center stop will be re-invented into a mixed-use project anchored by a new urban Harris Teeter grocery store. Supplementing the aggressive expansion plans of Harris Teeter is the new Safeway grocery store opening on Wisconsin Avenue in Georgetown in March 2010. A number of Wegmans Food Markets also are beginning to proliferate the suburban region.

Here are a few final observations:

• Unemployment is holding at less than 6 percent, which is approximately 50 percent better than the balance of most of the country. More than 30,000 to 40,000 new jobs are expected to be created in the market.

• Residential housing sales are beginning to perk up as the new home sales pace is more promising than the traditional media is letting on. New planned unit developments have picked up strong sales momentum in Loudoun and Prince William Counties in Virginia.

• National retailers suggest that the D.C. market has had the least disruption of sales volume among any of the markets in which they operate.

— Cary A. Judd is a Principal with KLNB Retail.

D.C. Multifamily Market

While the recession has impacted NOIs in the Washington area, the local apartment market has weathered the economic downturn better than in most metros. The 60 basis point year-to-date rise in vacancy to 6 percent is the most glaring effect of the recession. Although rents remain resilient, asking rents inched up 0.4 percent in the most recent 3-month period, while effective rents declined for only the second quarter since 2004.

Job losses have weighed the most on Class A asking rents, particularly in areas where rent gains were sizable recently, such as Pentagon City/Crystal City, the Connecticut Avenue Corridor and Rockville. The district’s Dupont Circle, Logan Circle and Columbia Heights neighborhoods, however, are notable exceptions to this trend, as these areas remain desirable to renters. Lower-tier asking rents have managed to push higher in many locations, although softer rents and vacancy rents have been recorded in the Anacostia/Northeast D.C. and Stafford County submarkets. Development completions are accelerating this year, and the construction pipeline is expected to remain relatively full through 2010, posing a further threat of concession increases. A metro-leading 9,000 units are under consideration in Virginia, while there are 6,600 units planned in the district and 3,900 units proposed in Maryland.

Compared to operating fundamentals, significantly more fluctuation has been recorded in investment trends, particularly property pricing. While the metro’s gross revenue declined by approximately 0.2 percent during the 12-month period ending in the second quarter, the median sales price fell 27 percent. The wide gap between revenues and price trends indicates that recessionary fears have created an opportunity to acquire local apartment assets at a discount. Buyers have hedged their risk by targeting historically strong areas such as Capitol Hill and Mount Pleasant as well as infill properties near the Prince George’s/Montgomery counties border. Meanwhile, a lack of on-market assets in Northern Virginia has discouraged activity, despite healthy investor interest.

This year, tepid demand will depress asking rents 0.7 percent to $1,355 per month, while effective rents will retreat 1.9 percent to $1,282 per month. Asking and effective rents gained 3.6 percent and 3.3 percent, respectively, in 2008. Top-tier asking rents in the first half of 2009 fell 0.7 percent to $1,636 per month, while Class B/C asking rents receded 0.2 percent to $1,168 per month.

Moderating demand for Class A apartments has driven vacancy 40 basis points higher to 6.9 percent. Employment losses in lower-paying sectors have forced vacancy for Class B/C apartments up 100 basis points to 5.7 percent. Through the end of the year, inventory expansion and waning residential demand will push metrowide vacancy to 6.8 percent.

For investment sales, distressed-asset acquisitions and sales involving REIT-owned properties are expected to put further upward pressure on initial yields, which currently stand at 6.75 percent for most properties brought to market at this time. Prospective buyers should be aware that prices will fluctuate less in Logan Circle, Dupont Circle, Bethesda and Arlington due to the cities’ long-term viability and proximity to district employers.

— Ramon Kochavi is the regional manager of Marcus & Millichap’s Washington, D.C., office.

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