Retail Traffic

SCW MARKET PROFILE: D.C., Construction Capital

Washington, D.C.

Demographic Overview

Population: 5.1 million
Rate of Population Growth: 1.5%
Median Household Income: $70,000
Unemployment Rate: 3.8%

Retail Overview

Retail Vacancy Level 2002: 6%
Retail Vacancy Level 2001: 6.7%
Average Rent Per Sq. Ft. 2002: $21.60
Average Rent Per Sq. Ft. 2001: $21.00

Sources: U.S. Census Bureau, Insignia/ESG, Trammell Crow, Marcus & Millichap

Got a friend looking for construction work? You might want to buy him a bus ticket to the nation's capital.

Though many of its technology companies have tanked, these are still good times in metropolitan Washington. The stability brought by federal jobs means that consumers are continuing to put out cash for housing, clothes and furniture, and that's fueled a burst of retail development.

Realty services firm Insignia/ESG calls the metro area “arguably the strongest retail property market in the United States.” In two of its key counties — Virginia's Fairfax and Maryland's Montgomery — retail vacancy rates are under 2 percent.

“It's a very hot market,” says K.C. Whang, a senior advisor to Sperry Van Ness for the D.C. area. “We're seeing vacancies in single digits in practically every area I know, including new places coming out of the ground.”

The key is people: Metro Washington has lots of them, and the right kind. The region's population soared 16 percent between 1990 and 2000 and now stands at 5.1 million, while the median household income is $70,000 — a veritable fortune compared to the $42,000 national median. Federal spending contributes $80 billion to the $300 billion local economy.

“Washington has been blessed with a more stable economy than some parts of the country,” notes Jim Wheeler, executive vice president of real estate developer Rappaport Cos. of Vienna, Va. “We took a hit when the dots bombed, and you can drive out the Dulles Toll Road and see some see-through buildings, but that's a short-term aberration.”

Much of the past decade's phenomenal growth has been in northern Virginia, and the current boom is pushing retail development farther into the once-bucolic countryside.

Fairfax-based Peterson Cos. is developing a 700,000-square-foot power center called Gateway Center in Gainesville and a lifestyle center, Fairfax Corner, on a prominent site just off I-66 in Fairfax. Gateway, anchored by Target and a home improvement store yet to be named, will be fully open in the summer of 2004. Fairfax Corner, opening this summer, will feature 285,000 square feet of retail in a pedestrian-oriented setting anchored by a National Amusements cinema.

Rappaport also owns land in Gainesville — opposite the Gateway site — for future development. Wheeler calls the area beyond historic Manassas “the next ring of growth.”

“The retail market hasn't shown any real signs of weakness,” says Peterson Vice President Paul Weinschenk. The only hurdle is that traffic-choked communities are beginning to turn away new proposals. “Retail zoning is hard to get in this area, and there's not as much as there could be,” he says. On the other hand, the lack of new sites could be a useful governor to prevent overbuilding.

Meanwhile, centers continue to add space and renovate. The two-year-old Dulles Town Center continued its expansion with the fall opening of a 144,000-square-foot Nordstrom. H&M has announced that it will open a 21,000-square-foot store there in the spring — one of seven area stores the Swedish clothier plans to open.

H&M also will be going into the region's biggest and best-established mall, Tysons Corner Center in McLean. Tysons Corner — the area's retail rent leader, with an average of $70 per square foot compared to the regional average of $21.65 — has other changes in the works, too. The mall's co-owners, Wilmorite Properties and the Alaska Permanent Fund Corp., are buying its 230,000-square-foot JCPenney store, which will close in April, and may use the space for a new department store, specialty retail, restaurants and/or entertainment.

The site of yet another new H&M store illustrates one of the area's hottest trends: The resurgence of the District's downtown business center as a retail hotspot. H&M has leased 27,000 square feet in the long-vacant Woodward & Lothrop department store at Eleventh and F Streets NW in the East End, an area near Chinatown that's become a destination thanks to the new MCI Center, home of the NBA's Washington Wizards.

