The Retail/Real Estate Industry take on Washington

The March issue of Retail Traffic Magazine has an overview piece about the Washington DC market in the article CAPITAL GAINS, By Bob Hirschfeld.

_________Begin editorial comment
I don't agree with the characterization that the strength of the market comes from the MCI Center and the Convention Center. The Convention Center "booked solid, for the next 10-12 years"... ya gotta or at least drink the kool aid.

I think it has to do with:

(1) Mayor Barry getting off the scene;
(2) which renewed confidence in investing in the city (first with commercial developers and later with people willing to live in the city-see below);
(3) continual expansion of the Federal Government (the NCPC projects the need for 30,000,000 square feet of federal office space over the next 20-30 years);
(4) a decrease in "inventory" of developable land in the western part of downtown which means that developers had to look east--to the East End, Union Station, NoMa, and M Street SE--if they want to develop anything at all (COMING ATTRACTIONS: South Capitol Street; Development over the Union Station Railyard; Anacostia and East of the River); and
(5) a marginal increase in demand for urban living, which has led to an incredibly strong demand for residential housing, particularly historic building stock, designated or not.

Other factors, like the "Livable Downtown" and "arts" overlays helped bring vitality--a mix of uses--to the office ghetto that marked Downtown heretofore, making it more attractive to live downtown (note that the CVS at 7th and H Streets NW is now open 24 hours), which further drives demand for the amenities that also attract office workers (quality restaurants, places to hang out, etc. This has probably had far more impact on "Creating a Vibrant City Center" than the MCI Center in particular.

The Convention Center, well, I don't know yet. I do think there needs to be greater effort to integrate the people-attraction aspects of the Convention Center to more direct economic benefits for small businesses and tourism oriented to the "local experience" of Washington rather than the dominant and primary tourist experience related to the National Capital and the Federal Experience that defines Washington, DC to everyone in the world except for those of us that live here.

I sure would like to know the breakdown of the hotel and restaurant taxes. How much of these taxes support attraction development and maintenance other than for the Convention Center?

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But getting back to the story, it is reprinted here in full.

"Put aside thoughts of sleepy Southern towns and federal tax cuts — real estate in our nation's capital is booming. Office and multifamily development is soaring and retail is percolating.

Downtown D.C. — roughly, the stretch between Union Station and the White House — is enjoying a newfound vitality that is attracting conventioneers, sports fans and refusenik commuters living in condos, all of whom are driving retail demand for restaurants and home furnishings stores. “Ground Zero for the new D.C.” says Len Harris, broker with Vanguard Realty, is Gallery Place, located at a Metro stop at the edge of Chinatown, next to the MCI Center sports arena and within walking distance of the new convention center.

A mixed-use vertical mall, Gallery Place is a joint venture of the John Akridge Cos. and Western Development Corp. that opened in October 2004 and provides 230,000 square feet of office space and 250,000 square feet of retail, along with luxury condos and a multiscreen Regal cinema. Madison Retail did virtually all the leasing, and has assembled a portfolio of shops that include Ann Taylor Loft, Urban Outfitters, Benetton and Aveda Institute. According to Richard Lake, managing director of Madison Retail Group, Gallery Place “includes national retailers which traditionally have not been east of 14th Street.” Harris calls the area around the project “D.C.'s equivalent of 42nd Street, meaning, it's relatively lit up.”

The catalysts of D.C.'s downtown renaissance are not in dispute. In 1997, Abe Pollin relocated the NBA's Washington Wizards and NHL's Washington Capitals from the Beltway border to the downtown MCI Center on 7th Street. In March 2003, the city unveiled an $850 million, 2.3 million-square-foot convention center. Today, says Madison Retail's Eric Rubin, the convention hall is “booked solid for the next 10 or 12 years.”

Rubin provides the historical backdrop. “Traditionally, downtown has been solid because you have stable office tenancies with law firms and associations. For 30 years, there wasn't any new housing built. Starting around 1996 or 1997, the residential cycle kicked in and office developers became residential or mixed-use developers. Gallery Place is but one example. The mayor has said he wants to add 100,000 new residents over 10 years. You have 7,000 residential units set to open around the downtown core. Everywhere you look there's a crane.”

The downtown renaissance is no accident. Christopher Collins, land use partner of the law firm Holland and Knight notes that the District provides incentives that promote retail, housing and historical preservation. According to Collins, “The city said it wants a vibrant downtown. That initiative goes back to former Mayor Marion Barry. The downtown we're talking about was planned 10, 15 years ago. Now it's coming to fruition.”

Real estate professionals are enthusiastic about the District's efforts. “Everything the city has done for this area was the right decision,” says James O'Neill of KLNB Retail. “The know-it-alls said, ‘You don't have enough rooms to support the country's seventh largest convention center,’ so the city went out and built a bunch of hotels. Then retailers said, ‘Hey, restaurants will do good but you've got nobody living there,’ so they bid out a bunch of multifamily residential projects and now you've got something like 25,000 new roofs within three blocks, all of which were sold out before they could be delivered.”

