Retail demand in the Mid-Atlantic surpasses supply as tenants actively expand to capitalize on the area's favorable demographics.
Retailers are establishing a stronghold on the Mid-Atlantic region to take advantage of favorable demographics that have positioned the area as one of the strongest economies in the nation.
Developers are capitalizing on the ever-growing market with many new projects in the pipeline.
The federal government and research industries create a big draw for the Mid-Atlantic region, bringing many people to the area for employment. The population of the District of Columbia has grown by 43,592, or 7.6 percent, from 2007 to 2011, according to the Washington D.C. Economic Partnership D.C. Development Report.
Due to its growing population and the high average household incomes of its major metros, the Mid-Atlantic offers prime locations for retailers. Seven of the top 10 most affluent counties in the nation in 2011 were located in the Washington, D.C., area, according to The Washington Post. The top three counties on the list are located in Virginia and average household incomes top $100,000: Loudoun ($119,134), Fairfax ($105,797) and Arlington ($100,735).
"The Mid-Atlantic region continues to be a robust market of commerce for consumers, so the trade area is an appealing place for retailer expansion," says Chris Weilminster, senior vice president of leasing for Federal Realty Investment Trust. At the end of September, Federal Realty Investment Trust's portfolio included approximately 19.1 million square feet of retail.
As consumers relocate to the region to find jobs and take advantage of higher wages, retailers are rapidly expanding to further capitalize on a market with a high disposable income. John Henry King, development director for the city of Bowie, Md., cites the local vacancy rate as proof of demand: the city of Bowie has a retail base that includes 3.6 million square feet with only a 6 percent vacancy rate.
While many retailers continue to expand and develop new concepts in the Mid-Atlantic, the restaurant industry is expanding the most vigorously. Food users such as restaurants and grocery stores have been the main driver of retail leases.
Weilminster says that the full-service and quick-service restaurant sector remains very active. This sector is witnessing the most demand from customers when it comes to restaurant options.
"Consumer demand for both quick-serve and casual sit-down dining is very high. We like these tenants because they generate a lot of foot traffic to our centers," agrees Geoff Glazer, vice president of acquisitions and development in the Mid-Atlantic and Northeast Regions for New Hyde Park, N.Y.-based Kimco Realty Corp., which owns approximately 180 neighborhood and community shopping centers in the Mid-Atlantic.
Cooper's Hawk Winery & Restaurant is working with Next Realty Mid-Atlantic LLC to expand its presence in the area. Next Managing Principal George Galloway says the chain is considering locations in Northern Virginia right now.
Galloway also notes that Lime Fresh Mexican Grill and World of Beers are two more multi-unit concepts that are expanding in the Mid-Atlantic. Tampa, Fla.-based World of Beers offers a selection of more than 500 domestic and craft beers. The chain currently has one location in the Mid-Atlantic in Arlington, Va., but is looking to grow its Mid-Atlantic portfolio. Lime Fresh Mexican Grill, based in Maryville, Tenn., is a burrito restaurant that offers freshly prepared Mexican food with homemade salsa, sauces and sides. The chain operates four locations in Washington, D.C.
"A number of restaurant operators/managers from various chains are breaking out and starting their own restaurants," says Richard Lipsky, vice president of commercial real estate for Carl M. Freeman Companies.
For example, Chef Robert Wiedmaier's Mussel Bar & Grille opened at Bethesda Row in Bethesda, Md. The development is situated in Montgomery County, which continues to be a key location for potential retailers because of its demographics.
Numa Jerome, senior vice president of East Coast leasing at Combined Properties, says that Fairfax County in Virginia and Montgomery County in Maryland are the two most appealing options for an expanding restaurant operator because of high consumer demand in these affluent markets.
Fast/casual concepts that are performing well include Corner Bakery Café, which has 17 locations in Washington, D.C., and Baltimore; and Chipotle, which has more than 50 locations in metro D.C., and doesn't seem to be slowing down any time soon. Chipotle has even recently launched its Shophouse concept, which is a Southeast Asian kitchen that offers rice and noodle bowls. Shophouse Southeast Asian Kitchen has one location in Dupont Circle on Connecticut Avenue.
Real estate prices reflect the demand. "Cap rates got very aggressive in the fast/casual sector," says Jonathan Hipp, president and CEO of Calkain Cos. "I've seen more McDonald's [trade hands] in the market in the last 12 months than I think I've seen in the last 10 years. Some of the McDonald's were trading in the low to mid-four cap rates."
