The Duke of Westminster's investment advisers wanted to get in on the Washington area's hot market for shopping centers. His real estate investment company in London, Grosvenor Group, looked for 2 1/2 years before scoring last week. It paid $200 million -- or $433 a square foot -- for 15 retail properties in Northwest Washington and Old Town Alexandria.
It is a sign of the strength of the region's retail market in the view of developers, brokers, investors and retailers.
Metro Business: Coverage of Washington area businesses and the local economy.
The area is seen as especially stable compared with the rest of the country because it has steady job growth and well-educated consumers with high levels of disposable income. Those factors attract plenty of large, nationally-known retailers who are willing to compete for space, driving up rent prices. And the high rents attract real estate investors who are flush with cash and looking for a stable return.
"The demand for retail investments is strong," said R. William Kent, an executive vice president at the CB Richard Ellis brokerage firm. He specializes in real estate investments. "D.C.'s downtown has had a renaissance of development, and the suburbs are constrained because the land is zoned and there are few places to build more. So that's been driving up the price per square foot for rents and on what [investors] are paying."
Executives at Grosvenor, which owns more than 1 million square feet of office space in the Washington area as well as properties in Chicago, Los Angeles and San Francisco, said they have seen the pricing of retail properties become more aggressive, particularly in the Washington area.
"We wanted retail that was in good, solid locations because it has low risk," said Andrew Galbraith, a senior vice president in the Washington office of Grosvenor, which is controlled by the duke, Gerald Cavendish Grosvenor, and has been developing real estate in London for centuries. "If you've got good residential in the neighborhoods around your retail, there is always demand for a retailer to take space there. And that makes for a good real estate investment."
Not that the area stands alone as a retail mecca. In fact, a nationwide study of 40 major metropolitan retail markets showed that the Washington area dropped to second place this year after ranking first for the two previous years. The study ranks cities based on their job growth, rates for renting retail space, vacancy levels of stores and future development.
Orange County, Calif., claimed the top spot this year in the study by Marcus & Millichap Real Estate Investment Brokerage Co., which is headquartered in Southern California.
"For the D.C. metro area, to go from one to two is not a big step," said Andrew P. Boyle, regional manager for D.C. at Marcus & Millichap.
The Washington area's vacancy rate for retail space is 6 percent, the study said, and in some areas like Silver Spring and Gaithersburg, it is as low as 4 percent. The vacancy rate has stayed solid for the past two to three years. The national average vacancy rate is 8 percent.