Washington, D.C.’s Vibrant Retail Market
Even with new developments on the way, space is tight in one of the best retail markets in the nation.
Roundtable moderated by Jerrold France, Randall Shearin and Stephanie Mayhew

Shopping Center Business held its Washington, D.C., roundtable at the offices of Goulston & Storrs.

Shopping Center Business recently held a roundtable in Washington, D.C., to get a taste of the retail market in the area. The roundtable was hosted by the law firm of Goulston & Storrs at the firm’s offices on K Street. We invited area developers, owners and brokers to the roundtable. In attendance were: Howard Biel, Faison & Associates; John Tschiderer, Federal Realty Investment Trust; Tom Maskey, Peterson Companies; Shedson Weisel, Goulston & Storrs; Dennis Moyer, Goulston & Storrs; Elizabeth Link, Gallery Place Georgetown [Western Development]; Jordan Krasnow, Goulston & Storrs; Eric Rubin, Madison Retail; Keith Sellars, Washington, D.C., Economic Partnership; Catherine Timko, The Riddle Co.; Jonathan Hipp, Calkain Companies; Mark Katz, H&R Retail; Tim Taylor, University Town Center; and Peter Matheson, Combined Properties.

SCB: How is the downtown market, in terms of tenant activity?

Mark Katz (left) and Eric Rubin (right).

Rubin: In previous roundtables, we’ve talked a lot about how the downtown market is coming; I would tell you now that it is here. West Elm has opened a 40,000-square-foot store. The Williams-Sonoma people are very pleased with its performance. Because of that commitment, Zara is opening this week. Madame Tussaud’s, while not pure retail, does generate retail sales, opened 2 weeks ago. Another lease that was recently signed is a new concept called Peruvian Connection, which is a mail order catalog from Kansas that’s opening its first store here. Other retailers are now paying attention to downtown Washington, D.C. The F Street corridor, between 9th and 11th street, is filling in. Downtown, overall, is very strong. We are just anticipating the construction start of the old convention center site, which will deliver a huge amount of retail, as will another project that is being done by Douglas Development. The next 4 years look promising.

Katz: The market is extremely strong. It is more of a question of finding the correct space for the retailers more than their interest. We are having a problem in the entire market finding space for our clients. The vacancy rate is the lowest overall that I’ve seen in the last 20 years. We are doing lists of box space over 20,000 square feet for the entire market to make sure we don’t miss anything. The list is very short. The old convention center site is going to provide further retail boxes. The only question is how they configure it and what sizes will be there. Penn Quarter is also a good area. We have looked at it for various retailers. The next up and coming area will be down by the ballpark.

Sellars: The fascinating story, once you get outside of downtown in the District, are the neighborhoods. Both Herb Miller’s [Western Development] project at Georgetown Park and Union Station are having a third evolution for those markets. Georgetown started as more restaurants and fashion apparel. Western Development may potentially be bringing a department store to Georgetown. Union Station started out as a transportation hub, added retail, and is now repositioning all the leases in the project. These projects just strengthen the overall market and help become the anchor for the CBD.

SCB: What is Western Development up to in Georgetown?

Link: Georgetown Park is choosing between two great department stores and taking the inline space more upscale. We are focusing on fashion and we’re also adding some residential space.

Katz: Another area that’s happening right now is the New York Avenue corridor. There is some opportunity for big box space. It is going to be very curious to see what happens there. There are some infrastructure issues there.

SCB: What are the neighborhoods that are looking for retail? Where are the opportunities for developers?

Sellars: I think Anacostia is going to be very hot in the next 5 years. Development in the city has gone from west to east, now it is going across the river.

Timko: There are neighborhoods that are developing as very strong neighborhood retail centers. One example is 14th Street. Whole Foods opened in 1999 or 2000 at 14th and P Streets. There has now been a number of retailers who have moved into that neighborhood and transformed the landscape. It has really become an authentic retail corridor. U Street is the same way. Also, H Street Northeast; I worked on a redevelopment plan for that in 1982, but today the street is on a natural course to development. Investors have seen the opportunity and regional and local retailers have grasped it as a great location.

Sellars: The city has also done some positive things like infrastructure and planning for light rail. Developers and retailers get excited about that investment by the city.

