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 21/2 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.
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.
The area's developers plan to deliver 2.6 million square feet of new retail projects this year, consistent with the past few years. The rates asked for retail rentals have grown by nearly 2.5 percent every year since 2001 and are among the highest in the country.
Along Rockville Pike, rental rates are averaging $40 to $50 per square foot. A spot in trendy Georgetown commands $70 to $80 per square foot, as does space in Chevy Chase. To get into Westfield Shoppingtown Montgomery near Old Georgetown Road and Democracy Boulevard in North Bethesda generally costs in the upper $50s or $60s per square foot.
Boyle said the Washington area lost the top spot in his firm's survey partly because some land once zoned for retail is being switched to residential to meet high demand for new condos.
At the same time, the area's housing boom has helped boost the retail market because retailers want to be near their customers.
For example, Federal Realty Investment Trust, a Rockville-based real estate investment trust that owns 5 million square feet of retail shopping centers in the D.C. area, said it is spending $30 million to improve a rundown shopping center on Route 1 in southern Fairfax County.
"We see a lot of housing being built there, and we see higher incomes and we want to have the retailers of choice," said Donald C. Wood, chief executive at Federal Realty, which owns Pentagon Row, Bethesda Row and Congressional Plaza in Rockville.
In Hyattsville, developers are turning parking lots into a 2-million-square-foot project with condos, offices and retail near East-West Highway and Bell Cross Road.
"Retail is being driven by the fact that we're in a market that's heavily government, and we've had defense spending that's a little out of control right now and so if you have a job, you're spending money shopping," said Lawrence B. Hoffman, principal of H&R Retail in Chevy Chase. "You're buying a house, you fill it up with merchandise and that's fueling the retail market."
Retailers that once were more likely to locate in the suburbs are now coming into the District because they are finding potential customers there too.
In some cases this urban retail renaissance means a set of boutique stores like those at the newly opened Gallery Place project, a mix of condos, offices and retail near MCI Center in the District. The 250,000 square feet of retail includes United Colors of Benetton, Urban Outfitters and Ann Taylor Loft as well as a megaplex movie theater.
In early 2008, Target plans to open its first store in the District near 14th Street and Park Road NW. The chain, which positions itself as a discounter with an upscale sense of style, will build its 180,000-square-foot store across 14th Street from the newly renovated Tivoli Theater, which has been turned into a small theater, townhouses and restaurants, and another condo project at the Columbia Heights Metro station.
"There's a vision for reinvigorating that area, and we're excited to be a part of it," said Lena Michaud, a spokeswoman for Target Corp.
Lewis Bolan, a principal of Bolan Smart Associates Inc., a D.C.-based retail consulting firm, said retailers are attracted to the area because the demographics are "so stunning."
"Every retailer in the country knows here there are people with more income, education and good jobs," Bolan said. "That makes them salivate."
But brokers and developers caution that the popularity of the area's retail market could falter. If local consumers start feeling less confident about the economy and don't spend as much money, that could hurt retailers' sales and lead them to lease less space.
Some retail experts say the market may become oversaturated with the most popular retail trend these days -- the town center, where shops and often a supermarket are bordered by landscaping and sidewalks to recreate the feeling of a pedestrian-friendly small town main street. Already there are town centers in Bowie, Rockville and other suburbs.
When will the retail euphoria end?
"Nobody thought it would last this long," said Hoffman of H&R Retail. "It has to come down. I don't have a crystal ball, but it just has to."