Although demand remains strong, Steve Boyle, managing director of Edens, cautions: "In micro-markets where there is a proliferation of restaurants in a concentrated area, you have to be careful that the restaurants don't start taking away market share from each other as opposed to continuing to meet pent-up demand. Initially, a concentration of restaurants is a great thing as it attracts folks and the area becomes a 'food destination.' But unless the restaurants offer diversity in price point or concept, they can end up cannibalizing each other." Edens develops, owns and operates community-oriented shopping centers in primary markets throughout the East Coast.
Grocery stores have also recognized these trends across the food industry. The Washington D.C. Economic Partnership D.C. Development Report says that 16 new grocery stores have opened in D.C. since 2000. The report also states that there are nine grocery stores currently under construction in the District of Columbia.
Active in the Market
Health clubs have been actively expanding in the Mid-Atlantic recently. Gold's Gym, LA Fitness, Equinox and Planet Fitness lead the way.
"Health clubs are much more mainstream and accepted now than they used to be," says Jerome. "If you've got vacant anchor or junior-anchor boxes, it's one of the few viable options that you have."
Jerome says that this trend follows the reduced footprints of big-box retailers, such as Best Buy, PetSmart and office supply tenants, which developed new perspectives on optimal store sizes, thanks to changes in logistics and e-commerce. After these retailers downsized, health clubs are one of the few categories of tenants that can occupy large spaces.
King notes that Fitness 4 Less, a new-to-market retailer for the Mid-Atlantic, has recently opened a 21,750-square-foot location to anchor Regency Centers' Bowie Plaza. The 102,903-square-foot center is strategically located in Bowie with access to Laurel Bowie Road/Route 197. Within three miles, the average household income is $119,282.
Not only are health clubs expanding in the Mid-Atlantic, other fitness related chains such as sports stores are also taking notice of the region. Total Hockey, a hockey equipment retailer based in Maryland Heights, Mo., entered the region by opening its first store in metro Washington, D.C., in Rockville at Wintergreen Plaza, which is owned by Fordham Development Co.
The Development Pipeline
More than 434,000 square feet of new retail space will be delivered in 2013, according to the D.C. Development Report. Another 587,000 square feet will come on line in 2014, marking the most retail deliveries in greater D.C. since 2008.
"Most of the major developments are in markets that are established. They're dense, they're solid and the demographics are appealing," says Jerome.
One of the largest projects currently available for leasing is Square95 in Woodbridge, Va. Other major development projects include The Wharf in Washington, D.C., and Pike & Rose in Rockville, Md. (See sidebars on the projects at the end of this article.)
JBG Rosenfeld is developing the 260,000-square-foot Downtown Crown in Montgomery County, Md., which will be the center of a 182-acre mixed-use development.
A joint venture between American Sekisui House and community leaders began construction on Phase I of Downtown One Loudoun in July. Upon completion, the 358-acre project in Loudoun County, Va., will be approximately 1 million square feet and include 1,040 residential units and 702,000 square feet of retail.
Carl M. Freeman Companies is working on St. Mary's Place, a 30,000-square-foot center in Beltsville, Md. Aldi Grocery Store will anchor St. Mary's Place. Lipsky says the company is close to signing a fast/casual restaurant and the remaining space will be home to tenants that provide neighborhood services.
When analyzing what tenants to sign at these new centers, the emerging trend is that convenience is key. Developers are working together to add not only more service tenants like fuel centers, dental companies or banks, but also bringing an office or residential component to each project.
Union Market, which Edens is developing, is located in the meat-packing district of D.C., historically known as Florida Avenue Market. Boyle says the location will allow the property to retain its authenticity and celebrate its food roots. The company is finalizing plans for the project, but expects to bring boutique hotels, restaurants and retail space to the market.
In addition, online retailing has had a great impact on the market and has forced retailers and center owners to analyze the function that each tenant plays within a center. More thought is being allotted to the tenant lineup since stores are downsizing while simultaneously expanding their online presence in order to provide the perfect in-store selection for the consumer. This has caused many developers to renovate their properties to provide a new customer experience by bringing the perfect mix of a variety of tenants.