Hipp: Retail is no different in the suburbs than it is in any major metropolitan market. It is a herd mentality. Once you start to get a certain number of retailers in the market, then it is validated and everyone wants to flow into it. That attracts investors who want to buy older properties.

Timko: There is also a commitment and willingness on the part of the city in Washington that has helped attract retailers. Retailers are seeing the investment by the administration to continue development in these neighborhoods, and on some of the retail projects. There are always going to be problems in every city.

(left to right) Keith Sellars, Howard Biel and Catherine Timko.

Biel: What is fascinating about this market is that the reports of Washington’s affluence and the fact that people are moving into downtown are widespread. This is not a market that is demand constrained. Retailers do well here. It is a market that is supply constrained. That is the problem that those who represent retailers have. How do you find sites in these markets that can appeal to these large retailers? It is fun to be involved with the identification of large sites around town that no one thought about before. There are car dealerships who now want to locate out of the city; that will free up a piece of land. The smart player in the Washington market today who appreciates the lack of demand constraints, goes to the supply side and tries to look innovatively at the supply of land throughout the city, then match that up with retailers. The beauty of our business is that we are the matrimonial agent between marketplaces and consumers. This market is on the upcoming side of the curve.

Katz: The Washington market has grown tremendously over the last 8 years. We have approximately the same number of federal employees as we did during the Reagan administration, but everything has been outsourced. All the government growth has been outsourced. Instead of government employees you have more private sector employees [serving the government] who is better educated, better paid and more eclectic and cosmopolitan. The whole wealth effect that has taken place here in the last 5 years is most evident with the degree of the shops at the Chevy Chase Collection.

SCB: If you take a look at what has been and is being developed in this market it is much more high end than it was 10 or 15 years ago. John [Tschiderer], if you could speak to that since you have developed a number of centers in the market.

John Tschiderer

Tschiderer: Our drivers are obviously wealth, education level and population growth. One other driver is creating a sense of place. It is an overused term, but if you go to Bethesda Row and The Village at Shirlington, [they are] creating that sense of place with the right kind of elements that make the experience inviting. It gives it the address that makes it a known commodity. Retailers and consumers want to be there.

Rubin: When I deal with retailers, I tell them that you can’t compare Washington to any other city in the country. It wasn’t laid out to compare; it was laid out by the Europeans. If you look at where London was a few short years ago, that’s kind of where the overall market here is heading. It is reflecting in the retailers that are being attracted here. We are seeing more international retailers coming. The design also affects the projects we are doing; they’re more pedestrian oriented here. In other parts of the country you have up and down cycles; we don’t see many down cycles because of the government. We are soon going to have one of the strongest convention center markets in the world.

SCB: Are you seeing the demand from the luxury tenants?

Rubin: I work a lot with specialty and lifestyle tenants and we are seeing very strong demand from those types. We’ve got a number of town centers under development in the region. They are attracting tenants like Ann Taylor, Chico’s, Coldwater Creek and Talbots. They are seeing plenty of customers here to grow from. The Chevy Chase Collection was a very big statement. It said we were a luxury market. The same with Tysons Galleria. Their tenant mix is just going more upscale. We also have high end retailers that don’t want to be in a mall; they want a main street location. They look at Georgetown and downtown. Every tenant that is in the top malls in the country who is going for a street or lifestyle strategy is looking here.

Weisel: One of the contributing factors to that has been the increase in the entertainment side of things. Over the last few weeks, I have been to the dedication of New Harman Hall, a new venue for music and theater. The other night I went to the new Signature Theatre at Shirlington. A project that we are working on — that still has a ways to go — is the renovation of the Howard Theatre near the convention center site. That is going to help contribute to the 24/7 environment here.

SCB: Liz [Link], on the project that you are working on in Georgetown, are you seeing strong demand?

Link: We are going more upscale and we think it will be predominantly international tenants. There is going to be a lot of competition for the space because there is not that much space out there.

