By V. Dion Haynes
Washington Post Staff Writer
Monday, November 10, 2008

Not long ago, developers at Madison Marquette envisioned capitalizing on the influx of affluent residents flocking to Charles County by rebranding their 20-year-old strip mall, Festival at Waldorf, as the upscale Shops at Waldorf Center.

They were going to build 100,000 more square feet of space, with lavishly landscaped walking paths and stylish boutiques and eateries. They cleared about 10 acres of woods adjacent to the mall and shopped the idea around the country to select national retailers. Interest was strong, and offers from potential tenants poured in for a late 2008 opening.

But now, the storm water pipes stacked neatly on the site and a large sign seeking leasers are the only evidence of expansion. Many of the retailers backed out when the bottom fell out of the economy. So a few months ago, developers postponed construction, opting to build the project in phases over two years.

The slowdown in consumer spending, along with the housing meltdown and credit crunch, are putting the brakes on retail expansion projects in the region, which had been one of the hottest commercial real estate markets in the nation. Developers here and across the country are postponing, scaling back and even canceling retail projects. And those with new sites are finding it increasingly difficult to sign tenants that have enough capital to not only finance the interior construction but to pay the rent.

Retail, which represents almost a quarter of the 800-million-square-foot commercial real estate space in the Washington area, has been hit much harder than the office and warehouse segments of the industry because of the troubles national chain stores are facing, experts say. About 2,200 retail jobs were lost in the region this year, experts say.

Retailers "saw their sales slowing regionally and around the country," said James M. Farrell, principal of the Madison Retail Group, the commercial leasing division of Madison Marquette. "As time went on, they saw that trend accelerating and they said, 'It does not make sense for us to commit to new stores at this time.' "

"What we were not going to do is 'build it and they will come' -- a 'Field of Dreams' kind of thing," Farrell said, something many developers did during the real estate boom. The company opted to postpone start of construction until early next year, he added, "given what we're hearing from a host of retailers."

Construction of new retail space in the United States from January to July fell by more than 37 percent compared with the same period in previous years, according to the International Council of Shopping Centers. Expansion of auto dealerships, restaurants, department stores and other retail operations was off substantially. But supermarket growth was flat and drugstores expanded by more than 18 percent, reflecting consumers' shift from spending on wants to spending on needs.

The Midwest suffered the most, as retail construction dropped 45 percent. The South, which includes the Washington region, experienced a 37 percent reduction.

That outlook is not expected to improve much in the near future, with moves by several retailers, including Linens 'n Things, Circuit City and Starbucks, to close stores and announcements by Target, Staples and Wal-Mart to reduce the number of stores they will open.

"More recently, you started to see more weakness -- projects are delayed and a lengthening of the construction process -- reflecting the unavailability of money," said Michael P. Niemira, chief economist and director of research at the shopping center council.

"Small strip centers tend to be the most hard hit," Niemira added. "Mom-and-pop stores are affected first."

Examples of the obstacles to small-business expansion are playing out at DC USA, a 500,000-square-foot mall that opened in March in the District's Columbia Heights neighborhood.

Developers say that Target, Best Buy and other national retailers located there have exceeded their sales projections. The builders have an agreement with the city to set aside 15,000 square feet of space for local and minority businesses but have been unable to fulfill it so far. About 30 local people who have expressed interest in opening a restaurant or shop in the mall had to give up their plans when their houses, retirement funds and other collateral lost value, preventing them from obtaining loans to cover start-up costs.

"We've had people work for a year or two years-plus to get in a space," said André Byers, director of business development at the Development Corp. of Columbia Heights. "The commitment is there, but they are unable to amass capital and had to walk away."

In Fredericksburg, commercial real estate broker Brian Cunningham drove through the parking lot at the Cosner's Corner shopping center, pointing out the older, more thriving section with Staples, Target and Dick's Sporting Goods, and the new section, with numerous vacant storefronts.

Cunningham pulled up to a new 16,000-square-foot red-brick-and-beige stucco building his company, GVA Advantis, is trying to lease out. A couple of years ago, he said, he would have had commitments for the space even before the building was finished. Cunningham has firsthand knowledge of retailers' dilemma: He said he and his wife signed a letter of intent to open their second Maggie Moo's ice cream store in another section of the shopping center but changed their minds when the economy slowed.

Retailers say, " 'We like the area; we like the region. But things are unsettled,' " Cunningham said. "They don't feel it's the right time to expand."

Beige stucco and brick buildings are in various stages of completion at the Brandywine Crossing shopping center in southern Prince George's County. So far, Target is the only store operating; Costco will open tomorrow, and several other national retailers, including Marshalls, will do so in the spring.

Developers say they were fortunate enough to get the major retailers lined up before the economy sputtered. But they are having problems signing leases for smaller specialty stores.

"Capital markets are in disarray," said Howard Biel, senior managing director at Faison Enterprises, which is building the shopping center. "We'd like to finalize leases," he added, but is experiencing difficulty getting potential tenants to "commit to a deal today."

"We'd be further along in terms of specialty store leasing if this were done two years ago," he said.

The drought in retail tenants is sparking a flurry of incentives and assistance. Some real estate brokers are offering other agents $50 prizes, flat-screen TVs and heart monitors just to tour their retail space.

Cunningham said developers are offering tenants the opportunity to move in and pay little or nothing for interior renovations and rent for several months. "Now, half the deals I do have some element of free rent," he said.

DC USA officials said they plan to ask the District to offer assistance to the local and minority businesspeople unable to obtain adequate financing for a possible relocation into the mall.

City officials did not respond to inquiries on whether they would support such a request.

And Farrell, leasing official for the Waldorf shopping center, said his company recognizes that in this market it cannot seek annual rent increases, as it did in the past. In fact, according to CoStar Group, which provides information and marketing services to the commercial real estate industry, the average retail rent throughout the region dropped from $27.81 a square foot at the end of last year to $26.28 currently.

"We're going to make deals fair and reasonable for both parties," Farrell said. "If it means holding the line on rent, we're going to do it."