As 2012 begins, the Mid-Atlantic region is showing strong signs of growth. One of the strongest retail markets during the recession, the area has seen quick backfilling of any vacant big box spaces and several new developments that are set to break ground this year. Market fundamentals in Washington, D.C., Maryland and Virginia are some of the best nationwide.
“Overall, the market is healthy,” says Catherine Timko, community strategist at Washington, D.C.-based The Riddle Co. “The Mid-Atlantic region still has one of the strongest retail markets in the country. We have higher than average incomes, disposable income, population growth and a solid base of jobs, all of which contribute to an appealing retail environment.”
The primary submarkets have been performing the best with strong sales and any empty space being leased up quickly. The secondary and tertiary submarkets are picking up speed, although sales are lower and more concessions are being made. As a whole though, the region is performing well.
“The Mid-Atlantic region is pulling the rest of the country forward,” says David Feldman, regional manager and Mid-Atlantic regional director of special asset services in Marcus & Millichap’s Washington, D.C., office.
Leasing activity in the Mid-Atlantic region has picked up dramatically during the past 6 months, says Michael Isen, vice president of NAI Michael’s Lanham, Maryland, office. Vacant big boxes are rapidly disappearing and several retailers are expanding in the market. Many centers, especially those in core markets, have occupancy rates in the mid to high 90s.
In fact, Krista Di Iaconi, principal of acquisition and development at Chevy Chase, Maryland-based JBG Rosenfeld, says JBG Rosenfeld has several properties that have remained fully leased. Numa Jerome, senior vice president of East Coast leasing for Combined Properties’ Washington, D.C., office, adds occupancy at the company’s portfolio rose from approximately 92 percent in the fourth quarter of 2010 to 93.5 percent in the fourth quarter of last year.
“Lately, business has been much busier,” says Debra Ramey, partner of The Shopping Center Group’s Norfolk, Virginia, office. “Whenever boxes or spaces become available, there seems to be interest in them. It’s still taking a long time to get deals approved and done, but there is positive activity.”
Despite a number of big box retailers exiting the market during the past few years, such as Superfresh, Linens ‘N Things, Blockbuster, Filene’s Basement and Borders, the spaces were leased up quickly. Tremendous leasing activity is occurring in areas where population continues to grow, says Tom Fidler, senior vice president and principal of Lutherville, Maryland-based Mackenzie Commercial Real Estate Services.
Isen says leasing is driven by the strong demographics in the region due to population increase and a financial economy that is relatively stable. “Every big box that was available in this market is leased,” he adds.
In Class A markets, lease-up of quality product is causing an interesting dilemma. “Our biggest concern is we are running out of quality product to lease,” says George Galloway managing principal in the McLean, Virginia, office of Next Realty Mid-Atlantic. “Unless there is more new construction or more retailers downsizing or liquidating, supply will continue to be constrained through 2015 and maybe beyond.”
In strong, core markets, the supply and demand factors are starting to balance out more and it’s getting a little bit tougher for tenants to find space, says Chris Weilminster, senior vice president of leasing for Rockville, Maryland-based Federal Realty Investment Trust. “At any high-profile space within the market, landlords are able to command a premium,” Ramey adds.
Class B or C shopping centers are having a harder time getting leased, Galloway continues. Compared to Class A centers, more concessions, such as tenant allowance, signage and lease are being made in order to secure tenants.
In some centers, landlords are keeping occupancy rates high by leasing to tenants they might not have considered in the past. “Landlords are leasing space to less attractive tenants such as banks and drug stores because they are willing to pay the asking rents,” Timko says. “Although these types of tenants may not be ideal to support the preferred merchandise mix for the community, they keep the vacancy rate low.”
Many national retailers are looking to expand in the market, including discount retailers, supermarkets, fast casual restaurants, gyms and sporting goods stores. “More companies are looking for deals, which is a function of how healthy our market is,” says Andy Segall, principal of Baltimore, Maryland-based Segall Group.
