When the founding fathers were trying to decide on a site for the federal capital, they eventually opted for one that took advantage of the Potomac River—at the time a major conduit of trade and a center of early American culture. Since then, it seems the river was forgotten by the city and parts of its southeast and southwest districts became economically depressed.

That is changing as Washington, D.C. is the latest city to re-embrace its waterfront. Activity is bustling not just along the banks of the Potomac but also along another great river—the Anacostia. In the southeast and southwest neighborhoods of D.C. numerous projects have been completed, under construction or planned. The only hitch is the pervasive credit crunch that is part of the deepening recession. That has thrown a pall on some plans at least for now. Nevertheless, those neighborhoods have undergone a dramatic revitalization, even if the full transformation will take longer than developers had planned.

The centerpiece of the revival of southeast Washington, D.C., is the $611 million Nationals Park, the new home for Major League Baseball’s Washington Nationals. The park debuted last spring in an area referred to as the Capitol Riverfront District. Upon completion, the district will boast 15 million square feet of offices, 9,000 residential units, 1,200 hotel rooms, four parks and 785,000 square feet of retail.

Down the Potomac River in Prince George’s County, Md., with skyline views of both Washington, D.C., and Alexandria, Va., is National Harbor. The $2 billion project developed on 300 acres by the Fairfax, Va.–based Peterson Cos., also opened last spring. It is home to the Gaylord National Resort and Convention Center, one of the largest privately owned hotel and convention centers on the East Coast. Residents began occupying condominiums at the project in the fall and its foot traffic as well as its roster of retail tenants is growing. Sixty percent of the 200,000 square feet available at the end of 2008 had been leased. The remaining 100,000 square feet is expected to come on-line in June.

Nationals Park and National Harbor are hubs for developers planning projects. However, like in the rest of the country, leasing of retail space has slowed in Washington, D.C., coinciding with declining retail sales as Americans cut back on discretionary spending. The District may fare better than many other metro areas because of the large concentration of government-related jobs, but it is not immune.

“It’s been a challenge,” says Thomas Maskey, senior vice president of retail at the Peterson Cos. “You almost have to lease space twice because the retailer either pulls out or they are unable to access the credit needed to move forward with their plans.” The Peterson Cos., like many other developers nationwide, has experienced dwindling inquiries from retailers because of the recession. Maskey says those previously interested retailers are pulling back and revisiting expansion plans. When the credit markets thaw, Maskey says, developers will be poised to move forward on stalled projects. Until then, he says, there’ll be a dearth of activity.

Despite the slowdown, the high-profile projects up and running in the southeast and southwest quadrants of Washington, D.C., created a “me too” syndrome among developers who don’t want to miss the boom, notes Michael Stevens, executive director of the Capitol Riverfront Business Improvement District.

One reason? In addition to the throngs of daytime and evening visitors and weekend sports fans expected to pack the various entertainment and dining venues, there are more than 13,000 government employees and contractors slated to occupy new office space in southwest D.C. at offices of the U.S. Department of Navy and U.S. Department of Defense, as part of the Base Realignment and Closure Act (BRAC).

Although the effects of BRAC won’t be felt for a year, Grubb & Ellis’ vice president of retail Edward Goldmeier notes it is expected to contribute to the long-term net gain in population in the area.

“I think the stadium put that part of D.C. on the map,” says Numa Jerome, senior vice president for East Coast leasing at Combined Properties, Inc. “There is a lot going on there that hasn’t been taken advantage of, which has attracted development in areas that had been previously under-retailed.’’

The Washington, D.C.–based retail real estate firm is bidding to develop the retail component of a 5-million-square-foot, mixed-use development at the former site of D.C. General Hospital, located in Southeast D.C., two miles from both the Capitol and Nationals Park stadium. Combined Properties and development partner Franklin L. Haney Co. formed a joint venture called Hill East Development Team. The firms propose to start construction next year with completion slated for 2023. The estimated $1.8 billion project will include 250,000 square feet of retail.

Another big project underway is the redevelopment of the former Washington Navy Yard, by Forest City Enterprises. According to published plans, the Yards will feature 5.5 million square feet of retail, residential and office space. A public park, riverfront trail and courtyard will be surrounded by three retail pavilions. It is to be completed by the end of the year according to Forest City’s Web site. However, Forest City declined to discuss its project’s status.

Meanwhile, Washington, D.C.–based Monument Realty previously announced plans to develop a project called Half Street, a 775,000-square-foot mixed-used gateway between Nationals Park and the Capitol. It will include retail in addition to a 196-room hotel. It is unclear when the project will be completed. Monument declined to comment on its project.

Also in the works is Clark Realty Capital’s Poplar Point, a 6.4-million-square-foot mixed-use waterfront community located on the east side of the Anacostia River, directly across from Nationals Park. The Arlington, Va.–based developer was selected by Washington, D.C., as its partner to develop the 110-acre waterfront neighborhood. The development will include a 70-acre park, housing and retail. Clark declined to discuss the project, which is scheduled to be completed in January 2010 according to its Web site. Sean Madigan, a communications director for the deputy mayor for planning and economic development, says the plans call for 405,000 square feet of retail, including specialty anchors that could include a home improvement store and big-box discount retailer.

The Obama boom
The activity on the rivers is part of a larger burst of building in the nation’s capital, one that defies the broader slowdown facing the retail real estate sector nationally. Overall, in Washington D.C., some 1,000 projects are expected to come on-line between now and 2014 according to the Washington D.C. Economic Partnership (WDCEP). The agency estimates that construction pipeline, which includes retail developments, to total $60 billion.

A primary reason for the boom in retailers looking to open additional stores or set up shop in the Capital City is that it has less than 9 square feet of retail per person compared with the national average of 20 square feet, says Jerome.

As a result, WDECP’s president and CEO Steve Moore says many of Washington’s nearly 600,000 residents (most of who are political appointees, with so-called recession-resilient jobs) shop in the neighboring states of Maryland and Virginia. Moore estimates D.C. residents spend more than $1 billion in retail sales annually in the suburbs.

“Historically, northern Virginia and Montgomery County, Maryland, had gotten all the high-quality national retail, but National Harbor has shifted that,’’ says Eric Rubin, principal, at the Madison Retail Group, the third-party arm of Washington, D.C.–based retail developer Madison Marquette, which handles tenant/landlord leasing and investment sales.

Fueling retailers’ past decisions to locate stores in the adjoining states was the exodus of D.C. residents to Maryland and Virginia; not to mention the higher cost and expenses associated with real estate taxes and mixed-use development in the city by comparison to greenfield development in the outlying areas.

To curb developers’ flight to the suburbs, the city instituted some incentives. There is $100 million in tax increment financing available. Last year, it provided a total of $3 million for three projects.

Also among the appeals for Washington D.C., is that in a downturn it has a more stable job base and should be less prone to the effects of the recession than other major cities. The District’s positive job and population growth is expected to accelerate with the Obama presidency. His estimated $850 billion economic stimulus package paves the way for an increase in spending from incoming residents.

The silver lining for D.C. is that it is home to the federal government of the United States, and by virtue of the financial crisis, a shift has occurred where the city now is the focus of the financial markets, says Rubin. The regulatory environment around finance is changing and it will benefit Washington, D.C., as the place to do business. “What that does for retail is people have to spend money to eat, drink and buy stuff,” he says.