Washington area attracts new retail developments

The Washington area had the lowest shopping center vacancy rate among large metropolitan areas at the end of the second quarter of 2012.

The overall vacancy rate for all types of shopping centers is 5.3 percent in the Washington area, down from 5.6 percent one year ago, and far lower than the national rate of 9.2 percent in June.

With low vacancy rates and the highest median household income in the United States, the Washington area is attracting new retail development. Many of the significant new projects are grocery-anchored centers or of a mixed-use nature. They will fill a need in the market; 56 percent of the Washington area’s shopping center square footage is more than 25 years old, and larger tenants often are seeking newer space.

New development

There were nine major grocery-anchored shopping centers, totaling 2.2 million square feet, under construction or renovation in the region in July. The first phase of the Mosaic District in Merrifield is set to deliver 350,000 square feet of retail space by September. The project will include Mom’s Organic Market.

Other projects are moving forward as well:

JBG Cos. and Bozzuto plan to break ground on Downtown Crown, a mixed-use town center in Montgomery County. The project is to include 540 apartments and 260,000 square feet of retail, anchored by a Harris Teeter grocery.

Bozzuto and Southside Investment Partners are redeveloping a Giant Food store along Wisconsin Avenue near the National Cathedral in the District. The project, Cathedral Commons, is to include 128,000 square feet of retail, a 56,000-square-foot Giant Food store, 137 apartments and eight town homes.

Ground work has started on a multifamily project along St. Asaph Street in Old Town Alexandria for a 175-unit apartment building with a Harris Teeter located on the ground floor.

The Rosenthal Chrysler Jeep dealership at 3400 Columbia Pike in Arlington County has shuttered, and the site is to be transformed into a multifamily complex with ground floor retail.

McCaffrey Interests is planning a 166-unit multifamily project along Lee Highway in Arlington County, which is to include a My Organic Market on the first floor.

Outlook

We expect the vacancy rate for shopping centers to decline during the balance of 2012, as new retailers enter the market and existing retailers look to expand. In particular, national tenants are focused on close-in, higher-end centers.

Shopping centers with notable vacancies may have a hard time attracting new tenants, unless the property is located in a top-performing neighborhood or the center undergoes renovations. Given demand for Class A space, we believe property owners will continue to invest, where the cash is available, in repositioning existing, underperforming assets — either upgrading or transforming those shopping centers. Currently, tenants seeking space are most interested in newer, Class A space with significant foot traffic. Of note, centers that focus on everyday needs, such as groceries and other necessities, remain successful during economic downturns or slow-growth periods. The current economic expansion cycle in Washington is likely to be a muted one, given concern over federal budget cuts.

Given the long-term demand for retail goods in this area, we believe developers will look to continue to develop new retail space at least until 2013-14.

Sandy Paul is the national research director at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.