Some examples of tenants looking for space in the market include T.J. Maxx, BJ’s, Walmart, Big Lots, Dollar Tree, Planet Fitness, LA Fitness, Harris Teeter, Safeway, Wegmans, Dick’s Sporting Goods, Chipotle and Starbucks. Additionally, Di Iaconi says the Virginia Department of Alcoholic Beverage Control, which operates the state’s liquor (ABC) stores, plans to open between 20 and 30 stores this year.
“Quite a few retailers are looking to expand, while others are beginning to look at strategic plans that may involve moving into new markets they haven’t been in before,” says Gerald Divaris, chairman and CEO of Virginia Beach, Virginia-based Divaris Real Estate.
John King, economic development director for the City of Bowie, Maryland, says that consumers will drive 10 to 20 miles to shop at specific national retailers, so there is a lot of demand for new retailers to enter the market. Specifically, he says specialty grocers such as Trader Joe’s would be a welcome addition to Bowie.
Economic development initiatives can play an important role in helping to backfill vacant space. For example, Larry Hentz, business development specialist for the Prince George’s County Economic Development Corp., says the president of the EDC, Gwen McCall, took initiative to help backfill vacant supermarkets.
“She developed a proactive plan and targeted supermarket chains looking for 30,000-square-feet,” he says. “As stores leave, we’ve developed a list of chains that would be interested in going into these locations so the communities are not at a great disadvantage.”
While leasing activity is on the rise, there are still sticking points between landlords and tenants in retail leases. Weilminster says hot button topics of discussion include lease provisions, such as co-tenancy, exclusivity and control areas. “Those are the ones that tend to take a tremendous amount of time negotiating,” he says.
Divaris says co-tenancy has been especially difficult in new developments. “There’s a war going on between tenant’s expectations, developer’s intents and the resistance of banks,” he says. “Some of that is being resolved through having some flexibility with co-tenants.”
“The clauses that once upon a time we wouldn’t have offered to small shop tenants, whether it’s co-tenancy or the right to terminate, now you can find those clauses in a fair number of small shop leases,” adds Jerome.
Tenants aren’t taking chances with regards to co-tenancy because during the last development cycle, second development stages, timelines or tenants that were promised weren’t delivered, Segall says.
Although during the past few years tenants have had the upper hand in lease negotiations, a shift towards a more balanced relationship has started to occur. “While everyone fights hard to make the best deal possible, both the landlords and tenants recognize that they need each other to survive,” says Galloway. “We are all working together to make the industry solvent and viable again.”
It’s a symbiotic relationship, adds Isen. “Landlords need tenants and tenants need landlords.”
Fidler says that in the coming year, there is some concern that small shop tenants who fought their way through the recession could close their stores, causing a slight uptick in vacancy rates. “We’re tracking a high level of default in rental payments,” he says. “We anticipate some of that space coming back on the market.”
However, in markets where space is tight, there is hope that larger retailers will also release non-performing locations, says Galloway, which would allow new retailers to enter the market and owners to improve their tenant mix.
Increased Sales Volume
Sales volume in the Mid-Atlantic has been heating up tremendously, particularly for investment sales. Cap rates are high, especially for Class A product, and competition for quality assets is tight. Additionally, there is a vast amount of lending opportunities for properties in the Mid-Atlantic, says Feldman.
“Last year, the Washington, D.C., metropolitan region broke records with investment sales,” says Steve Boyle, director of Mid-Atlantic development at EDENS’ Washington, D.C. office. “Approximately 32 shopping centers were sold for a total of more than $1.2 billion in transactions.”
Di Iaconi says several REITs and pension funds are looking for quality retail assets to add to their portfolios. In fact, two of the largest shopping center sales in the Mid-Atlantic region last year were made to REITs.
Washington, D.C.-based Washington Real Estate Investment Trust purchased the 199,000-square-food Olney Village Center in Olney, Maryland, in August for $58 million. Food Warehouse anchors the center, which was 98.7 percent leased at the time of the sale.