Rick Cobert, deputy director for economic development for Stafford County, Va., says, "The 21st century retailer is focusing more attention on building the long-term customer relationships. In Stafford County's expanding market, retailers are using the Internet to attract customers to their stores from Panera Bread's 'MyPanera' card to loyalty programs at specialty stores and major chains."
Combined Properties is redeveloping Fairfax Circle in Fairfax, Va., from an outdated center that offered approximately 100,000 square feet of retail to a fresh-faced mixed-use property. The new Fairfax Circle will include approximately 400 residential units with 80,000 square feet of ground-level retail. The company's main goal is to alter the tenant lineup by bringing convenience tenants and new restaurants to the center.
Kimco also has a redevelopment project in the works to expand Wilde Lake Village Center in Columbia, Md. When the center's anchor, Giant Food, closed its doors in 2006, business gradually declined at the center and forced the company to focus its efforts on revitalizing the property.
Wilde Lake Village Center currently includes 99,000 square feet, but will be expanded to include 60,000 square feet of retail, 21,000 square feet of office space and 250 residential units. David's Natural Market, which anchors the center, will move to a larger space. The company is also adding a new national drugstore chain to the project. Other renovations include upgrading all of the retail buildings and adding a parking garage, as well as expanding the courtyard and existing parking. The redevelopment will begin in spring 2013.
"People are coming here and settling as opposed to leaving. Neighborhoods are emerging in ways that aren't as transient as they once were," says Boyle. "So, while we remain a very transient population overall, there's a fundamental component of our population that's staying and calling D.C. home."
Supply vs. Demand
Although there is a significant amount of new construction under way, the region is experiencing a lack of supply that is unable to meet the immediate demand for retailers wanting to enter the market. As such, the population suffers from a lack of choices in the market and often has to travel long distances to shop.
"D.C. is grossly underserved," states Jerome. "The projects that are being developed or projects that exist certainly have great appeal for retailers."
Galloway agrees: "The new construction is still at a trickle compared to what it was during 2002 to 2007. Our biggest challenge in this market is that we have more demand than we have available space."
The densest markets — where demand really outstrips supply — are Fairfax and McLean, Va.; Bethesda, Md.; and downtown D.C., according to Galloway.
"The supply of retail relative to the population compared to the national average is certainly an underserved number," says Boyle.
Nationally, the average is 23.1 square feet of shopping center space per capita, according to ICSC. This compares to 8.2 square feet of retail per capita in D.C., according to the D.C. Development Report.
Because of the shortage of retail spaces, tenants have to look at markets that they would have ignored in previous years. Retailers must expand their outlook in order to look at other locations that had previously been tossed aside.
"We are continuing to see more interest from typically mall-oriented retailers that are considering upscale, lifestyle-oriented strip center projects and well-heeled main streets," says Weilminster. In particular, big-box retailers that have launched smaller prototypes are taking advantage of this trend. This includes Petco's Unleashed concept that provides the same products as Petco in a smaller package. Petco Unleashed has two locations in the District of Columbia in Georgetown and Washington NoMa (North of Massachusetts Avenue).
Retailers are expanding their target areas in places like Stafford County, Va., by looking at locations that had been overlooked in recent years. The county ranks 13 on The Washington Post's national list of the highest income counties for 2011 with an average annual income of $91,348 per household. Cobert says that retailers are drawn to sites in the Southern Gateway where two major projects are now under way — Celebrate Virginia North, a 2,400-acre mixed-use development, and Carter's Crossing, a 35-acre retail center. Retailers are now considering opening locations in the Quantico Corporate Center, which is an 85-acre, mixed-use property. The retail portion of the center is approximately 8,000 square feet, but due to the area demographics and its location adjacent to several major shopping centers on Garrisonville Road, retailers are attracted to it. Retailers realize not only can they capitalize on the industrial and office tenants that also work there, but the growing residential base as well.
Mid-Atlantic retail is proliferating in a way that offers more alternatives for new retailers. The 14th Street Corridor in the northwest part of Washington, D.C., is another submarket that is gaining some attention in the Mid-Atlantic. The 14th Street Corridor, or U Street Corridor, has always been thought of as a residential part of the city, but Boyle says retailers, such as Trader Joe's, are considering the area.
Frederick, Md., is also witnessing a substantial amount of growth in the city's historic downtown district. Business development specialist Heather Gramm with the city of Frederick's Department of Economic Development says the city's 40-block downtown district is the largest historic district in Maryland and is starting to attract larger national tenants looking to take advantage of infill projects.
