At 5.1 percent, the Washington area had the lowest shopping center vacancy rate among large metropolitan areas at the end of the third quarter of 2012, down from 5.3 percent the quarter prior and 5.5 percent one year ago. This compares favorably to the national rate of 9.2 percent in September 2012.
Core jurisdictions including the District, Arlington and Alexandria held a 4 percent vacancy rate at the end of the third quarter, lower than that of inner suburbs (Montgomery, Prince George’s and Fairfax counties) and outer suburbs (Frederick, Loudoun and Prince William counties). However, the rate of decline during the past year was stronger in the inner and outer suburbs. While tenants continue to show preference for retail space located closer to the core, demand remains steady for well-located space in the outer suburbs.
Grocers, discount stores, gyms and household goods stores have been signing deals in the Washington area during the past nine months. Most recently, T.J. Maxx and HomeGoods announced plans to open in the Shops at Georgetown Park in the District of Columbia. Kohl’s has expanded by two new stores in the Washington area, opening in Aspen Hill and Haymarket.
Retail investment in this region is likely to increase along with consumer confidence. The Consumer Confidence Index for Greater Washington increased to 60 in June 2012, from 55 in December 2011, and 52 in July 2011, according to the Greater Washington Board of Trade. In the region, confidence bottomed out in July of 2011. The District of Columbia, suburban Maryland and Northern Virginia each experienced rises in confidence in June 2012 compared with six months earlier.
In the period ahead, greater retail spending could come from the highest income segment. The Board of Trade’s survey respondents with the highest incomes had the greatest confidence in the local economy. Respondents earning more than $150,000 rated at 67 on the confidence index in June 2012, up from 59 in July 2011. This compares with a score of 52 for respondents earning less than $100,000, up slightly from 50 in July 2011.
There were 11 notable grocery-anchored shopping centers, totaling 2.9 million square feet, under construction or renovation in the area at the end of the third quarter of 2012. As lending loosens and consumer confidence rises, groundbreakings should increase. Given the long-term demand for goods in the region, developers are likely to consider opening new centers by 2014-15, when market conditions appear likely to favor landlords.
We expect the shopping center vacancy rate to decline during the balance of the year. Although some underperforming retailers will close, there will be new and expanding retailers looking to take the vacated space. Top tier shopping centers in prime neighborhoods should have greater ease filling vacancies than centers with little to distinguish themselves from the competition.
Property owners should continue to invest, where the cash is available, in repositioning existing underperforming assets — either upgrading or transforming shopping centers. Currently, tenants seeking space appear to be interested in newer, higher-end space with significant foot traffic. Centers that focus on everyday needs, such as groceries and other necessities, tend to remain successful during economic downturns or slow-growth periods.
We expect future retail development in the Washington area to focus on a mixed-use format involving office or residential space within a walkable urban area or close to public transit. Overall, people want to drive less and shop for goods close to where they reside.
Sandy Paul is senior vice president and national research director at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.