In October of last year, Phoenix-based Cole Real Estate Investments acquired the 167,000-square-foot Winchester Station in Winchester, Virginia, from Trout, Segall & Doyle Winchester Properties for $26.8 million. The center was 97.5 percent leased at the time of the sale to tenants including hhgregg, Ross Dress for Less, Bed Bath & Beyond, Old Navy, Michaels, Olive Garden and Red Lobster.
“Class A product is moving quickly,” Feldman says. “It’s a competitive bid environment amongst buyers and we’ve experienced cap rate compression. Cap rates have come back to where they were in the accelerated marketplace a couple of years ago.” Average cap rates for Class A properties are around 6.2 percent, says Boyle.
“There is a lot of money chasing very few deals,” says Jerome. “Buyers have to be smart and use good judgment when chasing acquisitions because it’s easy to over pay. Having said that, the market is still attractive enough that if you are going to pay for real estate anywhere, this is the place to do it.”
Class B and C product has also experienced sales, says Feldman. Because it has been such a heated market for Class A properties, core and core plus buyers are starting to look elsewhere for better returns. Although there is less competition for Class B and C product, it is growing.
In fact, some companies have chosen to focus primarily on the Class B and C markets. “We’ve had great successes in the secondary and tertiary markets,” says Jon Wheeler, president and CEO of Virginia Beach-based Wheeler Interests. “We really feel, from an investment standpoint, that the real dollars and wealth is made in those markets versus the true core markets.”
In 2012, Wheeler says his company focused on buying and looks to acquire between 10 to 15 centers. “From 2012 to 2015, it will be a fantastic opportunity to stabilize portfolios and grow from what was lost between 2008 and 2010,” he says.
During the next year, Feldman anticipates for quality core and core plus deals in primary markets, cap rates will continue to be in the 5 to 6 percent range, and the move to Class B and C product will continue to occur. Additionally, he says the lending gates should continue to open, which will fuel additional transaction velocity.
“Our appetite for interesting, well-located real estate is strong,” says Boyle. “We have a fair amount of capital that we are looking to strategically place, whether it’s traditional suburban grocery-anchored centers or more urban, core properties.”
Surge in Development
For the first time in years, there is a rise in development activity in the Mid-Atlantic region. While redevelopments are still occurring, several new projects are breaking ground this year.
“2012 will be the first time in 4 years that we will actually have a fairly substantial amount of new retail space coming on line,” says Segall. “Most of what has come on line in the last 3 years was older product that was renovated, but now there are some ground up developments actually being built and delivered.”
One of the largest developments that is slated for completion this year is Phase I of EDENS’ 1.9 million-square-foot Mosaic, a mixed-use development in Merrifield, Virginia. The first phase, including 350,000 square feet of retail space, 553 apartment units, a 150-room boutique hotel and 112 townhomes, will be delivered this October.
An eight-screen Angelika Film Center will anchor the retail portion, which will include tenants such as Target, My Organic Market, Neiman’s Last Call Studio and a restaurant by Washington, D.C., restaurateur Jeff Black.
“Mosaic will not only transform the immediate suburban area and give it a place, it will, for all intents and purposes, become a regional destination,” says Boyle.
The company also has a 1.2 million-square-foot mixed-use project known as The Shops at Stonefield, which is under construction in Charlottesville, Virginia. Phase I, totaling 270,000 square feet, will be delivered in November 2013, with Trader Joe’s and a Regal Cinema anchoring the retail portion.
This summer, Federal Realty will break ground on Phase I of its Pike & Rose project in Rockville, Maryland. The 300,000-square-foot Mid-Pike Plaza that sits on the site will be redeveloped to create the more than 1.7 million-square-foot retail and office property. Additionally, 1,500 apartment units will be constructed on the site. The first phase includes 160,000 square feet of retail, 80,000 square feet of office space and 450 residential units, says Weilminster. An eight-screen, 750-seat iPic movie theater will anchor the retail portion.
Also in Maryland, Ward Properties has begun development of Phase II of the 40-acre Boulevard at Box Hill in Abingdon. The anchor, a 144,000-square-foot Wegmans, opened in September. When fully developed, the center will have 430,000 square feet of retail space and restaurant space.
