AREA REVIEW: Urban renewal fuels the Mid-Atlantic

Government spending spurred by the U.S. war on terrorism is allowing the Mid-Atlantic region to remain relatively strong in a weak economy. According to Chicago-based Grubb & Ellis, the D.C. metro region will take on about 65,000 new jobs in 2002, increasing spending dollars and consumer demand for urban retail in the area.

The District currently ranks among the fastest growing economies in the United States and has a history of stability in times of economic recession, and the market's less-crowded peripheral areas in Maryland and Virginia stand to benefit by proxy as the District continues to float.

“I can't say enough good things about the epicenter of this Washington, D.C./Baltimore metro market,” says Mike Gorsage, senior VP of Trammell Crow Co.'s Washington, D.C., office. The only downside to the market is its state of saturation. “The local economy is robust, and the retail market is upscale but supply-constrained with high barriers to entry.”

Altogether, The District, Maryland and Virginia are currently home to 313.4 million sq. ft. of GLA, according to ICSC. Most major retailers already enjoy a presence in the Mid-Atlantic, but those chains wanting to enter or expand in the market are not finding the glut of new developments that were available in the expansive 1990s.

Instead, they are circling underperforming stores like buzzards, waiting for the chance to gobble up freshly vacated prime GLA. In other cases, retailers are moving into blighted urban areas where greyfields offer malleable space. “It's a function of available money and demand far exceeding supply,” says Tom Maddux, president of Towson, Md.-based KLNB.

The recent bankruptcies of Kmart, Hechinger and Montgomery Ward mean big-box retailers such as Wal-Mart and Kohl's will have the easiest time expanding in the Mid-Atlantic in the next few years. Empty boxes that aren't snapped up by the big chains can be redeveloped profitably, as exemplified by The Market Common, Clarendon — a mixed-use project by Chicago-based developer McCaffery Interests.

McCaffery took a dark Sears store near Georgetown and redeveloped it to include 250,000 sq. ft. of retail, 300 apartments, 87 townhomes and 100,000 sq. ft. of office space. The Market Common's retail space is 100% leased to the likes of Pottery Barn, Crate & Barrel and Apple Computer — a lineup more suited to the area's tony consumers than Sears. Phase I of the project has been such a success that the company plans to add 10 more stores in a 125,000-sq.-ft. second phase this summer.

In the Baltimore suburb of Woodlawn, Md., the management of 1.1 million-sq.-ft. Security Square Mall is working with the buyer of a 143,252-sq.-ft. former Montgomery Ward building to explore possible uses and tenants for the two-story facility, says Deirdre Moore, vice president and general manager of the mall. The building, which underwent a $3 million renovation in 2000, was vacated in January as part of the 250-store national Wards bankruptcy.

The buyer is Security Wards LLC and Security Square Mall is owned by Bethesda-based Capitol Real Estate Services Inc. and is anchored by Hecht's and Sears.

Of course, success stories such as McCaffery's cannot be replicated at all greyfields and vacant buildings at high-traffic malls such as Security Square are rare. Vacant anchor spots with little promise of attracting a retail tenant will likely be converted to other uses such as medical or mini-storage, Maddux says.

One property type that is almost vacancy proof in the Mid-Atlantic is the stalwart neighborhood center. Not surprisingly, supermarket-anchored strip centers are the most popular formats with lenders and developers in the region, particularly those anchored by Safeway or Giant. At $200 per sq. ft., prices for these centers are as strong in the Mid-Atlantic states as anywhere else in the United States except for perhaps the West Coast, Gorsage says.

And investors are willing to pay more of a premium for the Washington, D.C., area in particular. Cap rates are 8.25 to 8.5 with an internal rate of return (IRR) of 10.5, he says. Although the majority of owners of these centers are small companies, a few larger companies have amassed healthy neighborhood portfolios, including Federal Realty Investment Trust (which recently announced plans to refocus on community center properties), Giant Food Realty and Combined Properties.

