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Retail Vacancy Tops 20% In Downtown D.C. While Suburban Storefronts Fill Up

Retail vacancies have begun to come down from their pandemic highs across the Metropolitan Washington region, but not in Downtown D.C.

The former Farmbird space in Penn Quarter, which shuttered in April

The District's central business district's vacancy has risen from 6.6% in winter 2020 to 20.7% this summer, according to new research by retail advisory firm Dochter & Alexander. The East End's vacancy rose from 9.2% to 21.2%. Combined, there is more than 800K SF of vacant high street retail in the heart of the nation's capital.

Those office-heavy areas are lagging behind the rest of the region, where high-street retail vacancy dropped overall vacancy rate to just over 14%, down from about 15.8% last fall. 

With rising interest rates restricting access to credit and a shaky office market that's yet to return to full strength, there may be further trouble ahead for the landlords stuck with underutilized storefronts, Dochter & Alexander Retail Advisors principal Dave Dochter told Bisnow.

"Absorption is really predicated on people coming back," Dochter said. "If people aren’t active on the streets, then these retailers aren’t able to sell and transact."

Momentum does appear to be building, albeit slowly, for downtown D.C. office occupancy. The region saw a 4.7% post-Labor Day bounce in occupancy, according to data from Kastle Systems released last week, but the market has yet to reliably break 50% of pre-pandemic levels.

Meanwhile, Metro ridership hit its highest point since the pandemic began, but average weekday daily rail entries are less than half what they were in 2019, according to data from WMATA

"If you were telling me you want to build new retail downtown right now, [it's] probably not the best environment to do that," Dochter said. "If you're going to build new retail in Union Market, or Bethesda, or 14th Street, or Georgetown, it could be a different situation."

The gloom hanging over the downtown retail market is largely absent from neighborhoods that boast dense residential development. Among those submarkets seeing a resurgence is Georgetown, where the pandemic quieted a traditionally upscale shopping destination.

Georgetown's vacancy rate jumped from 8.4% to 17.8% between winter 2020 and fall 2021, but has come down to 16.5% in Dochter & Alexander's most recent report. That number will continue to fall, in part because absorption that began last year is beginning to show up in vacancy statistics, Dochter said.

"It’s actually relatively competitive to get space in Georgetown right now," Dochter said. "When you have a critical mass and a clustering of these brands ... that’s where they want to be, and because of that it’s leading to a lower vacancy."

He pointed to the opening of Glossier in a 7K SF space and the pending arrival of Showfields in a roughly 20K SF space as signs of quickening activity in the market, and said he expects vacancy to decline further as tourism picks up in the internationally known neighborhood.

Many of Georgetown's newest tenants are direct-to-consumer brands, which Dochter said have begun clustering as like attracts like. 

Other submarkets are seeing a similar phenomenon. Bethesda Row had the lowest vacancy rate of any submarket this summer, dropping to just 2.78%, and Clarendon saw its rate drop more than 6 percentage points last fall and this past summer.

Some of that success is due to the curation done by developers like Federal Realty in Bethesda Row, but also due to long-term development and demographic trends, including the rise of denser residential buildings in suburban submarkets and a slowdown in new supply of retail space due to the pandemic and current economic conditions. It doesn't hurt that D.C.'s suburbs are among the wealthiest in the country.

"There’s submarkets in the suburban areas where there’s not the inventory that some of the clients and retailers want," Dochter said. "There’s a lot of demand to have that access to that demographic."

The probability of a recession and further interest rate hikes may put a damper on that recovery, Dochter noted. While the D.C. area has long been seen as a relatively recession-proof market due to the presence of the federal government, those public workers have been slow to return to the office.

That means that their regular presence on the Metro and in downtown office buildings can't be taken for granted as a fallback for downtown retail this time around. Dochter said there is a chance a recession may bring workers back into the office, but for now, it's too soon to tell how resilient D.C.'s retail scene will prove in the coming months.

"It could very well have a counterintuitive effect where a recession demands that more people come back to the office, which then spurs the downtown environment to have a lower vacancy," Dochter said. "That could be actually another way to view it that may not be that apparent on the surface."