Cleveland Park Retail: My off-hand evaluation, the rents are too high

The high vacancy rate in the Cleveland Park retail district in upper northwest DC is covered, in "A Hush in Cleveland Park: Businesses Vanish From Once-Vibrant Strip In Affluent Area Along Connecticut Avenue," from today's Post.

The story attributes the number of retail vacancies to the neighborhood commercial district zoning overlay restriction limiting restaurants to 25% of the total retail frontage.

Washington Post graphic.

I wrote about the general problem of commercial zoning and business viability two days ago, in the entry "Negative impacts from "the market economy" and the "local" real estate market" and rather than repeat the links there to many past blog entries on the verysame subject, I refer you to that piece.

Still, this story is similar to past Post stories on Dupont Circle and Clarendon, which get mentioned in entries such as:

- Speaking of neighborhood commerical district revitalization ... in DC (2007)
- Retail and authenticity: continued (2007)
- Dupont Circle's changing retail environment covered in today's Post (has a link to the story)
(2006)
- Clarendon (Arlington Virginia) (has a link to a column by Marc Fisher) (2006)
- Another reason why independent retail is tough in the city (2006)

The story has a glaring omission. It doesn't list the asking price for rents. Without that number it is impossible to put the number of vacancies in context.

Figuring out retail viability is a simple process

1. The general rule of thumb is that a retail business should pay no more than 4% to 10% of gross revenue for rent. Restaurants (not coffee shops), because they have higher sales volumes, can pay up to 15%.

2. Retail businesses typically sell $200 to $400/s.f. Figures are published in a variety of sources. This table from a development company, 2007 Retail Store Taxable Sales Estimates, shows the range is dependent upon the store, and is from $40 to $700.

A 2,000 s.f. space with sales/s.f. of $200 will gross $400,000. So ideally, the rent should be between $16,000 and $40,000 annually. On a per square foot rental basis, that is a range from $8/s.f. to $20/s.f.

My guess is that rents in Cleveland Park are (significantly) greater than $40/s.f.

Businesses not generating high enough sales/s.f. can't survive, whether or not there are restrictions on restaurants.

Likely one of the contributions to high costs is high property taxes. The buildings, zoned commercially, are likely valued for more than they are worth in terms of housing actual thriving retail businesses. Hence the high prices.

Ironically, the limitation on restaurants is an indirect method of supporting broader retail, because it limits escalation and crowding out of standard retail by restaurants willing to spend more money on the same space.

Cleveland Park has some real advantages. A lot of high income households nearby, big apartment and condo buildings meaning a great number of potential customers, a Metro subway station plus bus service up and down Connecticut Ave., a movie theater, bringing people into the commercial district at night, etc.

But if rents are out of kilter (i.e., this story about Magruders, "Small Market Shuts, Leaving Big Hole in D.C. Hearts: Magruder's an anchor in Cleveland Park," from the Post) you can't make individual businesses or an entire commercial district more successful than what basic business economics enables.

Excerpt from the 2006 blog entry on Dupont Circle....

There is nothing wrong with chain retail complementing independently retail. As pointed out in the article, "Some local merchants concede that the chain stores have increased foot traffic." And at the same time, they set a higher bar for marketing and merchandising, which encourages other businesses to improve as well.

But this statement pisses me off:

"If you want to get frustrated at the local guy not wanting to pay the rent, get frustrated at him not being able to get his act together and compete," said Bill Miller, a senior vice president at Transwestern Commercial Services, a realty firm.

Mr. Miller is being deliberately disingenuous. Chain retail benefits from a wide variety of sweeteners from vendors that independents do not have access to.

For example, Ann Taylor Loft likely negotiates financial givebacks from clothing manufacturers, when items are discounted. Manufacturers don't like doing this, but given the market power possessed by Ann Taylor, they have to give in.

No independent store has this kind of market power.

There are other advantages possessed by chains, and the property owners who rent to them. For example, a lease to a chain store can be "factored" or be loaned "against" by a bank, whereas this isn't the case for an independent store.

Plus, there is a fine line between adding retail options, mostly for residents, and homogenizing the retail offer in the city.