Retailers, mainly grocers, have set their sights on prime infill locations in the Mid-Atlantic to cater to an underserved retail market.
Even though the Mid-Atlantic is home to some of the country's most favorable demographics, the lack of new development during recession years has led to tight vacancy rates and staggering high levels of retail leakage. Development companies are now eager to grab hold of the opportunity to meet this unmet demand by building projects in prime, infill locations.
There are currently 1.7 million square feet of retail under construction in Washington, D.C., according to the Washington D.C. Economic Partnership's 2013/2014 D.C. Development Report. Approximately 767,000 square feet of that is slated for a 2014 completion.
Comparatively, more than 1 million square feet of new or rehabilitated retail space (representing $300 million in investments) will exist in metro Baltimore by the end of 2014, according to the Baltimore Development Corp.
The lack of availability has also established a very competitive market for retailers looking to expand and investors wanting to grab a piece of the Mid-Atlantic pie.
"The Mid-Atlantic region benefits from an affluent, educated work force with better than average employment opportunities, which gives retailers confidence that all the right ingredients exist for their success," says Chris Weilminster, senior vice president of leasing for Federal Realty Investment Trust. The company is developing Pike & Rose in Rockville, Md., which is one of the largest projects in the Mid-Atlantic pipeline.
The Washington, D.C., metro area as a whole is one that retailers love. Eight counties in the region are among the top 15 in highest median household income in the U.S., according the U.S. Census Department's 2012 American Community Survey. Loudoun County, Va., ranks No. 1 on that list with a median income of over $117,000. Even 25 miles out from Washington, D.C., Stafford County, Va., ranks sixth in median household income at more than $97,000. Closer in counties, like Fairfax and Arlington Counties in Virginia, have median incomes north of $100,000, while Montgomery County, Md., has a median income greater than $94,000. The high levels of disposable income are causing retailers to continue to take notice of the area and rapidly expand.
Growing retail demand is driven by grocers, fitness concepts and fast-casual restaurants. There are currently eight grocery stores under development in the District of Columbia, according to the D.C. Development Report. The report also states that retail sales for food services has increased by 6.7 percent during the past year.
Experts agreed that while retailers are sticking to fool-proof locations when opening new stores, investors and pension funds alike will take more of a risk in 2014 when it comes to investing in Mid-Atlantic properties due to the shortage of supply. The coming year will be characterized by high levels of competition and a continued resurgence of retail opportunities as the Mid-Atlantic recovers nicely amidst a rebounding economy.
Washington, D.C., has witnessed its population grow by 4.5 percent from July 2010 to July 2012. There is an estimated 8.1 square feet per capita of shopping center space in the District and roughly 27.9 square feet in the metro area, according to the D.C. Development Report. Many new residents in D.C. are turning to its suburbs in order to do their shopping. Grocery stores are taking note of this wide gap and rapidly planning additional stores in D.C. to capitalize on the population growth.
In 2014, D.C. will open its 28th grocery store since 2000. The supermarket category continues to grow with Whole Foods Market, Trader Joe's, Wegmans, Harris Teeter and Safeway all fighting for new development and backfill opportunities.
Whole Foods Market, in partnership with real estate firm WC Smith, recently signed a lease for a new 36,000-square-foot store in southeast Washington, D.C. The store, which will be located near Navy Yard and Nationals Park at 800 New Jersey Ave., will anchor the retail portion of WC Smith's $443 million development, which the company is still in the process of branding. This will mark the fifth Whole Foods location in D.C. when it opens in early 2017.
Safeway has adopted a very similar business model to Whole Foods Market in its expansion throughout the Mid-Atlantic. According to Jason Yanushonis, leasing and brokerage representative, and Jim Farrell, senior director of leasing and brokerage, with The Rappaport Companies, Safeway focuses on remodeling older developments and building a project around its new stores. The revitalized developments usually include the new Safeway, ancillary retail offerings and either an office or multifamily component above.
"Most excitingly, retail is becoming the standard for most ground-floor space, activating our streets and neighborhoods," says Michael Smith, business development and project manager with Williams Jackson Ewing. "Developers now want to build retail, instead of being forced to, and see it as both a legitimate source of revenue and a value adder for upper floor uses." Experts also predict that other retail users will capitalize on this trend in 2014 by expanding their own grocery offerings.
George Fox, director of leasing and vice president of business development for Virginia Beach, Va.-based Wheeler Real Estate Co., explains, "In 2014, you will continue to see national dollar stores — Dollar Tree, Dollar General and Family Dollar — relocate from inline locations in grocery-anchored neighborhood centers to freestanding outparcel buildings, thereby eliminating their grocery sales lease restriction and allowing them to sell an unlimited range of grocery items."
