By all accounts, 2009 is shaping up to be a brutal year for retail real estate. With massive job cuts across a multitude of industries (unemployment reached 7.2 percent in December, up from 4.9 percent a year earlier) and consumer spending down for six straight months, retailers have been closing stores, leading to lower rents and higher vacancies at malls and shopping centers. The Mid-Atlantic region, including Maryland, Virginia and Washington, D.C., is not immune from that fallout, with chains such as Linens ‘n Things, Circuit City, Tweeter and Boscov’s closing a number of stores in the area.
But President Obama's move into Washington and base realignment and closure (BRAC) plans going into effect throughout the region provide two powerful stimulants that could mean the Mid-Atlantic weathers the economic storm much better than other parts of the country. The federal government is expected to expand its job force, while BRAC will keep a steady inflow of new, high-income residents into the states. Those residents will need supporting infrastructure, including housing, schools, healthcare facilities and, most important to developers, retail.
Below, a number of real estate experts based in the Mid-Atlantic give Retail Traffic their outlook on the region. Among them: Edward Goldmeier, vice president for retail in the Baltimore office of Grubb & Ellis, a national commercial real estate services firm. He covers the area from Fredericksburg, Va. through Washington, D.C. to Maryland. Charles F. Phelps, Jr. is president of Paraclete Realty, LLC, a Millersville, Md.-based retail real estate services firm. Paraclete Realty serves Maryland, Virginia, Washington, D.C., as well as Delaware and Florida. Thomas H. Maddux is a principal with KLNB retail, a Baltimore-based commercial real estate services firm active across the region. And Catherine Timko is a principal with the Riddle Co,, a Washington, D.C.-based business and economicconsulting firm.
Retail Traffic: How is the leasing activity in the region holding up?
Phelps: There are a lot of vacancies.
Goldmeier: Generally speaking, there is a definite slowdown in the properties where we are representing the landlord. There aren’t a lot of tenants looking and the ones that are looking are value-oriented and looking for very aggressive.
Maddux: I think there is a combination of things going on. [There] are spaces that are being vacated through bankruptcy. We have Linens ‘n Things and Circuit City and Tweeter. Each of these tenants has several stores in the region and that creates immediate vacancy in the market. Then there are others—Boscov’s gave up three sites around Maryland. Until this downturn started, probably a year ago, there was very little vacancy in the market. And like with any other vibrant real estate cycle, there was a lot being built and a lot planned, so we will have some vacancy as the result of projects that were conceived before the downturn.
Retail Traffic: Is anyone expanding right now?
Goldmeier: We have a regional dollar store that’s looking for opportunistic situations. The whole category of [value-oriented] and dollar stores—Dollar General, Dollar Tree, Big Lots—is out there. We [also] have a number of franchise concepts that we work with and those franchisees that are well capitalized are still able to open locations.
Phelps: Grocery stores--but it’s more talk than it is action.
Timko: Forever 21 and Guess have both just signed leases in downtown D.C. There are also more regional businesses looking at the markets.
Maddux: At the national level, I think we are still waiting to see [the effects of the past holiday shopping season] on what the expansion plans will be for any of the national retailers. They are obviously going to be very cautious in 2009 and 2010. One opportunity that I think is real today is for local and regional tenants to have access to retail spaces that they previously couldn’t afford. Especially with small shop leases in the coming year, that’s where we see our opportunity to maintain or fill vacancies in existing centers.
Retail Traffic: How are landlords reacting to the downturn? Are the rents softening? Are you seeing tenants get more perks?
Timko: Landlords are open-minded and willing to negotiate, depending on the individual situation. One of my retail clients is doing very well, but they are still asking for rent relief and the landlord just said, “No.” But I do think there is more creativity and more openness. We are seeing more flexibility in rents for both new and existing tenants and also tenant allowances. Some owners are using this as a perk for existing tenants rather than rent relief.
Phelps: I think landlords are becoming very realistic. Asking rents have come down every bit of 20 percent and they [are offering] build-out money.
