Contact Us
News

With 1M SF Of Retail Under Construction, D.C. Landlords Forced To Get Competitive

Want to get a jump-start on upcoming deals? Meet the major D.C. players at one of our upcoming events!

The affluent D.C. region has weathered the storm of retail closings better than many parts of the country, but the continued construction of new retail space as part of mixed-use developments has made the market more challenging for landlords.

Half Street Jair Lynch 1250
A rendering of the Half Street retail corridor outside of Jair Lynch's 1250 mixed-use development

There is currently 990K SF of retail under construction on the D.C. region's major retail corridors, adding a significant chunk of new space to the 21.5M SF of existing retail inventory on those corridors, according to Dochter & Alexander Retail Advisors latest market report, provided exclusively to Bisnow ahead of its release.

Much of the new retail space is coming in the ground floor of new office and multifamily buildings as developers look to create vibrancy, but Dochter & Alexander principal Dave Dochter said the retail construction boom is changing market dynamics. 

"It's putting some pressure on the deal economics," Dochter said. "The concessions from a TI standpoint, we're seeing them tick up. We're seeing some pressure on rents because developers are competing with new construction."

The onslaught of new retail construction has created a modest uptick in the region's vacancy, but it is still well below the national average. The latest regional vacancy rate is 6.2%, up from 6% last summer and 5.8% in fall 2017, according to Dochter & Alexander. The region is still outperforming the country as a whole, which has around 10% average retail vacancy, but some D.C. neighborhoods with rapid construction and high rents have vacancy in the double digits.

Capitol Riverfront, a booming neighborhood with 264K SF of retail under construction, has a vacancy rate of 10.4%, according to the report. The neighborhood also has the most multifamily construction in the region, and anchors such as Nationals Park and The Yards have helped it land new retailers, but Dochter said it will take time for all of the new space to fill up. 

"There's a lot of supply coming onto the market [in Capitol Riverfront] and the residential needs to be absorbed to be able to meet that supply," Dochter said. "With the natural cycle of the growth in that market, it's probably going to be a little bit soft for some period of time." 

New developments just north of the ballpark along Half Street from JBG Smith and Jair Lynch have signed retail concepts including Mission, Atlas Brew Works and Punch Bowl Social. The corridor will be crowded at least 81 days per year for Nationals games, but Dochter questioned whether it could become a year-round regional draw. 

"There's something to be said about the clustering of retail along Half Street," Dochter said. "With all the retail that's delivering there, the question will be, 'Can that be a regional draw like The Wharf?' That's still a question." 

D.C. Retail under construction
A graph showing the amount of retail under construction in popular D.C. area submarkets

The D.C. submarket with the highest retail vacancy centers around the home of two other professional sports teams, the Capital One Arena. D.C.'s Seventh Street corridor also has a 10.4% retail vacancy, according to the report.

Seventh Street has 90K SF of retail space under construction, the fifth-most of any submarket in the region, according to the report, but its rents are by far the highest. Retail rents on Seventh Street can reach $400/SF, according to the report, with Georgetown's M Street coming in second at $300/SF and 14th Street in third at $177/SF. 

Fast-casual company Honeygrow, a Philadelphia-based stir fry concept that entered the D.C. market with two locations in 2016, closed its Seventh Street spot last year because of the high cost of doing business.

"The bottom line is rents were crazy for us," Honeygrow CEO Justin Rosenberg told Eater in November. 

Several older retailers including Fuddruckers, RadioShack and City Sports have closed their doors on Seventh Street in recent years. But some have been replaced by newer concepts such as Capital One Café and Studio Xfinity. 

"There's a natural cycle," Dochter said. "Some of the retailers on Seventh Street have been there for 10 years, and there's the evolution of new concepts that will come in." 

Anthem Row
A rendering of the Anthem Row's Eighth Street pedestrian retail corridor

The Seventh Street corridor will soon be strengthened by a host of retail delivering around Mount Vernon Square, Dochter said, such as the Apple Store in the Carnegie Library and Equinox and other concepts at The Meridian Group's Anthem Row. 

While D.C.'s retail market dynamics have been impacted by the surge of new construction, they have not been significantly hurt by retail closures from major companies such as Sears, Kmart, HHGregg and Toys R Us, Dochter said. D.C.-area landlords have been able to fill vacant spaces with concepts from grocery stores to movie theaters to fitness clubs to home goods retailers, and Dochter said they often get better deals with the new tenants. 

"In general, those [vacancies] have been absorbed pretty quickly in the D.C. region," he said. "A number of those landlords that are getting Kmarts and some of these boxes back are able to upgrade the uses and get better rents than they were previously getting. 

"These national portfolio closures in our market have been to the benefit of these landlords. In other markets around the country that have probably been over-retailed, that's not the same situation, because there's not demand to backfill them."