The old Woodies building, owned by Douglas Development, is courting other major retailers — including Crate & Barrel, Bed Bath & Beyond and Virgin Records — for the remaining 150,000 square feet of retail. Douglas is also renovating smaller buildings along nearby Seventh Street, much of it as restaurant space.

A big new East End player will be Gallery Place, a 640,000-square-foot mixed-use project developed by partners Western Development and John Akridge Cos. and scheduled to open in November with 275,000 square feet of retail. Among its tenants will be United Artists, which will operate a 14-screen theater in the center.

A couple of miles west, in tony Georgetown, the $65 million Cady's Alley project has opened with 130,000 square feet of retail space leased mainly to home furnishings tenants. Nearby, H&M is opening yet another store, this one in venerable Georgetown Park Mall.

And capitalizing on the opening of the new Washington Convention Center, Roadside Development will open the 27,000-square-foot O Street Building in the historic Shaw district this summer. The redevelopment of this 133-year-old building will include streetfront retail, and Roadside, with services firm Madison Retail Group, are working together to sign tenants.

Retail development is coming to the inner city as well, a change attributed to D.C. Mayor Anthony Williams. The Brentwood section of Northeast Washington is home to the inner city's first new shopping center in 20 years: a power center called Rhode Island Place being developed by Detroit's Graimark/Walker Urban Land Development and anchored by a 120,000-square-foot Home Depot and a 55,000-square-foot Giant Food. (An effort to land Kmart for the site fell through.)

“This is one of the largest urban projects we've been involved in,” says Rick Walker, Graimark/Walker's president. The appeal for developers is simple: “The density is extremely high,” Walker notes, “and we were able to sign letters of intent for over 80 percent of the space even before the project was approved.”

In Southeast D.C. neighborhood Anacostia, Rappaport will redevelop the Skyland Shopping Center, an existing center whose parcels currently have multiple small owners. Construction should begin as soon as the National Capital Revitalization Corp., a public-private entity created to support District development projects, gets clear title to all of the center's land, says Wheeler. He says he hopes the 240,000-square-foot center will include a junior department store, a supermarket and a third store as mini-anchors.

In the Columbia Heights section of Northwest D.C., Horning Brothers' Tivoli Square project is converting the historic Tivoli Theater area into a mixed-use center anchored by a Giant Food and featuring 20,000 square feet of retail. A portion of the theater itself will be converted into a new 250-seat theater that will be the home of the GALA Hispanic Theatre group; the rest will be used for retail and offices.

Across the street, Grid Properties' DC USA development will be anchored by a 169,000-square-foot Target — the first in the city. In another D.C. first, Best Buy is going into the vacant Hechinger site on Wisconsin Avenue in Northwest Washington.

The return of retail to the city, says Wheeler, reflects the changing market facing retailers. “Target, Home Depot and others have only so many places to go in the suburbs,” he says. Adds Whang, “The low-hanging fruit in the suburbs is all gone.”

Suburban Maryland has its share of action, too. In Largo, Baltimore's The Cordish Co. is replacing the former USAirways Center athletic arena with a 460,000-square-foot retail and entertainment complex called the Boulevard at Capital Centre scheduled to open late this year. In Chevy Chase, Lowe Enterprises has just finished renovation of mixed-use Chevy Chase Pavilion, which includes 150,000 square feet of upscale retail.

How long the metro area will stay hot for retail development is an open question. Insignia/ESG notes in its annual report that Washington has “a unique mix of resources” that may enable it to resist the national economic slump.

But Whang believes the slowdown eventually will catch up with the region's retail development.

And Wheeler, a veteran of the commercial real estate profession, is resigned to the cyclicality of the business. “I've got eight years before retirement,” he says, “and I expect the market will go down, back up and down again before then.”

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