JBG Rosenfeld is partnering with Greenbelt, Maryland-based Bozzuto Group to develop Downtown Crown, the mixed-use, town center portion of Crown Farms in Gaithersburg, Maryland. The project will break ground this summer on 260,000 square feet of retail space, anchored by Harris Teeter, and 540 apartment units.
In National Harbor, Maryland, The Peterson Cos. anticipates breaking ground this summer on the 388,000-square-foot Tanger Outlets at National Harbor, which is slated for completion in 2013. “The acceptance of outlet shopping by the higher demographic is becoming much more prevalent,” says Taylor Chess, senior vice president of retail for Fairfax, Virginia-based The Peterson Cos. “With people’s psychological change to look for better values, outlets will be and are the way to go today in new development.”
Hentz adds that the Prince George’s County EDC is assisting The Peterson Cos. throughout the development of Tanger Outlets at National Harbor. “A development specialist from Prince George’s County EDC is assigned to each major development in the county to work with the development team throughout the permitting and construction process,” he says.
Peterson is also planning to begin development of the 300,000-square-foot Promenade at Virginia Gateway Town Center in Gainesville, Virginia, in March. Originally, a 500,000-square-foot lifestyle center was planned for the 40-acre site, but development was shelved in 2005, says Chess. The company re-evaluated its plan and decided to use 13 acres for a 79,000-square-foot BJ’s Warehouse, which got the ball rolling on the project again.
“We never compromised the integrity of the lifestyle component that was designed here,” Chess says. “Since BJ’s opened in late January and the Regal Cinema theater is signed, we have had a lot of interest from retailers to do a scaled-down version of the center.”
A 14-screen, 57,000-square-foot Regal Cinema will anchor the center, which will include an additional 120,000 square feet of retail space. Chess anticipates completion in 2013 on the movie theater and retail portion.
In Williamsburg, Virginia, Phase II of Settlers Market shopping center is set to break ground in early 2012. Washington, D.C.-based Federal Capital Partners is developing the property, which will include more than 250,000 square feet of retail space upon completion. The center is the gateway to the New Town Master Planned Development Corridor.
The Shopping Center Group has secured three anchors for the second phase of development, including a 30,000-square-foot Stein Mart, a 25,000-square-foot HomeGoods and a 10,000-square-foot ULTA. Additionally, Sleepy’s recently signed a 7,300-square-foot lease. Completion for the second phase is slated for the fall of this year.
“We are very excited to be signing leases for a center that is coming out of the ground,” says Ramey.
Another mixed-use development project that’s breaking ground is One Loudoun in Ashburn, Virginia. Alamo Drafthouse recently signed a 34,000-square-foot lease for an eight-screen theater to the retail portion of One Loudoun. A joint venture between Miller and Smith and North America Sekisui House, as well as retail development partner Potomac Development Group, is developing the property.
The first phase, which is slated for completion in the spring of 2013, will include the movie theater and two 54,000-square-foot retail buildings, says Bill May, vice president of McLean, Virginia-based Miller and Smith.
Di Iaconi says that the large amount of developments breaking ground this year is not all that surprising. “In a downturn if you have good real estate, there’s an opportunity to work on positioning and development plans, and a lot of the big players in our market did just that,” she says. “Then, when the market starts to warm up again, developers are entitled and ready to go.”
Forecast for 2012
With strong leasing and sales activity, as well as a variety of retail projects breaking ground or delivering new space to the market, the Mid-Atlantic region is poised for a strong 2012.
“In 2012, we expect steady, slow growth like we experienced in 2011,” adds Next Realty’s Galloway.
Investor, consumer and retailer confidence will continue to increase, fueling growth in the Mid-Atlantic region, says Wheeler. “A majority of the future growth of real estate has a psychological component to it like it never has before, and people are feeling better about where the market can go in the coming years.” Segall adds, “2012 will be the best year we’ve had of our [company’s] 4-year journey.”
— Savannah Duncan