Retail Research

Market Report

Second Quarter 2016

Washington, D.C., Metro Area

Well-Heeled Clientele Drives Retail Demand; Investors Get Creative to Boost Yields
Rising employment growth bolsters
builder ambitions; deliveries set to reach
cycle peak. The Washington, D.C., metro
has moved past the slugglish pace of hiring in previous years to record meaningful
expansion over the past year. Employment
growth recently topped 2 percent for the first
time since 2005, indicating that recent gains
in retail operations are founded on stable
improvement. Builders responded with another year of construction in excess of 1.5
million square feet, providing new opportunities for retailers seeking space. However,
this space was readily absorbed, leading vacancy to contract for a fourth straight year.
In 2016, completions will reach the highest
point of the current cycle, yet are more than
two-thirds pre-leased, reducing the pressure
on existing operations as the new space is

absorbed into the market. In addition, deliveries will favor the Suburban Maryland submarkets, a pivot away from the Suburban
Virginia and District offerings in past years.
Holistically, the market will record a small tick
down in vacancy, while tacking on a low-single-digit asking rent gain.
Abundance of capital drives cap rate
compression; rare value-add deals highly sought after. Investor appetite for D.C.
metro retail establishments remains robust
as investors of all sizes seek to place capital
in the market. As the buyer pool continues to
widen, a lack of listings has become apparent as current owners enjoy price appreciation, limiting their desire to sell. As a result,
more buyers have shifted their strategies to
the suburbs in search of higher initial yields.

The surrounding counties in Virginia and

Maryland make up the bulk of deal flow,
particularly in the submarkets with favorable demographics and foot-traffic counts.
Meanwhile, many buyers are undertaking
strategies to boost the future value of their
properties through re-tenanting of existing
spaces. However, the rarity of these deals
has motivated more investors to consider
repurposing old industrial and office space
into mixed-use and retail space in search
of greater values and cash flow. Overall,
cap rates will begin in the mid-5 to low6 percent range for the best locations
and tenants, while mid-tier and suburban
assets can price up to 150 basis points
above the average. Deal flow will likely stay
compressed in the year ahead, fostering
higher prices on closed transactions.

2016 Retail Forecast

2.0% increase
in total employment

2.0 million sq. ft.

Employment:
After creating 68,500 new jobs in 2015, Washington, D.C., organizations will hire 65,000 workers this year, a 2 percent expansion.

Construction:

will be completed

Builders will complete 2 million square feet of retail space, the highest total of the current cycle,
with deliveries most concentrated in Suburban Maryland. In the prior 12 months, developers
completed 1.59 million square feet.

10 basis point

Vacancy:

decrease in vacancy

The uptick in construction is largely pre-leased, reducing vacancy concerns over the coming
year and leading to a 10-basis-point decline in the vacancy rate to 4.6 percent. In the previous
12 months, vacancy fell 20 basis points.

2.2% increase

Rents:

in asking rents

Tighter retail operations sponsored a 1.2 percent advancement in the average asking rent in
2015. This year, competition among retailers will foster a 2.2 percent rise in the average asking
rent to $26.11 per square foot.

Retail Research | Market Report

Economy
Over the past year, Washington, D.C., organizations created 68,500 new jobs,
Asking Rent Trends
expanding total employment in the metro by 2.2 percent. In the prior year,
States
45,500 workers wereMetro
hired, a 1.5United
percent
growth rate.

Employment Trends
Metro

United States

Year-over-Year Change

Year-over-Year Change

4%

8%

Employment gains were driven by robust expansion in the professional and

business 4%
and leisure and hospitality sectors, where payrolls swelled by 17,400
and 14,100 positions, respectively. Information technology and resources were
0%
the only contracting
sectors, with headcounts dropping 1,000 positions each.

3%
2%
1%
0%
12

13

14

15

16*

Another -4%
year of strong job growth contracted the unemployment rate in the
metro 50 basis points to 4.1 percent. After peaking at 6.5 percent in the fourth
quarter of
2009, the unemployment rate has fallen 140 basis points. During this
-8%
time, more than
created.
12 230,000
13 positions
14 have been
15
16*

Outlook: The vigorous pace of employment growth will continue in 2016 as

65,000 new workers are hired, a 2.0 percent advancement. In the previous four
quarters, organizations added 68,500 positions, a 2.2 percent climb.

Construction
Square Feet Completed (millions)

Average Price per Square Foot

During the pastSingle-Tenant

12 months, developers
completed 1.52 million square feet of
Sales Trends
new retail space, a 0.7 percent supply injection. More than two-thirds of the
new inventory was completed in Suburban Virginia, with the rest split between
$400and Suburban Maryland.
the District

Retail Completions

Builders$375
will shift their focus to Suburban Maryland in 2016, with nearly 1 million
square feet of deliveries expected. The largest project underway is mixed-use
Cabin Branch,
with plans for nearly 450,000 square feet of retail space leased
$350
to more than 90 upscale retailers.

