Retail leasing activity remains below average in D.C. area

May 12, 2013

Despite the fact that retailers continue to open more stores and total net absorption of retail space continues to increase, retail leasing activity in the nation’s capital remains below average. This slower pace reflects broader shifts in the way that retailers meet consumer demand, and how that translates into demand for retail space.

In the Washington region, total net new demand for retail space over the past four quarters weighed in at nearly 1.1 million square feet. While a big increase from 2010, retail leasing levels are still about 40 percent below the four-quarter average recorded since 2006. The trend across the United States has followed a similar pattern, with the most recent four-quarter national total coming in at only two-thirds the typical average.

A look at demand for retail space by tenant type illuminates the broader trend playing out in the region. Traditional merchandisers — from big-box discount department stores to pet stores and office suppliers — have vacated more space than they have opened over the past quarter. These are exactly the kinds of retailers that are experiencing the greatest competition from online retailers, where price is king.

On the other hand, retailers that offer services and goods that are not easily delivered by e-commerce have been expanding their store base recently. These businesses offer value above and beyond items that are readily commoditized and typically provide an element of service or some benefit that cannot be boxed and shipped.

For instance, it is difficult or impossible to adequately treat a patient or to cut hair over the Internet. Even some smaller scale creature comforts just aren’t the same when experienced at home. In the first quarter of the year, nine separate new stores offering gourmet frozen yogurt opened across the region.

While many might keep a frozen treat in the freezer for a sweet-tooth fix, these trendy eateries provide a space to meet friends or enjoy a family outing, experiences that just wouldn’t be as special in the confines of a kitchen. Movie theaters have also evolved, morphing into a total immersion event by offering adult beverages, gourmet food and plush leather seats to provide a starkly different experience than movies streamed to the small screens of mobile devices.

This trend is playing out in the health of shopping centers. Local shopping centers that have an above-average concentration of entertainment, services and dining options tend to enjoy a much stronger occupancy rate than those that do not. This is the new face of brick-and-mortar retail. We should expect to see those retailers who are successful in offering an experiential component continue to grow, because they are the ones that can best fend off the price wars of the Internet.

Erica Champion is a senior real estate economist with CoStar Group in Washington.

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