First Washington Realty, which advises and manages 85 community centers in the area, reports strong occupancies, attractive market rents and tenant sales consistent with performance before the recession took hold. “We're very pleased with the performance of our portfolio and the market appears to be rewarding this particular property type with strong pricing,” says First Washington Realty chairman Stuart Walpert.

Other retail darlings in the Mid-Atlantic include well-leased, neo-Main Street developments and freestanding urban drug stores, Maddux says. One recent success is Simon Property Group's 650,000-sq.-ft. Bowie Town Center, which opened in the booming east D.C. suburb of Bowie, Md., in October. Hecht's — the locally based division of May Department Stores Co. — and Sears anchor the center.

Tenants are reporting above satisfactory sales per sq. ft. at the project, according to the developer. “From the feedback we're getting, anchors are exceeding their forecasts by a wide margin,” says Mike McCarty, Simon's senior VP of research and corporate communications. “Given the level of success we've had here, this is clearly a market that's on our shopping list for acquisitions and new developments.”

Another model Main Street — Federal Realty Investment Trust's Bethesda Row — occupies seven city blocks within the Bethesda, Md., CBD. Construction is underway on the project's 130,000 sq. ft. fifth phase — a 68,000-sq.-ft. Giant supermarket. The center is anchored by Barnes & Noble. According to Ron Kaplan, chief investment officer, the REIT considers Bethesda Row “the signature project in our Main Street retail program.”

Washington, D.C., metroplex

“Although the nation is going through a recession, our local economy is much stronger, with new jobs being generated at a significant rate,” says Deborah C. Bartlett, director of market research for Trammell Crow Co.'s Mid-Atlantic office in Washington, D.C. Lend Lease and PriceWaterhouseCoopers echo these sentiments in their Emerging Trends in Real Estate 2002 report, in which D.C. is identified as the second hottest real estate investment market to watch after New York. And according to the U.S. Bureau of Labor Statistics, the metro D.C. area's unemployment rate stands at 3.9%, lower than the national average of 4.8%.

Such favorable conditions have prompted several companies to scout for new properties in metro D.C. These include Edens & Avant of Columbia, S.C.; Regency Centers, a Jacksonville, Fla.-based REIT; and Kimco, which is buying eight neighborhood centers from The Rouse Co., Columbia, Md., Gorsage says.

Though budget-wary consumers are pinching pennies in all major markets, D.C. shoppers are still splurging on the occasional luxury item. Simon's 991,000-sq.-ft. The Fashion Centre at Pentagon City — which includes tenants Nordstrom, Coach, Bernini and Kenneth Cole — is faring well in spite of the slowdown in upscale retail sales, McCarty says. “Like every shopping center in America, Fashion Centre felt an immediate falloff in traffic following Sept. 11.”

But with the quick return of office workers to the surrounding area, foot traffic picked up. Then the residential shoppers came back, and finally the tourist visitors. Of all major U.S. markets, Washington, D.C.'s tourism was the slowest to recover, McCarty says. Downtown's new convention center, scheduled for completion in 2003, should boost sales by bringing more foot traffic to the city.

Baltimore

Sometimes considered a component of the larger D.C. metroplex, Baltimore is home to more than 750,000 consumers. Ranked the No. 14 market to watch in the Emerging Trends 2002 report, Baltimore's retail inventory totals 54 million sq. ft. In Baltimore's city's CBD alone, 36 projects — including retail, office, hotel and mixed-use — totaling $695 million are underway, according to a recent report from Downtown Partnership of Baltimore.

The city's depressed downtown is on the road to resuscitation thanks to several ambitious developments, most notably Inner Harbor East — a $500 million project of locally based H&S Properties Development. Occupying what had been the last undeveloped tract along the city's harbor, the project will include an 18-screen cinema, 50 stores and nearly a dozen restaurants. A six-level office building and an 800-key Marriott have already opened at Inner Harbor, which will eventually encompass some 15 separate buildings.