3
2
1
0

12

13

14

15

16*

$325

In addition to the plethora of construction this year, developers are also increasing the pipeline of retail spaces for next year. More than 2.6 million square feet
$300
has been proposed
in142017, the
12 for delivery
13
15 highest
16**amount of the current cycle.

Outlook: Builders will complete 2 million square feet of retail space in 2016,
with projects evenly split between multi-tenant and net-leased offerings. In the
previous 12 months, 1.59 million square feet was delivered.

Vacancy
During the last four quarters, the average vacancy rate in the metro ticked down
Trendsthe 10-basis-point decline recorded
30 basis points Multi-Tenant
to 4.7 percent,Sales
exceeding
in the prior year. Improvement in Suburban Virginia and Suburban Maryland
outweighed
$400a rise in vacancy inside the District.

Vacancy Rate Trends

United States

Average Price per Square Foot

Metro

Vacancy Rate

12%

The Downtown D.C. submarket outperformed the broader D.C. area, with the
$375
average vacancy rate declining 50 basis points to 2.9 percent. The District posted a vacancy increase of 40 basis points to 5.0 percent during this time period.
$350
The Georgetown-Uptown submarket also struggled, with vacancy rising 50 basis points$325
to 4.7 percent.

9%
6%
3%
0%
12

13

14

15

16*

The Greater Fairfax County submarket registered tremendous strength over the
past year$300
as vacancy fell 50 basis points to 2.1 percent, the lowest level in the
12
13
14
15
16**
entire metro. During this period, net absorption nearly doubled deliveries.

Outlook: A higher pace of construction in 2016 will foster a more measured

* Forecast

rate of improvement in the market as new space is delivered and absorbed by

local retail tenants. As a result, the average vacancy rate will decline 10 basis
points to 4.6 percent as development shifts to the outer suburbs.

Market Report | Retail Research

Rents

The I-270 Corridor posted a3%

dramatic upswing in the average asking rent, vaulting 10.4 percent to $26.18 per square foot. In addition, the SE Fairfax County
submarket advanced 11.6 2%
percent to $31.18 per square foot. The two submarkets recorded the strongest rent growth in the market.
1%
The Southeast Fairfax County
submarket also thrived, with the average asking
rent surging 7.6 percent to $30.74 per square foot as absorption far exceed
0%
supply additions. The Bethesda/Chevy Chase submarket underperformed, with
13 to $39.44
14 per square
15
the average asking rent falling12
5.7 percent
foot.16*

Asking Rent Trends

Metro
Year-over-Year Change

Year-over-Year Change

The average asking rent for marketed spaces increased 3.2 percent to $25.69
Employment Trends
per square foot during the last four quarters. While the District was unchanged,
Metro assets
United
Suburban Virginia and Suburban Maryland
eachStates
tacked on 3.6 percent
4%
to average $25.88 per square foot and $21.81 per square foot, respectively.

United States

8%
4%
0%
-4%
-8%
12

13

14

15

16*

Outlook: The average asking rent will climb 2.2 percent to $26.11 per square

foot this year as new spaces are absorbed and vacancy remains sufficiently tight
to breed competition for existing spaces. In 2015, the average asking rent rose
1.5 percent.

Single-Tenant Sales Trends**

Retail Completions

Along with the pickup in transactions, the average price per square foot rose to
more than $450 as investors2 paid up for high-quality credit tenants and locations. Fast-food restaurants exchanged ownership above $475 per square foot,
1
while drugstores exceeded $500
per square foot.
Average cap rates in the product type have drifted lower over the past year, with
0
first-year yields now beginning in 12
the high-4
best assets
13 percent
14 range
15for the16*
and rising into the mid- to high-5 percent for shorter leases or regional credits.

Single-Tenant Sales Trends

Average Price per Square Foot

Square Feet Completed (millions)

In the last fiscal year, single-tenant transaction velocity rose nearly 15 percent
as buyers deployed more capital in the market. While closed transactions were
4
largely unchanged in the District and Suburban Maryland, activity in Suburban
Virginia jumped more than 40 percent.

$400
$375
$350
$325
$300

12

13

14

15

16**

Outlook: Buyers will remain active in the metro as excellent demographics

and high-density living spur demand for properties yielding above the cost of
capital. Areas outside the Beltway have seen the largest uptick in activity, which
is likely to continue as product inside the District remains extremely scarce.