In addition to supermarket chains and dollar stores adding grocery components, there is a strong demand from consumers for more convenience offerings. This has caused fitness concepts, especially more niche brands that rely on smaller footprints, to rapidly expand throughout the Mid-Atlantic. These include Xango, Soul Cycle, Core Power Yoga and Orange Theory Fitness to name just a few.
Upscale theater chains have also set their sights on the Mid-Atlantic. Landmark Theatres announced in early January that it was planning a six-screen cinema at Atlantic Plumbing, a new mixed-use community at 8th and V streets in D.C. The JBG Companies and Walton Street Capital are developing the 350,000-square-foot project, which will open in late 2015. This marks the second new theatre Landmark is building in the Washington, D.C., metro area, according to a press release from the company.
iPic Theaters is also opening its first location in the Mid-Atlantic in Federal Realty Investment Trust's Pike & Rose project in the White Flint district of Maryland.
The expansion of theater chains reflects a larger trend of other retail tenants rapidly expanding throughout the Mid-Atlantic to take advantage of a growing millennial culture that prefers to spend its disposable income on experiences. Pub and microbrew restaurant concepts have taken the region by storm.
Bar Louie already operates five locations in the Mid-Atlantic in Gainesville, Ashburn and Arlington, Va.; Washington, D.C.; and Rockville, Md. The restaurant chain has shown no signs of slowing down its rapid expansion plan any time soon.
Experts also cited Miller's Ale House and new-to-market retailer BJ's Restaurant and Brewhouse as other chains that plan to expand in the Mid-Atlantic. The pubs and microbreweries have grown in popularity in the region due to their ability to draw in a large millennial crowd that is willing to spend more income on eating out.
Surprisingly, Stafford County, Va., recently received its first Chipotle and the restaurant chain is considering other locations. The county is aggressively courting the fast-casual segment and has ideal locations in both the northern and southern parts of the county, says Tim Baroody, deputy county administrator and director of economic development and legislative affairs for Stafford County.
Other ideas that have garnered interest from the millennial clientele in the Mid-Atlantic are chef-driven, one-of-a-kind restaurants that provide a unique experience. Federal Realty Investment Trust's Weilminster mentions Robert Wiedmaier's Mussel Bar and Grille, and Wildwood Kitchen, as well as Michael Babin's Neighborhood Restaurant Group.
"It has been interesting to see so many top chefs who start in downtown city centers refocus their energy on securing suburban market locations," he says.
While chef-driven restaurant concepts are branching out to the suburbs, other retailers are focusing strictly on infill locations that have the traffic counts to be a proven success.
"Retailers are being disciplined about staying focused on securing sites in mature, infill markets that have an established and successful retail presence. Retailers are not looking to be pioneers," explains Weilminster. "They no longer want to risk opening stores in the fringe developments that are betting on housing and employment workplace growth."
"Retailers have been looking more closely at urban locations and are being more open-minded to space configuration and parking availability in favor of population density and access to mass transit," adds Smith.
Kroger and Walmart are two companies that are taking advantage of infill locations with their smaller Marketplace and Neighborhood Market concepts, respectively. The businesses are adapting their footprints in order to have a presence in more high-profile locations.
"Retailers are shrinking their footprints, plain and simple. Even stores that are coming up for lease renewal will also want to shrink their footprints," says Jonathan Hipp, president and CEO with The Calkain Companies, based in Reston, Va.
Popular submarkets include the 610 Corridor in Stafford County, as well as the York Road Corridor in Baltimore County. When it comes to the District itself, Keith Sellars, president and CEO of the Washington D.C. Economic Partnership, a public/private partnership dedicated to facilitating economic development in the District of Columbia, says that a sweet spot for retailers is any location near mass transportation.
"Retailers are willing to be a bit more creative and opportunistic, and less rigid in their site selections," adds Blake Cordish, vice president of The Cordish Company, based in Baltimore.
Focus on Retail
Not only do retailers want to establish themselves in prime locations, developers are also planning new projects in some of the city's most dense submarkets. While mixed-use centers continue to lead the way when it comes to ground-up development, firms are once again focusing on providing a strong mix of retail offerings to accompany office and multifamily components as well.
"You're seeing the best-in-class developments getting done," Cordish says. "They're in the strongest real estate locations with really good sponsors and developers behind them that have access to capital. The Class B spots without the strongest sponsorship just aren't getting done."
The Wharf is one of the most talked about projects in the works for the Mid-Atlantic. The $1.5 billion, 3.2 million-square-foot project is being developed by Madison Marquette and PN Hoffman along the Potomac riverfront in D.C. Phase I will be complete in 2016. Upon full build-out, The Wharf will feature 358,000 square feet of retail, 1,350 residential units, 960,000 square feet of office space and three hotels. The 27-acre development will also include a concert venue and an artisanal food market.
CityCenterDC is another mixed-use project that will revolutionize downtown Washington, D.C. Hines and The TFI US Real Estate Fund are building the 10-acre, pedestrian-friendly project. Phase I includes more than 270,000 square feet of retail, 458 apartment units and 216 condominium units, as well as a public park and central plaza. Occupancy of the residential buildings occurred in December 2013, while the retail and office components will open during the first half of 2014.
Construction of Phase II of the project is expected to commence in 2015. It will consist of an approximately 370-room luxury hotel and 73,000 square feet of additional retail. Phase III of the project will be completed by another developer, Gould Property Company, and will consist of a 500,000-square-foot office building and 40,000 square feet of retail space. The project is a joint venture between Clark Construction Group, Smoot Construction of Washington, D.C., and McKissack and McKissack is the general contractor for CityCenterDC.
The Rappaport Companies is also very active in the Mid-Atlantic, focusing on developing Skyland Town Center. Construction on the project, which is located in southeast Washington, D.C., will begin during the third quarter of 2014.
Skyland Town Center will include approximately 300,000 square feet of retail and 454 residential units. The project will be built in two phases with the first phase scheduled for a 2017 completion. The D.C. Development Report says the project has an estimated value of $260 million.
According to Rappaport, it is talking with Walmart and a pharmacy to anchor the retail portion of the center and will be targeting restaurants, home furnishings and service-oriented retailers for the remaining space. The Skyland Development team includes The Rappaport Companies, WC Smith, Harrison Malone Development LLC, Marshall Heights Community Development Organization and Washington East Foundation.
"Ward 7, which is located just east of the Anacostia River, is currently underserved by retail, which is why the District government has made the development of Skyland Town Center a priority," says Sheryl Simeck, vice president of marketing and communications for The Rappaport Companies. "There are more than 35,000 residents within one mile of the project. Residents have been waiting for this project for almost 25 years, and we believe the area is overdue for quality retail and residential development."
St. John Properties, which normally concentrates on building office campuses, is building Reisterstown Crossing in Reistertown, Md., approximately 18 miles northwest of downtown Baltimore, to complement its Reisterstown Office Park. The population within five miles of the center is 66,846 with an average household income north of $92,000. The 13,000-square-foot center is targeting restaurant users to cater to an office lunch crowd and the surrounding community.
"The increased inventory of space that was generated during the recession has been eroded to the point where there are very few opportunities for larger tenants," says Alex Montague, vice president of Colliers International's Baltimore office. "Overall vacancy in the Baltimore region stands at just 5.3 percent and declined steadily throughout 2013. Developers have begun to dust off projects that have been in storage for the past few years, and they are actively seeking anchor tenants to kick the projects off."
In addition to the Atlantic Plumbing project previously mentioned, The JBG Companies is also redeveloping an underutilized center in Rockville, Md., into Galvan at Twinbrook. Located on the west side of the Twinbrook metro station, the project will feature 100,000 square feet of street-level retail that will be anchored by a 63,000-square-foot Safeway. Galvan at Twinbrook will also include 356 apartment units and two levels of underground parking. Delivery is scheduled for 2015.
Large Deals for Large Players
Even though there is a large amount of new construction in the Mid-Atlantic pipeline, there continues to be a shortage of assets on the market when it comes to the investment sector. With the economy on the upswing, banks are more eager to award loans to private investors looking to enter the market. Because of the multitude of players in the game going after a constrained supply, prices are only increasing with the largest companies being the primary parties able to close deals.
"REITs, institutions, opportunity funds, private investors and foreign investment funds are all very actively looking at acquiring the limited number of retail projects that come to market. It is a very active, competitive market," says Weilminster.
Grocery-anchored centers remain the most attractive from an investment standpoint, while net lease properties are growing in popularity.
"Grocery-anchored shopping centers continue to attract the most institutional attention, and there are lots of small net lease deals circulating," says Collier International's Montague.
Similar to expanding retailers, investors are sticking to tried and true submarkets when it comes to acquiring properties.
"Investors are taking the lower risk path and staying in proven markets. Most acquisition activity centers on existing Class A properties in the strongest metropolitan statistical areas," says Geoff Glazer, vice president of acquisitions and development for the Mid-Atlantic and Northeast Regions with Kimco Realty Corp. "With competition and pricing levels high, the larger players are the ones who generally close the deals."
While there is a surplus of investors in the market, the Mid-Atlantic remains underserved from a retail standpoint even thought the region has some of the most favorable demographics in the nation. Vacancy rates will remain tight with the abundance of expanding retailers in the market until several large-profile projects come on line.
— Brittany Biddy