"Downtown we have about 130,000 square feet of new retail and office projects that are planned or under development right now," says Gramm. "We're seeing more of the infill places with larger footprints for the regional and national brands as well."
What was once home to only niche retail, Frederick's historic downtown district is now embracing national tenants looking to expand, including Five Guys Burgers and Fries.
In addition to retailers having to look elsewhere to expand their portfolios, investors also have to branch outside of their core product and look at Class B and C assets in order to increase their holdings in the Mid-Atlantic.
"There are many investors looking for A properties in the region, but not many available to purchase," explains Lipsky of Carl M. Freeman Companies. "This is driving up the prices on A centers and pushing many developers like us to pursue products in B and C locations."
Because there is minimal opportunity in the market, there are a lot of potential buyers, especially institutional players, that are active when an asset comes to market. Due to high demand, investors have started expanding their focus to secondary submarkets in order to expand their presence in the region. This is true for larger assets and for smaller, single-tenant assets like the ones Calkain specializes in.
Hipp of Calkain notes, "A year ago people were just focusing on the core markets, but because of a lack of product out there, people are now starting to look at the tertiary markets at almost the same cap rate today that they would see in a core market."
Due to the multitude of players in the game, the return on investment for new acquisitions is very low due to these compressed cap rates.
"From a buyer's perspective, there is such little supply available that pricing expectations from the limited sellers makes it very hard to put deals together with acceptable long-term returns," says Weilminster.
Glazer elaborates, "With strong demand for existing Class A properties, pricing levels are strong and properties are generally acquired by the larger players."
Pension fund advisors and REITs are the most active in the market because institutional buyers can afford to pay more for strong Mid-Atlantic properties. These companies must get their funds in the market to provide the expected returns to their investors.
"There was a belief that during the recession developers would have issues with financing and capital, and there would be opportunities for financially stable, well-capitalized owners to acquire assets, but that hasn't happened," says Jerome.
The Mid-Atlantic continues to present multiple options not only for sellers in the market, but expanding retailers looking to capitalize on favorable demographics.
Pike & Rose
Federal Realty Investment Trust is developing Pike & Rose, which is located in the White Flint District of Montgomery County, Md. The project will deliver 155,000 square feet of retail, 80,000 square feet of office space and 500 residential units in Phase I. The 24-acre development has the build-out capacity of 430,000 square feet of retail.
Pike & Rose broke ground in July 2012, and remains a prime target for potential retailers due to its easy access to interstates 495 and 270, as well as the new Inter-County Connector. The first phase of the project will be complete in summer 2014.
iPic Theaters was one of the first retailers to sign on to the project, bringing its first location to the Washington, D.C., market. iPic Theaters offers upscale auditoriums and high-end dining options, as well as a cocktail lounge.
Chris Weilminster, senior vice president of leasing for Federal Realty Investment Trust, says the company is targeting well-known, soft-goods retailers for the remaining spaces.
"Pike & Rose will be a collection of iconic retailers that appreciate being in a special project mixed with great entertainment venues, high-end health clubs and spa services, as well as national and local restaurants."
Pike & Rose is expected to be the anchor project for all of the development that is planned to occur in the White Flint District during the next 15 years.
A significant development in the pipeline is The Wharf, a 27-acre, mixed-use waterfront development in D.C. The $1.5 billion project will begin construction in 2013 and will feature 3.2 million square feet along the Potomac riverfront. Phase I of the development will be complete in 2016.
David Brainerd, managing director of Madison Marquette, which is developing the project with PN Hoffman, says the project will attract D.C.'s rising number of educated, high-income young professionals who are interested in urban living.
When fully developed, The Wharf will include more than 1,350 residential units, 358,000 square feet of retail, 960,000 square feet of office space and three hotels totaling 680 rooms. Additionally, the development will be home to a concert venue and a 13,000-square-foot artisanal food market.
"The Wharf will establish a new world-class neighborhood along the city's southwest waterfront and will both add to and preserve such iconic institutions as the municipal food and fish market, and the 7th Street Park and Landing," says Brainerd.
New York-based Ehrenkrantz, Eckstut & Kuhn has overseen design efforts for The Wharf, which will seek LEED Gold certification. The project will feature tree-lined streets, in addition to waterfront walkways and retail options with access to water taxis and ferry services.
— Brittany Biddy