Maddux: Those rental rates are coming down, those rental rates are being corrected and giving local and regional retailers an opportunity to come in. I think landlords were willing to provide tenant allowances when the funds were available to them. But if the lending markets are shut down for now and these landlords can’t borrow money to provide tenant improvements, obviously they are not going to provide them. We are going to live through that little phase too, when the tenant will say “This is my deal, this is what I need.” And the landlord will say “I understand the lower rental rate, but I don’t necessarily have the [tenant improvement] TI dollars.”
Retail Traffic: How much investment sales activity are you seeing in the retail sector?
Goldmeier: It’s more of a sideline on my end, but there’s been a huge slowdown. A lot of the sellers have not adjusted to the new reality, but buyers are not buying unless they see a real opportunity. I’ve seen cap rates on some of the freestanding drug stores that at one point were below 6 percent and are now 7.25 percent. It’s been easily a point and a half to two point increase.
Phelps: Cap rates are definitely going up; it depends on the strength of the retailers. But it’s clearly going above 7 percent. And those [buyers] that are in the market are looking, but not acting.
Timko: Investment sales are slowing down due to the lack of capital, [but] this is expected to improve as the year continues. Cap rates in the Washington metro are between 7 percent and 9 percent. There are so few deals, though, that it’s tough to accurately gauge this.
Retail Traffic: Which areas of the region seem to be the strongest?
Phelps: I would say that the closed-in markets are stronger than the rural areas.
Goldmeier: Downtown D.C. And Reston, Va. is a solid market. They also have less big-box development, so they are able to hold their own.
Timko: Right now, Washington, D.C. is holding its own. Communities that are highly dense and diversified economically are stronger.
Maddux: The Washington, D.C. market, which affects the entire region, is struggling through the same real estate cycle as the rest of the country because of the overbuilding of the residential market. And while we were in the expansion phase, retail development was following that market and it was also following the redevelopment of the urban areas of downtown Washington and Baltimore. Obviously those things have slowed down considerably. But the rest of the market, your typical grocery-anchored centers in established neighborhoods with good demographics should be fine because we are not going to suffer through the same unemployment woes as other parts of the country because of the federal government.
Retail Traffic: How do you think your region will perform relative to the rest of the country during this downturn?
Maddux: Well, we’d like to imagine that our region will remain stronger than other parts of the country because of employment opportunities. The federal government is the economic engine in the region, in both the public and private [sectors], because of direct federal jobs and the indirect jobs. Any time a new administration comes into Washington, just the transition of people and jobs creates economic activity by itself. And what will encourage [further growth] is BRAC relocation. This has been talked about for several years and even with the downturn in the economy there are people being relocated to this region and there is development to accommodate the relocation of these jobs.
Goldmeier: Pretty much just up and down that 95 corridor almost down to Fredericksburg, you’ve got that impact of people moving in [because of BRAC]. And those jobs typically have a compounding effect—you are talking about people who are going to have a large enough income so it’s going to create a need for more housing, more infrastructure, more schools, etc.
Timko: We have a solid foundation—we have a strong economy, we are not growing jobs at the same rate as we were, but at the same time, we are not losing jobs. Also, parts of the market are not exceedingly overbuilt.
Retail Traffic: What kind of a mood do you expect to see at the ICSC Mid-Atlantic Idea Exchange show?
Goldmeier: Probably somber. I would definitely expect attendance to be [down]. If it wasn’t it would only be because there might be a fairly substantial number of people looking for jobs, and they might come in for networking. But in terms of the true dealmaker type of attendance it will definitely be lighter.
Timko: The Mid-Atlantic show will be much more positive than New York Deal Making. Some of it is timing, but some of it is the market—we are stronger than others.
Maddux: Clearly, the attendance at this show will be less than it has been in the past couple of years. And that will be due to the fact that there are less people engaged in this industry or the companies can’t afford to send people to these shows. There will clearly be fewer retailers and people who aren’t directly engaged in the retail industry who attended these shows in the past couple of years. But we expect all of the regular attendees to be at the Washington show. We are still fully engaged because we have to be, it’s part of our core business.