Dimitri Georgelakos, a broker with KLNB Retail, is feeling the pull of business going downtown. “My tenants are driving me to do more downtown,” he says. “What we've seen is a resurgence in the residential population that has turned downtown into more of a seven-day-a-week trade area.” A lot of suburban retailers have turned their attention downtown because the area is more balanced and they can go later into the evenings and weekends, Georgelakos says.

According to Rubin, the downtown development follows a particular sequence. “Department stores die. Office developers turn department stores into office buildings while keeping sizable retail footage,” he says. “New retailers come in that are good generators. Good restaurants generate activity. For retail, the center of the doughnut is between 7th and 11th streets on F and right now we're just filling in the doughnut.” Rubin commends Douglas Jemal of Douglas Development for bringing H&M into the Woodward and Lothrop building on 11th and F streets, but is not averse to giving his company, Madison Retail, credit for its prescience in signing retailers adjacent to the MCI Center. “We put in some names that are now starting to really benefit from downtown growth, like ESPN Zone, Barnes & Noble, and Filene's Basement.”

Circles of demand

Has the development of the downtown area reached critical mass? On the positive side is KLNB's O'Neill: “You need food. You need destination. You need housing. You need hotels. You needed the convention center. Those things, along with the sporting center, helped make all the other projects successful.” Others are more doubtful. According to Harris, “the retailing is not there yet, since some of the best spaces where retail will go are just being built.”And Widdicom admits, “Retail has lagged. All of the leases haven't tuned over yet and we have some significant gaps.”
Widdicom nonetheless finds some “circles of retail demand.”

Entertainment, for one. At the beginning of 2004, the downtown BID didn't have a movie theater. Now it has two: the Regal at Gallery Place, and an eight-screen art theater, Landmark, at 11th and E Street. Eateries are another retail segment that is sparkling. According to Widdicom, “We've opened about a restaurant a month for the past 30 months. And we have over 60 Zagat-rated restaurants in this 140-block area.”

The influx of downtown residents certainly helps purveyors of home furnishings. Best Buy and Container Store, both located nearby, are doing well, and Storehouse is scheduled to open in March. Also active is Hecht's — the only surviving old-line D.C. department store and by footage, the largest District merchant — which recently revamped its home furnishings department and put it on the first floor.

Downtown residential growth is also fueling demand for groceries that offer condo owners larger formats and more takeout choices. O'Neill notes that only a few years ago local grocers Safeway and Giant were closing stores. O'Neill, who reps Philadelphia-based Freshgrocer, is currently prospecting locations. “We're considering a half-dozen sites. We're looking at mixed-use and freestanding. We looked at a piece around Gallery Place and we looked at the old convention center site. We don't have a done deal yet.”

What's next for D.C.? “We're getting built out,” says Widdicom. When the MCI Center came in 1997 there were 70 development sites in the BID. Now there are 14. “We're starting to move across Massachusetts Avenue,” he says. In the short term, the only project comparable to Gallery Place is Mount Vernon Triangle, just north of the BID, where a group led by Lowe Enterprises will build apartments, condos and a 55,000-square-foot Safeway at the site of the former National Wax Museum. Groundbreaking is slated for spring 2005. Says Widdicom, referring to the impact of the new residences: “Mount Vernon Triangle will ensure that Gallery Place works.”

Our nation's capital was laid out in 1791 by George Washington's buddy Pierre L'Enfant on a plan that features sweeping vistas and grand avenues. For decades the area just east of the White House reflected shabbily on the grandeur L'Enfant had sought. Thankfully, that's no longer the case. “Mayor Tony Williams and his group have done everything you need to do to revitalize an urban center,” says O'Neill.

WASHINGTON'S CHANGING DEMOGRAPHICS


2003 Households % of Metro total 2008 Forecast % change 2003-2008
District of Columbia: 251,200 15.1% 261,100 2.0%
Charles, Md. 45,400 2.7 51,600 13.7
Montgomery, Md. 341,300 20.5 368,900 8.1
Prince George's, Md. 298,000 17.9 317,300 6.5
Alexandria, Va. 65,200 3.9 70,500 8.1
Arlington, Va. 88,800 5.3 92,000 4.6
Fairfax, Va. 380,000 22.8 408,800 7.6
Loudoun, Va. 73,000 4.4 93,500 28.1
Prince William, Va. 120,600 7.2 138,900 15.2
Metro Market Total 1,663,500 100 1,798,500 8.1

Source: Claritas, Demographics U.S.A. 2003, County Edition
Market Profile/Washington, D.C.

Washington, DC DEMOGRAPHIC OVERVIEW
Population: 570,042
Daytime Population: 888,000
Households: 249,220
Avg. Household Income: $74,221
Retail Market: $6.5 billion

Source: Washington, D.C. Marketing Center