Tom Maskey

Maskey: Washington, D.C., is a great retail market and it is only going to get better. It is way under-retailed. There are some functional and structural issues that can’t be attacked because of the way the city was built. It will never beat New York retail because you can’t get a 70-story building with a three-story retail project at the bottom here. No office developer here in his right mind will give up the first three floors for retail when he can get office rents for $50 per square foot net. As Howard [Biel] said, we are not short on demand, we are short on supply. There is no structural way of fixing the supply.

Hipp: We have seen a big spread going on in the retail condo market. We sold a deal in Logan [Circle] last year and we have another under contract, all above $60 per square foot rents. We sold it north of $1,100 per square foot. You will see more developers try to take that first floor retail and condo it. We have about three or four more deals we’re going to be taking to market nationally.

SCB: How are rents in the market?

Rubin: We have seen some solid escalations in rents in the areas we’ve been working in. If you start downtown and work your way north, downtown rents could start in the mid-$50s and go into the $70s. For the neighborhoods, like DuPont Circle and 14th Street, they are $60 to $65 per square foot. Five years ago it was in the mid-$50s.

Katz: Rents have spiked in general.

Rubin: In Georgetown, there is a lot of demand for small spaces from 1,500 to 3,000 square feet and they are hard to find. If the retailers aren’t prepared to pay north of $100 or $125 per square foot, they are not going to get anything right now. In Bethesda, Bethesda Row is tremendously successful right now. We are paying in the $70s for rents there. All over, rents are going up. We are really playing catch up in this market. It was a value market for many years.

Katz: There again, it goes back to the wealth effect of the last 5 years. Wealth has increased dramatically in the market.

Tschiderer: In Bethesda, in particular, the population hasn’t increased in 15 years, but the average household income has gone from $65,000 to $135,000.

Katz: Every retailer that we represent is doing well. It is like our market is on steroids. With BRAC (the Base Realignment and Closure Act) you are going to see this spread to some of the outer regions of the market as well. As those jobs relocate to outer markets, you will see jobs and housing relocate there. And for every employee that’s on base, there are two or three on the outside with government contractors.

SCB: Peter [Matheson] and John [Tschiderer], you represent two of the largest owners in the market. Have you seen macro trends here?

Tschiderer: The drivers have always been population growth, job growth and income growth. There are more disposable dollars in the marketplace, which are reflected in the sales performance of all the tenants. Finding tenants isn’t an issue. We have double digit escalation on our tenant rollover. When tenants go out of business, like Storehouse or Tower Records, the ability to replace that income is not difficult in this market.

Peter Matheson, Tim Taylor and Elizabeth Link.

Matheson: Vacancy is never a problem in the Washington portfolio. It presents an opportunity to bring the center in line with what the resident demands in the marketplace. Our occupancy rate is about 97 percent; there is good, solid demand from a lot of types of national and local retailers.

SCB: As University Town Center comes online, what kind of demand are you seeing?

Taylor: We are in a revitalization area, with the Metro station being our driver. We are about where D.C. was 5 years ago. We are still unexplored in Prince George’s County [Maryland]; retailers haven’t discovered our market yet. A few retailers are coming to our areas, but they haven’t seen the successes there. We are the largest and the oldest project there, but we are the first town center project coming on line in Prince George’s County. We are seeing strong demand for the retail from residents. We have trouble convincing retailers that this is the time to execute. We are getting a lot of local retailers. It is just a matter of time before the national retailers catch on.

SCB: Tom [Maskey], have you seen the demand from national retailers at National Harbor?

Maskey: Yes. We started off 11 years ago working on National Harbor. We are to the point now where we have a leasing strategy. We have started the development with the idea that we were going to put a lot of lodging in and follow up with restaurants. The retail has been slower. The residential demand has been fantastic, despite the down market. The first residential building sold out — 250 units — in 42 days. The second building is already half sold.

SCB: Where are the buyers coming from?

Maskey: It is an interesting mix. First, to show that we are drinking the water, 30 of our employees bought units at National Harbor. Outside of that, the buyers are from all over. Some people are buying it as a second home, or as a base in Washington. There are some local buyers who are going to use it as a primary residence. We developed it as an entry level product, with a lot of single-bedroom units. We found out midway through that it was the wrong product. People started to combine units to get to two and three bedrooms. It is a different buyer than we expected.

SCB: What is the plan for the retail leasing?

