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Why The DC Metro Is A Suburban Retail Oasis

Why The DC Metro Is A Suburban Retail Oasis
Brad Cullumber, David Redmond and Chris King

When Macy’s announced it would be closing a store at Alexandria’s Landmark Mall earlier this year, a sometimes-painful truth was underscored: Suburban retail is undergoing a shift, and large, midcentury regional shopping malls have not been weathering that shift well.

But as Walker & Dunlop’s Brad Cullumber, David Redmond and Chris King point out, that does not mean all suburban retail is in bad shape — especially in a strong demographic region like the DC metro area.

Redmond, whose team arranges financing for retail properties throughout the Mid-Atlantic, said neighborhood shopping centers, especially those anchored by grocery stores, can often fill the void being left by the decline of regional malls.

Consumers increasingly find that retailers with smaller footprints can still meet their needs, he said.

Why The DC Metro Is A Suburban Retail Oasis

“The daily necessity retail in this market does very well,” Redmond said. "Groups like Aldi or Trader Joe’s that are more recent entrants to this market have helped drive demand to own smaller neighborhood centers."

“They can be a great alternative to big-box retail, and people love them,” he said.

Redmond points out that in many markets, neighborhood shopping centers as an asset class now trail only multifamily as the preferred property type for commercial property investors and lenders.

Centers with Main and Main locations and strong tenancy continue to command very low cap rates, and lenders compete intensely for the chance to finance them, Redmond said.

“Late last year, we worked to place a $50M loan secured by a slightly older grocery-anchored asset in an A-plus location in a wealthy DC inner suburb with extremely high barrier to entry,” he said.

“Life insurance companies love placing long-term, fixed-rate money on these high-quality assets. The deal generated intense interest and somewhat of a bidding war at very low rates. In fact, at the eleventh hour, a life company with very little presence in the DC market looking to place a good-sized, well-secured loan came in with a rate 50 bps below the competition."

The loan had a term of 10 years with payments of interest-only for the entire term at a rate of 3%. It was an example how highly these assets are rated by investors and lenders.

Why The DC Metro Is A Suburban Retail Oasis
An office park in the DC suburbs

According to Redmond, one asset class’ struggles can become another’s gains.

“Part of what’s driving the debt market for neighborhood shopping centers in the suburbs these days are concerns about suburban office,” he said.

Redmond has seen investors and lenders in the area opting to own or finance retail properties in strong demographic areas instead of suburban office complexes, which have seen vacancies increase and require upward of $60/SF to fit out for new tenants.

“If I’m an investor or lender and I have the option, I’m going to push more money toward the neighborhood retail center because customers will continue to flow in, plus I won’t have to put as much into the space to have it ready for a tenant,” he said. "This is all the more true in the stronger submarkets."

Loudoun Country is just such a submarket. The Northern Virginia county boasts the highest household income in the country, according to the American Community Survey — and it sits right next to Fairfax County, which comes in at No. 2 on the list.

“You do have some insulation because it’s the DC area,” Cullumber said. “If this were Tampa, we’d have a different conversation.”

We are thrilled Walker & Dunlop has joined us as a founding partner of our Bisnow Beltway Bash, to be held at the TAO Nightclub in the Venetian on Monday, May 22, from 5:30-7:30 p.m. in Las Vegas. Register here.