Across from downtown Baltimore's aquarium, Kravco and co-developers A&R Development and Parkway Corp. are seeking tenants for the 125,000 sq.-ft. retail component of Lockwood Place. The mixed-use project, encompassing 600,000 sq. ft., will open this fall. And on Baltimore's West Side, Banc of America Community Development Corp. and Atlanta-based Harold Dawson Co. are redeveloping a gray department store district on Eutaw Street across from the Hippodrome Theater. The companies plan to turn the block into a mixture of apartment units and streetfront retail space.

Virginia

Infill development is popular in central Virginia as well. In the past year, Lowe's, Wal-Mart and Kroger have all expanded into dark spaces in the Richmond market. The city has a vacancy rate of 8.1%, according to Grubb & Ellis, and specialty retailers in particular are having a tough time weathering the recession. For example, at Taubman's 945,000-sq.-ft. MacArthur Center in Norfolk, high-end tenants Sephora, Z Gallerie and Bostonian recently announced plans to pull out of the center, citing insufficient traffic to sustain business.

In Richmond, a long-delayed pipeline of upscale department store-anchored regional centers appears to be moving again. Forest City Enterprises and local developer Thomas Pruitt recently pushed back the opening of their 1.1-million-sq.-ft. Short Pump Town Center by six months to 2003. The future of the center, which will be anchored by Nordstrom, Lord & Taylor, Hecht's and Dillard's, hinges on a legal dispute over $22 million in public bonds to be used for site improvements. The bonds would pay for the necessary road and utility improvements to the site. According to the Richmond Times Dispatch, competing developer Taubman Centers and three Henrico County taxpayers are protesting that the public bonds are being misappropriated.

After a similar six-month delay, Taubman finally broke ground on its 690,000-sq.-ft. Stony Point Fashion Park, which would directly compete with the Forest City project. Anchored by Dillard's and Saks Fifth Avenue, the center is set to open this September. Taubman is still securing a tenant for a third anchor spot, but it reports the center is 50% leased.

Richmond real estate pundits say the market can only support one of these malls. Average regional mall rent in Richmond runs up to $40 per sq. ft., which could force the area's high-end retailers to choose one mall over another. So the first center built will probably win the market. At the current rate of progression, it appears Taubman will be the first out of the gate.

Paula Stephens is an Atlanta-based writer.

The Mid-Atlantic region at a glance

Virginia

• Population, 2000 7,078,515
• Pop., % change, 1990 to 2000 14.4%
• Persons under 18 years old, %, 2000 24.6%
• Housing units, 2000 2,904,192
• Households, 2000 2,699,173
• Median household money income, $40,209
  1997 model-based estimate
• Retail sales, 1997 ($1,000) 62,569,924
• Retail sales per capita, 1997 $9,293

Maryland

• Population, 2000 5,296,486
• Pop., % change, 1990 to 2000 10.8%
• Persons under 18 years old, %, 2000 25.6%
• Housing units 2,145,283
• Households, 2000 1,980,859
• Median household money income, $45,289
  1997 model-based estimate
• Retail sales, 1997 ($1,000) 46,428,206
• Retail sales per capita, 1997 $9,116

District of Columbia

• Population, 2000 572,059
• Pop., % change, 1990 to 2000 -5.7%
• Persons under 18 years old, %, 2000 20.1%
• Housing units 274,845
• Households, 2000 248,338
• Median household money income, $34,980
  1997 model-based estimate
• Retail sales, 1997 ($1,000) 2,788,831
• Retail sales per capita, 1997 $5,274

Project listings

Maryland
Project Name | City, State	Developer | Headquarters	Center | Project Type	Total GLA*	Completion Date*	Anchors
Montgomery Town Center Gaithersburg	Bonsai Real Estate. Annandale, Va.	M| N	TBA	October 2003	TBA
Lockwood Place Baltimore	Kravco Co. King of Prussia, Pa.	E| N	600,000 sq. ft.	April 2003	TBA
Fallsgrove Village Center Rockville	Lerner Enterprises North Bethesda, Md.	S| N	150,000 sq. ft.	November 2002	TBA
Prince Georges Plaza Hyattsville	PREIT Philadelphia, Pa.	M| RD	877,019 sq. ft.	2nd quarter 2003	Hecht's, Kids R Us JCPenney, Old Navy
Oxon Hill Plaza Oxon Hill	Combined Properties Inc. Washington, D.C.	S| R/RD	143,000 sq. ft.	Open	TBA
Garrison Forest Plaza Owings Mills	M. Leo Storch Management Baltimore	S| R/E	150,000 sq. ft.	Open	Safeway Jo-Ann Fabrics
Virginia
Project Name | City, State	Developer | Headquarters	Center | Project Type	Total GLA*	Completion Date*	Anchors
Towne Center of Virginia Beach Virginia Beach	Divaris Real Estate Inc. Virginia Beach, Va.	MU| N	1.8 million sq. ft.	Fall 2002	TBA
Jemal's Featherstone Square Woodbridge	Douglas Development Corp. Washington, D.C.	S| R	187,977 sq. ft.	Open	TBA
Towne Crossings Richmond	Edens & Avant Columbia, S.C.	N| E/RD	110,748 sq. ft.	3rd quarter 2002	Bed Bath & Beyond Michael's
Crosspoint Plaza Lortan	Edens & Avant Columbia, S.C.	N| N	TBA	4th quarter 2002	TBA
Dulles Town Center Dulles	Lerner Enterprises North Bethesda, Md.	M| E	1.4 million sq. ft.	September 2002	Hecht's, JCPenney Nordstrom, Sears
Mercury Plaza Hampton	Mall Properties Inc. North Bethesda, Md.	S| RD	338,000 sq. ft.	August 2003	TBA
Cheshire Station Dale City	Regency Centers Jacksonville, Fla.	S| N	97,226 sq. ft.	2002	Safeway
Ashburn Village Phase IV Auburn	Saul Centers Inc. Chevy Chase, Md.	S| E	240,000 sq. ft.	May 2002	Giant Food Blockbuster
Stafford Crossing Stafford	AIG Baker Birmingham, Ala.	S| N	389,000 sq. ft.	Winter 2002	TBA
Short Pump Town Center Richmond, Va.	Forest City Enterprises Cleveland, Ohio	L| N	560,000 sq. ft.	Fall 2002	Hecht's, Lord & Taylor Nordstrom, Dillard's
Colonnade Court Dulles	Lerner Enterprises North Bethesda, Md.	S| N	50,000 sq. ft.	November 2002	TBA
Gateway Community Center Williamsburg	S.L. Nusbaum Realty Co. Norfolk, Va.	S| N	225,000 sq. ft.	2002	TBA
The Glen Woodbridge	Saul Centers Inc. Chevy Chase, Md.	S| E	151,639 sq. ft.	October 2002	Safeway, CVS
Fairfax Corner Fairfax	The Peterson Cos. Fairfax, Va.	MU| N	1 million sq. ft.	TBA	Ruth's Chris Steakhouse
Washington, D.C.
Project Name | City, State	Developer | Headquarters	Center | Project Type	Total GLA*	Completion Date*	Anchors
Cady's Alley Washington, D.C.	EastBanc Inc. Washington, D.C.	U| N/R	154,000 sq. ft.	Spring 2003	TBA
Center Type: S=Strip Center, N=Neighborhood Center, C=Community Center, M=Regional/Superregional Mall, P=Power Center, O=Outlet Center, L=Lifestyle Center, F=Fashion/Specialty Center, MU=Mixed-Use Development. Project Type: N=New Project, E=Expansion, RN=Renovation (updating look, refacing, common area or amenities upgrade), RD=Redevelopment (demalling or remerchandising), U=Urban retail. Completion Date*: Subject to change. Existing/Planned GLA (Expansion GLA): GLA=Gross Leasable Area. TBA=To be announced/unavailable.