Maskey: In the first phase, we open up 361,000 square feet, and of that, 100,000 square feet is restaurant space. There will be a lot of waterside dining. The retail is going to a mix of tenants who have not been in Washington before, and the standard, everyday guys. There are no anchors per se.

Timko: One thing that Tom mentioned that needs to be pointed out is that, despite the headlines, our housing market continues to be strong. It is different than many of the other markets in this country. Growth is not at the level it was 5 years ago, but it is still stable. We are still selling and prices are still going up, particularly in D.C. proper.

SCB: Faison has developed a few projects in Maryland. Why is Faison attracted to this market?

Biel: We have made a conscientious decision to focus our energies on subsections of the Washington market largely because in order to gain entitlement approvals you really need to understand the local marketplace intimately well. You have to be able to combat the fact that everyone wants a main street town center. We’ve found if we can concentrate in subsections, keep our pipeline full, and pull together a team of people who understand the community, we will have an efficiency and economy of scale that will serve us well. From our perspective, we have concentrated our efforts on Southern Maryland – St. Mary’s County, Calvert County, Charles County, Prince George’s County. Prince George’s County is a fascinating story. It has 900,000 people and it is probably the most underserved county in the region by far. We developed a project in Fairwood, just west of Bowie, and there was an 1,800-home development near us. The developer thought the homes would sell from $300,000 to $600,000; they are going from $500,000 to $1.2 million. There are a plethora of terrific [residential] projects being developed throughout Prince George’s. The retailers will come with the residential because they want to cater to that upper end consumer. Back to your question, we have a very full pipeline in Southern and Western Maryland. We also have some projects in southern Pennsylvania and the eastern panhandle of West Virginia. While there are a lot of people moving into the city, don’t discount the continued suburbanization of metro Washington.

Tschiderer: When you look at the population growth in this market over the next 10 years, it is suggested that 1 million people will move to the state of Maryland. Those people have to live somewhere, work somewhere and shop.

Katz: The market will also be high tech in nature and college educated.

Tschiderer: There are some indicators that give you incredible confidence in where the market is going in the next 10 to 12 years.

Katz: It is not what it used to be what it was 20 years ago when a military base expanded. You now have a whole different set of employees. What I find unique about some of these areas is that you will have a 3-mile population of 100,000 people. There may be 100 people who show up to the community meeting. They are dictating what 99,900 people do. A lot of these people don’t want the town centers. But the mothers who have three kids want them.

SCB: What kind of reception do developers get when they meet with suburban communities?

Biel: It can be utter craziness. We developed one project where there was an anti-Wal-Mart fervor. After we had a deal going with a 60,000-square-foot Giant Food and a 142,000-square-foot Wal-Mart, the community passed an anti-big box ordinance limiting stores to 75,000 square feet. This is a community that has no Lowe’s, Home Depot, Target, BJ’s, Sam’s or Costco. Ironically, and unfortunately for the community, the only store that would agree to do a 75,000-square-foot store was Wal-Mart. The community trying to keep out the store they didn’t want, got the store anyway. They saw the expansion potential, so when the economic coffers in that community run dry, Wal-Mart will expand to their full 142,000-square-foot prototype.

Katz: The majority of the population loses out on lower prices for the same goods that they buy somewhere else.

Tschiderer: The other buzz phrase is ‘quality of life.’ You have to listen and be a good listener, work through the issues and try to find a balance that’s appropriate for making the investment.

SCB: When you are doing reinvestments on properties that already exist in communities that have had these incredible changes in demographics, what are they asking for in terms of tenants?

Matheson: For us, that ties into the more affluent consumer. It usually translates into a more upscale offering. They want a better representation of national and regional retailers. It does present a great opportunity to bring the center more inline with the demands of the shopper.

Tschiderer: Our experience has been with the established markets in the D.C. area. There is a concept of repositioning. Repositioning doesn’t mean that we are remerchandising, although merchandising is an important part. It is the comprehensive plan that becomes a collaborative effort with the consumers, the business ownership, the community leadership and our own objectives as far as making an investment. As we look at these established markets with aging assets that we have an opportunity to redevelop, we put all those components into the equation.

