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D.C's Retail Market Heating Up With Over 120 New Tenants Searching For Space

Georgetown's M Street retail corridor.

The D.C.-area retail market has suffered from rising vacancy during the coronavirus pandemic, but a new report shows a surge in prospective tenants that could begin to fill that space. 

Eighty-six retail operators began seeking D.C.-area space in the first three months of the year, followed by another 45 tenants in April, a significant increase in activity from last year, Dochter & Alexander Retail Advisors' spring D.C. retail market report found.

Activity had begun to pick up in Q4, when 59 new tenants began seeking space, according to the report, but the previous quarters were much slower. Just two new tenants began seeking space in Q2 of last year, and four new tenants started searching in Q3. 

"There are groups seeing the light at the end of the tunnel with vaccines, and the reopening and foot traffic increasing, and now is the time to start to make those moves," Dochter & Alexander Retail Advisors principal Dave Dochter said. 

The increase in prospective tenant activity could help retail landlords fill the huge number of spaces that became vacant during the pandemic. Dochter & Alexander's report analyzed retail vacancy and rents in three submarkets, Downtown D.C., Georgetown and 14th Street, and it found vacancy roughly doubled in all three areas during the pandemic. 

In Downtown D.C., retail vacancy rose from 10.3% before the pandemic to 22.6% last month, totaling about 914K SF of vacant space. In Georgetown, vacancy rose from 8.4% pre-Covid to 16.6% last month, totaling 235K SF of vacant space. On 14th Street, vacancy rose from 5.1% to 11%, totaling 86K SF of vacant space. 

"There was a considerable uptick in vacancy, but that's being mitigated partially by renewed activity," Dochter said. "We expect that absorption to come into play, especially for some of these high streets."

A graph from Dochter & Alexander's report showing the number of new retail tenants that began seeking D.C.-area space each month.

The most active retailers searching for space in Q1 were full-service restaurants, accounting for 28% of new tenants on the market. Quick-service restaurants made up 19% of tenants on the market, while service retailers had 13%. 

Grocery tenants had the highest increase in their share of activity compared to pre-Covid, going from 3% of the market in Q1 2020 to 8% of the market last quarter. Entertainment retailers, such as theaters and gaming concepts, increased from 5% to 8%. 

Fitness and fashion retailers, which each accounted for 9% of activity in Q1 2020, fell last quarter to 5% and 3%, respectively. 

Dochter said the tenants on the market for space consist of a mix between D.C.-area small-business owners expanding their presence, retailers from other cities coming to D.C. and national chains looking to grow. One example of an operator from another city quickly expanding is New York-based dental startup Tend, which Dochter has represented in closing five D.C.-area leases, with plans for about 10 more. 

"We're seeing regional operators that have the capital and have tweaked their operations during the pandemic looking to expand," he said. "And we are seeing national groups, there's a fairly sizable uptick in domestic and a few groups from overseas."

Given the time it takes to close a deal and open a new business, the increase in new tenants searching for space will likely translate into more openings later this year or early next year, Dochter said. But the report also found a series of examples of new tenants that have opened so far this year. 

In Downtown D.C., Farmbird opened in January, the Cheesecake Factory opened in February, Foxtrot opened in March and New Orleans-style restaurant Dauphine's opened this month. 

In Georgetown, Foxtrot also opened a location in March, Freshbee's American Grill opened in March, Eastbanc's Concept 31/M Retail Lab opened in March and Roll by Goodyear opened in February. 

On 14th Street, South Block opened in January and wine bar Vin Sur Vingt opened last month. 

The Georgetown and 14th Street markets have experienced strong enough demand that retail rents in those neighborhoods increased from Q4 to Q1, while downtown rents continued to fall. Dochter attributed that difference to downtown's reliance on office traffic, but he is now seeing activity start to pick up downtown. 

"Even though the return of people occupying office space isn't here, we are seeing demand and users looking in the market, much more so than we were in the middle of the pandemic," Dochter said. "There's a light at the end of the tunnel and an opportunity to come into the marketplace because there is significant vacancy."