Washington DC Metro Area Retail Market Q1 2022: First Amazon then Covid. Can Retail Recover?

Rentable Building Area
Malls: 32,977,663 SF
Power Center: 27,434,147 SF
Neighborhood Center: 83,723,176 SF
Strip Center: 11,867,739 SF
General Retail: 106,360,719 SF
Other: 2,662,276 SF

Market: 265,025,720 SF

The pandemic impacted commercial real estate across the board but with varying degrees and in different ways. Office space was decimated and the diagnosis for recovery is grim. Industrial space actually benefited. Lockdowns, telework, and voluntary social distancing/isolation naturally led to an increase in e-commerce (storage and distribution) and the associated data storage needs (data centers) with Amazon/Amazon Web Services leading the way. Retail was negatively impacted; in the beginning by government-mandated lockdowns (and even landlords prohibiting tenants from opening), then by arbitrary occupancy edicts, and finally by a mass-hysteria that has infected nearly half the country fomented by the fear-mongering, mainstream media. After 2 years and with approximately 75% of DC metro residents vaccinated, the retail market is on the road to recovery. Vacancy rates for most subtypes (malls excepted) appear to have peaked and rents have recovered; however, rent increases may be more attributable to inflation rather than increased leverage on the part of landlords. While Costar predicts the average market rent to exceed $30.00/SF (triple net) sometime in 2022; free rent, tenant improvement allowances, and percentage rent concessions common in deals today result in a significantly lower net.

Vacancy Rate/Availability Rate
Malls: 9.3%/5.8%
Power Center: 4.5%/5.7%
Neighborhood Center: 5.7%/7.8%
Strip Center: 5.0%/5.8%
General Retail: 3.5%/4.8%
Other: 7.2%/8.2%

Market: 5.1%/6.0%

Market Vacancy Change Past 12 Months: 0.1%

Market Net Absorption Past 12 Months: 243,893 SF

Net Absorption Current Quarter
Malls: 3,757 SF
Power Center: (2,326 SF)
Neighborhood Center: 151,328 SF
Strip Center: 7,404 SF
General Retail: 76,345 SF
Other: 0 SF

Market: 236,508 SF

The retail market within DC proper continues to be the hardest hit by the pandemic. Remote-work policies have hollowed out the District’s office buildings along with the daytime worker economy, relied upon heavily by ground-floor retail. Draconian lockdown policies and mandates have only exacerbated the problem. Mayor Muriel Bowser recently extended DC’s indoor mask mandate until February 28, 2022 with Montgomery County and Prince George’s County following suit with extensions to February 21, 2022 and March 9, 2022 respectively. As is often the case, DC’s and Southern Maryland’s losses are Northern Virginia’s gains. Recently inaugurated Virginia Governor, Glenn Youngkin, has proclaimed, “We will not have shutdowns, we will not have lockdowns – we will be open.” This stark policy difference will likely strengthen existing tailwinds generated by Amazon’s HQ2 at National Landing and completion of the Silver Line Metro (Reston to Ashburn). Tenants and investors are unlikely to forget the economic devastation caused by the arbitrary and authoritarian government edicts of the past 2 years, which should result in increased demand and capital investment in Northern Virginia over the next 4 years.

Costar claims that leasing activity in 2021 showed signs of recovery in both deal count and square footage leased, approximately 350 and 1.5M SF respectively; however, net absorption in 2021 was negative (292,170 SF). Malls were dying before the pandemic and continue to struggle as do certain national brands whose business model and associated real estate strategy made them particularly vulnerable to the rise of e-commerce giants like Amazon. Other retail subtypes and tenants have been able to pivot and a limited pipeline has reduced supply-side pressure on the vacancy rate. In fact, the number of projects breaking ground is at a 15-year low with deliveries continuing to decline over 2022.

Average Asking Rent (NNN)
Malls: $31.01
Power Center: $29.05
Neighborhood Center: $29.63
Strip Center: $27.78
General Retail: $29.36
Other: $30.48

Market: $29.56

Market Rent Growth Past 12 Months: 1.1%

Northern Virginia has led the metro in population, job, and median income growth over the past few years. As a result, it also leads the market in terms of development. Not just retail though, NoVA has seen dynamic single-family and multi-family housing development to accommodate its growing employment base. Amazon is building approximately 110k SF of retail and entertainment space at National Landing; however, with the future of office and urban living still uncertain, the delivery of Phase 2 of the Silver Line Metro may be the bigger story with greater, long-term impacts on the region’s retail market. In November 2021, the Metropolitan Washington Airports Authority (MWAA) announced that the project was substantially complete and would be open to the public in Spring of 2022 (only about year and a half behind schedule). The extension of the Silver Line will connect Reston Town Center, Dulles Airport, and Ashburn to the rest of the DC metro via public transit. The Herndon and Route 7 submarkets are poised to benefit greatly with increases in demand, rents, and asset prices likely over the next few years. There are multiple projects underway along Route 7 (Ashburn) comprising more than 225k SF. The pandemic signaled a monumental reversal in the submarket’s fortunes, which previously suffered from a dearth of daytime traffic due to the fact that most residents worked in the District or in submarkets like Reston and Tysons Corner. With many employees now working from home, local retailers, especially restaurants, are thriving as they absorb the business lost by their urban counterparts.

Under Construction
Properties: 59
Percent of Inventory: 0.5%

Preleased: 70.9%

Malls: 0 SF
Power Center: 55,000 SF
Neighborhood Center: 288k SF
Strip Center: 0 SF
General Retail: 1,083,077 SF
Other: 17,300 SF
Market: 1,442,959 SF

Delivered Past 12 Months: 1.5M SF

Rents for most retail subtypes have recovered, at least from a nominal standpoint. At 1.1%, rent growth over the past 12 months is slightly below the market average for the past 5 years but is welcome news compared to the -0.6% from just one year ago. Unfortunately, these numbers are about as accurate a representation of the strength of the retail market as the federal government’s purported unemployment rate. The dirty little secret, reported by brokers and asset managers, is that concessions like 12-18 months of free rent, high double-digit tenant improvement allowances, and tenant-friendly percentage rent terms result in deals that require 2-3 years to become cashflow positive. This means that inflation is the main driver behind rent increases rather than strong economic fundamentals.

Sales Past 12 Months
Properties: 848
Average Cap Rate: 6.4%
Average Price/SF: $299

Average Vacancy at Sale: 6.7%

Market Sales Volume: $2.1B

Q4 2021 Sales Price/SF
Malls: $244
Power Center: $417
Neighborhood Center: $177
Strip Center: $243
General Retail: $434
Market: $334

National: $229

Q4 2021 Cap Rate
Malls: 6.19%
Power Center: 6.25%
Neighborhood Center: 6.38%
Strip Center: 6.41%
General Retail: 6.13%
Market: 6.24%
National: 6.91%

In a similar vein, the DC metro market average sales price per square foot has risen above and market cap rate fallen below pre-pandemic levels. Costar reports that the pace is accelerating because investors are racing to finish deals. This may be the case but the reason behind the race is not actual value appreciation but rather inflation and the risk of rising interest rates. It’s yet to be seen if cap rates have lowered because investors are willing to accept a lower rate of return or because the Fed has pumped more dollars into the system in the past 2 years than ever in recorded history; leading to asset inflation. It’s probably a combination of the two, but the point remains the same: no one wants to be the last one holding the hot potato. Savvy investors are likely looking to dump assets in the People’s Republic of DC and Southern MD to invest in more business and tax-friendly markets.