Sellars: Six or 7 years ago, we were begging to have any retailer coming to the District. People in the community said that they wanted a sit-down restaurant. Well, they came to areas like Columbia Heights and the DC USA area. People were taken aback; they couldn’t believe the national chains were in the neighborhood. Now, there is some pushback from all the new residents who have moved to the District; they want something cool and funky. They don’t want to be like their suburban counterparts. It is part of the evolution of retail here. The District is unique because we have missed entire cycles of retailers, who have now gone out of business. It positions us to get better retailers.

Tschiderer: We have had huge success with mom-and-pop retailers. In your projects, how much do you look at the specialty retailers or the local versus the nationals?

Biel: We work very hard on merchandising. We try not to have that standardized line-up that is homogenous. That is one of the tough things. It is a lot easier to bring specialty guys to Bethesda or Pentagon than it is to Waldorf. The same thing is true when you look at urban projects. With a lot of the local officials now going to ICSC and coming back with the great idea [of an urban project], you might be able to get a Target or Whole Foods to do something different in some more urban areas, but you are not going to get them to that in Woodbridge [Virginia]. We are doing a project right now in Hagerstown [Maryland], where we have about 50,000 square feet of specialty store space and 15 percent of that space will be done with local retailers. It gives some flavor to an otherwise homogenous project.

SCB: There are some areas here that are one-of-a-kind in the country, like Rockville Pike, where everything will have to start going vertical. How do you approach areas like this?

Tschiderer: If you look at Montgomery County [Maryland], which is a very well educated county on a planning staff level, they have principles on how they have managed the land use growth in the county. They are looking now at a corridor concept that is based around TODs [transit-oriented developments]. We have four assets in the market that are right next to Metro stations. Montgomery County is looking to allow higher densities for properties that are around transit stations. We are going to take advantage of that. It will happen over time.

SCB: Tim [Taylor] you are doing a TOD development.

Taylor: Price George’s County [Maryland] has already going through this same exercise about 10 years ago. They looked at transit district buildings. That really was the driver for our project. With the TOD zoning, the county allowed us to go as high as we chose. We ended up creating a more urban development in a suburban setting. We are creating everything with retail on the first level. It is a unique situation. We put in a 16-story student housing building with a swimming pool on top. You can see downtown D.C. from there, so the height is a real attraction. The support of the county has been critical to our project.

Tschiderer: A number of years ago, there was a book called ‘Edge Cities’ that was written. Bethesda was an edge city. You follow the [Metro] red line out. You have the CBD of Bethesda, you have Mid-Pike Plaza, you have Twinbrook, where JBG Rosenfeld has a significant undertaking, and we have a project at Rockville Town Square. This corridor, as it grows, is meeting market demands.

Katz: The interesting thing is the acceptance by the people who are in this room.

Maskey: When we did Silver Spring, we knew no one shopped off the Metro. Knowing that the Metro was there, we knew that there would be residential stability and office stability. Those two things would lend themselves to making the retail for a long period of time. Shoppers don’t come by Metro, but that area becomes very healthy residentially. It also densifies over time.

Timko: Population is starting to move into this region, and it is really an edgeless community now. The population is much smarter in these areas; they no longer have cars, they’re using Metro. I disagree with Tom; I have seen people come out of [The Fashion Centre at] Pentagon City with bags and go to the Metro.

SCB: Are there other opportunities in the market for transit oriented developments?

Rubin: Tysons Corner has over 100,000 people that work in the area every day, and it will increase its density and legitimize itself as a real downtown. Macerich has plans for the mall area.

SCB: How is the investment climate in the Washington, D.C. market?

Jon Hipp

Hipp: It is great. Everyone loves this market, nationally and internationally. There is kind of a disconnect between what Sellers want to get and what buyers are willing to pay. Sellers still think that the debt market is very aggressive and it is not. The debt today is coming from banks and life companies, not CMBS. There has really been a flight to quality. The non-credit assets that people were buying have gone away. Today, it’s the Walgreens and the A-credit retailers that are trading. When someone does decide to buy in D.C., not many people want to cut it loose. The retail condo sales are really the only things that have been coming off the market. They’ve been getting huge numbers.

Matheson: There has always been pent up demand from an investment perspective in this marketplace. This September [2007] has probably been the slowest September from a listing perspective for retail properties over the last 5 years because of what has happened in the credit market. Sellers are sitting on the sidelines waiting for the last four or five buyers to be at the table. I was expecting to come back after Labor Day and see four or five listings on my desk. There really haven’t been any quality listings of shopping centers available [in the D.C. market] for sale right now.

Hipp: It is more unanchored deals. We are going on a pitch tomorrow and another one on Monday: it is all unanchored.

SCB: What is the impression? Are sellers holding on because they think they are not going to get a good price this year? If they don’t get it on the market by November, they’re not going to close by December 31.

Hipp: There is a disconnect. The prices that we are recommending them take it to the market at, and what they think they are going to take them to market at, are different. We are going to be realistic and the sellers are going to be unrealistic. That is everywhere, but in the D.C. market it is stronger. The unanchored strips are only going attract a local buyer. No one from California is going to buy an unanchored strip center in Prince William County [Virginia].

Matheson: From an investment perspective, the D.C. market has to be one of the tightest and most difficult acquisition markets in the country. From an investment philosophy perspective, it is a small percentage of what happens in other major markets like Chicago and Atlanta. Those that make the list of the top buyers, we’re not talking about people that buy seven or eight centers; these are the fortunate few that managed to get the two or three premier centers in the marketplace. That $100 million volume for Maryland and Virginia puts them at the top of that list. This is just grocery-anchored shopping centers, not malls.

Hipp: These are pocket listings; they call five people and the deal is done.

Katz: Some numbers from last year: private equity bought 50 assets, about 8 million square feet. The REITs purchased 19 assets, a little more than 5 million square feet. Pension fund advisors traded three assets totaling 500,000 square feet. A lot of these deals are hybrid where they have private equity teaming up with a REIT in a joint venture.

SCB: What do you hear from lenders?

Matheson: We are starting to see spreads begin to come down, but they still have a way to go. We are not a high leverage buyer. We are 65 percent loan-to-value. Getting the lending has never been an issue for us.

Katz: This is the best market in the country for a lot of retailers. When other retailers hear about that, they want to be here.

Weisel: I’m curious as to how the retail sector is responding to the green movement?

Biel: We’ve managed to steer clear of it. We are catching it more on our multi-use projects that involve some county buildings, like libraries.

SCB: Where is the pressure to go green coming from? Is it the consumer? Is it the municipalities?

Biel: It is usually the host community.

Maskey: And in some cases the federal government.

Tschiderer: We are looking at the green sustainable initiative as a profit center. It can be a profit center when it lowers operating costs. Federal Realty is going through its own exercise right now, looking at how we can put sustainable practices into our operating properties as well as the culture of our organization as a whole. We have a signed agreement with a company called Smarter Fuel that produces biodiesel from the cooking oil used at the fryers at the restaurants in Bethesda Row. That biodiesel runs the shuttles around Bethesda. As before, that grease was an expense, it is now a revenue source.

Link: We are looking at a new project where we think we will be using a green fuel source that will cut the utility bills for the tenants in half. It will cost us approximately the same amount of money to install as a traditional system. It is a mixed-use project; a large office component with residential and retail.

Maskey: The problem until now has been that the upfront costs have been borne by the developer and the savings are garnered by the tenant.

Dennis Moyer (left) and Shedson Weisel (right).

Moyer: I have a question about retail in the District. Those of us who work on K Street have heard a lot about the District’s plans to revitalize the K Street corridor and turn the retail into more of a specialty retail shopping experience similar to mainstreets in other cities. It seems to me that there are a lot of the same structural issues. Does anybody think that there is some promise to revitalize the retail the way that the office is being revitalized on K Street?

Rubin: You will see improvement, but it is just a 5-day a week market. As much as we wanted Connecticut Avenue to be this great retail street 7 days a week, it just doesn’t register. We just don’t have the people living downtown. At Gallery Place, you have people 7 days a week. You will see an improvement and upgrade along K Street. It is a great restaurant market, and a great place for banks and services. Connecticut Avenue has shrunk to about two blocks worth of retail, where it used to be six or seven.