Washington

Demographic Overview

Population: 7.3 million

Rate of Population Growth: 1.5%

Median Household Income: $91,500

Unemployment Rate: 3.8%

Retail Overview

2002 Retail Completions: 3.4 million sq. ft.

Retail Vacancy Level 2002: 6%

Retail Vacancy Level 2001: 6.7%

Average Rent Per Square Foot 2002: $21.60

Average Rent Per Square Foot 2001: $21.00

Source: Trammell Crow Company, U.S. Department of Labor, Marcus & Millichap

Despite softening real estate demand elsewhere, the Washington, D.C. market remains strong. National and international retailers are competing for a presence in both urban and suburban locations, as are investors. And all indications point to that continuing.

D.C. has low unemployment and vacancy rates. The unemployment rate of 3.8 percent has economists predicting rising affluence. This trend, combined with an economy propped up by the federal bureaucracy, a relatively affluent market and a continuously expanding housing market, equals demand.

The situation has attracted new entries such as Zara, H&M, Virgin Records, Bop and Coach. Restaurants and specialty retailers, including Trader Joe's, World Market, Panera Bread, Cosi Sandwich Works and Potbelly Deli, have aggressively entered the market with plans for multiple locations.

“Interest in this market is not lacking,” says Eric Rubin, a principal at Madison Retail Group. “The challenge is finding the right sites. Our firm is working with landlords and tenants to find suitable solutions to meet the retailers' requirements. That requires creativity and compromise and often combining multiple storefronts and utilizing vertical space.”

The number of retail projects in development is surprisingly high given the rigorous local planning regulations. Many are mixed use, developed in concert with new housing — not just in suburban locations, but in older urban neighborhoods, too. With limited available land and rising real estate costs, creativity is essential and evident from the level of renovation, adaptive re-use and in-fill developments under way.

Chevy Chase Pavilion — a 350,000-square-foot, mixed-use project located in the exclusive Chevy Chase district, features 150,000 square feet of upscale retail shopping, 200,000 square feet of Class-A office space and a 198-room Embassy Suites Hotel.

New owner Lowe Enterprises is completing a multimillion-dollar renovation to improve lighting and signage and to provide prominent frontage for new upscale retailers. The center's 11-story glass atrium is home to upscale boutiques. Tenants include Pottery Barn, Talbots, Victoria's Secret, Georgette Klinger and a 9,150-square-foot J. Crew.

“Chevy Chase Pavilion has evolved into a lifestyle center through the integration of uses,” says Madison Retail Group's Michael Pratt. One example is the 20,000-square-foot Washington Sports Club.

The Market Common Clarendon, a new 10-acre infill project in Arlington, Va., emphasizes this trend. Developed by Chicago-based McCaffery Interests, the center includes 279,000 square feet of retail, 300 apartments, 87 town homes, 95,000 square feet of offices and 1,200 parking spaces. Tenants include Williams-Sonoma Grande Cuisine, Barnes & Noble, Apple Computer, AnnTaylor Loft and South Moon Under.

Retailers are also clustering in urban neighborhoods such as Georgetown. Cady's Alley — a renovation project developed by Eastbanc on the 3300 block of M Street — transformed more than two dozen historic properties and two surface parking lots into an architecturally striking development of about 140,000 square feet of contiguous retail/showroom space, 118 parking spaces in a three-level underground garage and an additional 10,000 square feet of innovative residential space.

Historic townhouses and warehouses along M Street and behind Cady's Alley also blend historic elements with modern design features. This project is home to prominent, ready-to-wear apparel stores, designers, furniture manufacturers and home decorating stores, with a 22,700-square-foot Baker Furniture store acting as anchor, and Ligne Roset, Hollis & Knight, BO Concepts and Ambiante Collection taking inline space.

Lease rates have remained fairly steady over the past 24 months, ranging from $20 to $80 a square foot, depending on location. The average rent is $23 per square foot, a figure that is skewed to suburban strip centers.

Prime streetfront property rents range from $50 to $80 per square foot — up slightly from a year ago and considerably from 1999 when prime locations were going for $25 to $60 per square foot.

Likewise, investment activity has resulted in a record number of transactions and interest from many outside the region. As of Nov. 30, Insignia/ESG alone had closed 15 retail properties valued at about $250 million in the Washington market — a record for the office. Bill Kent, executive director of ESG/Insignia's local retail sales group says the investors run the gamut from pension funds and REITS to wealthy families and foreign investors.

“Almost every type of buyer has been active,” he says. “Earlier in the year, demand was outstripping supply, but as pricing started to increase, more product has been brought to market. Now supply is pretty much in pace with demand,” he says. Among the year's most significant transactions were Giant Food's sale of the 330,000-square-foot Cascades Marketplace in Sterling, Va., to Edens & Avant, bringing the latter's area holdings to 1.2 million square feet.

Unlike most markets, investor interest extends into the neighborhoods. For example, New York's Urban America LP made several Washington area retail acquisitions in the past two years, in inner-city areas. “The D.C. metro area offers a great deal of opportunity to acquire and develop properties,” says Richmond McCoy, president and CEO.

Roadside Development, a D.C.-based firm, is completing several urban projects, including a four-acre neighborhood center anchored by a major grocer one block from the new convention center, and the renovation of a former Sears building into a mixed-use project.

Grocers are also making a comback, a welcome change for a community whose residents once were forced to leave the neighborhood just to buy the essentials.