Multi-Tenant Sales Trends**

Vacancy Rate Trends

9%

Over the last year, the average closing price per square foot for shopping centers advanced into the mid-$400
range, with assets in the District and Subur6%
ban Maryland accounting for the bulk of trading activity. The highest prices per
3%
square foot were paid in Suburban
Virginia and D.C.
Cap rates vary widely based
on property and credit quality, in addition to lease
0%
terms. Well-leased centers in good
locations
with14
national credit
will16*
fall into the
12
13
15
high-5 percent range. Meanwhile, shorter leases and regional credit tenants will
price up to 100 basis points higher.

Outlook: Value-add opportunities through re-tenanting or other facility upgrades will underpin investor outlays into the market this year.

Multi-Tenant Sales Trends

Average Price per Square Foot

Vacancy Rate

Trading in the Washington, D.C., multi-tenant

sector
fellStates
over the past year as
Metro
United
fewer investors opted to list their properties. Dollar volume jumped nearly 15
percent during this period 12%
as buyers scooped up larger metro assets in a desire
to deploy capital.

$400
$375
$350
$325
$300

12

13

14

15

16**

* Forecast
** Trailing 12-month period through 1Q
Sources: CoStar Group, Inc.; Real Capital Analytics

Retail Research | Market Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President | Marcus & Millichap Capital Corporation

National Retail Group

Visit www.NationalRetailGroup.com

Bill Rose

Vice President, National Director

National Retail Group
Tel: (858) 373-3100
bill.rose@marcusmillichap.com

Washington, D.C., Office:

Bryn Merrey

First Vice President, District Manager

Tel: (202) 536-3700
bryn.merrey@marcusmillichap.com
7200 Wisconsin Avenue
Suite 1101
Bethesda, Maryland 20814

The U.S. economy grew nominally in the first quarter as respectable consumer
trends were partly offset by softness in manufacturing, exports and business
investment. The lull in economic activity in the first three months of 2016, and
volatility in the stock and debt markets, will likely delay any action on monetary
policy by the Federal Reserve until midyear at the earliest. Against this broader
economic backdrop, retail properties continued to gain traction behind growing space demand and limited construction. This year, retailers will absorb an
additional 61 million square feet of space to cut the U.S. vacancy rate 30 basis
points to 5.9 percent.
CMBS issuance declined in the first quarter from the corresponding period one
year ago, offering the latest evidence of disruption in the securitized market. Although spreads on the highest-rated bonds in a securitized pool compressed
slightly during this years opening quarter, they remain wider than one year ago,
meaning borrowers face slightly higher costs. Bond investors also require higher returns on loans perceived as being aggressively underwritten with higher
LTVs and on loans issued to lower-rated borrowers, putting a squeeze on
securitized lenders that could potentially limit lending capacity.
Bank lenders remain positioned and capitalized to compete for market share,
perhaps gaining business that CMBS cannot fill. The Federal Reserves accommodative monetary stance continues to support a low cost of capital to
these lenders. National, regional and local banks offer leverage on retail property loans that averages in the 65 percent range and loan terms vary from five,
seven and 10 years. Spreads vary depending on asset location and quality but
generally start in the low- to mid-200-basis-point range above corresponding
swap rates. Bridge financing spread over short-term benchmarks is also available for properties in transition.

Local Highlights
Prepared and edited by

Aaron Martens

Research Analyst | Research Services

For information on national retail trends, contact:

John Chang

First Vice President | Research Services

Tel: (602) 687-6700
john.chang@marcusmillichap.com

Price: $250

Sagamore Development, the real estate arm of Under Armour CEO Kevin Plank,
has presented plans to redevelop more than 266 acres at Port Covington. This
would include 40 acres of public park space and 216 acres of updated retail,
industrial and office space crowned by the new Under Armour campus. The
plans would create more than 15,000 jobs in addition to the 10,000 workers
housed by Under Armour.
Originally planned as an office tower, Brandywine Realty Trust is now altering
plans for its Liberty Center development. Blueprints now call for 34,000 square
feet of retail space in addition to residential housing and office space. The Liberty Center will be more than 2.25 million square feet in total.
The Arlington County Board recently signed off on a plan to overhaul a 7.65acre superblock along Rosslyns eastern boundry. Plans call for demolishing
four office buildings, two residential towers and the Spectrum Theater in order
to replace them with five high-rises. Filed paperwork shows intent to deliver 1.8
million square feet of office space, 550 residential units, a 200-key hotel and
45,000 square feet of ground-floor retail.

Marcus & Millichap 2016 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated
using seasonally adjusted quarterly averages. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. Triple-net rents are used. Sources: Marcus &
Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Economy.com; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau.