Trends in retail rents for "globally-relevant" shopping districts

AP photo.

Retail rents came up recently with regard to the rehabilitation of the Takoma Theatre in DC, which was recently purchased by a property development company.

With regard to the theater building, they are seeking what I would call "high rents," at rates that are in line with other districts in the city, but not in Takoma where the retail trade area is smaller (e.g., 1/3 the size of Capitol Hill or 1/6 the size of Foggy Bottom or 14th Street) and therefore so is the revenue potential of the space.

(I have been thinking about this because some residents are "campaigning" for a Trader Joe's.  I said that's great, but given the realities of the retail trade area, why not expend your energies on something achievable, like the Streets upscale market.  They have one in Arlington and on 14th Street in DC, and recently they opened a store in Downtown Baltimore.  See "Streets Market & Cafe opens specialty grocer in downtown," Baltimore Sun.)

Economically justifiable rents are supposed to be based on the revenue generating capacity of the building.  The rule of thumb for retailers is that they should pay no more than 4% to 10% of their gross revenue in rent, although restauranteurs pay higher, up to 15% of gross revenue in rent, because of higher volume.

But for the most part, because the city's central business district and certain other submarkets (Georgetown, Chevy Chase) are part of the international-national property market, the city's commercial real estate is priced upward in all districts, even if they are not national or globally relevant submarkets, but decidedly local, with locally based property owners, businesses, and customers.

I have scads of entries on this general topic, such as:

-- Cleveland Park Retail: My Off-hand evaluation, the rents are too high (2009)
-- Commercial retail rents #2 (2009)
-- Problematic outcomes as real estate investment trusts buy more "high street" retail real estate (2015)
-- Dupont Circle's changing retail environment covered in today's Post (2006)
-- Globalization of the DC real estate market catches neighborhood commercial districts up in the wake (2006)
-- Retail Action Strategy (2007)
-- Franchises sucking the local flavor out of L.A. (2007)
-- Retail and authenticity: continued (2007)

Understanding comes down to understanding these issues at a variety of scales.  But the reason that places languish usually comes down to a disconnect or incongruence between property owners and likely tenants, as well as how the city's property tax assessment methodology overprices commercial real estate outside of the "global" submarkets.

Though increasingly, like in Cleveland Park, Dupont Circle, Chevy Chase, and elsewhere, national firms have entered those submarkets, which leads to a steady repricing upwards of the real estate.

To get a sense of the scale of the highest value commercial districts around the world, Cushman Wakefield's regular report on this market, Main Streets Across the World, is a good source of info.

Outside of New York City, the highest priced commercial districts are outside the US.  Within the US, outside of New York City, Boston, Chicago, Philadelphia, San Diego, San Francisco, Seattle, South Florida, and DC have the highest priced markets.

In DC, the highest priced retail space is in Penn Quarter, at $220/s.f., which surprised me, but I guess we have to admit that the Verizon Center as an anchor makes a big difference.

Dupont Circle, Georgetown, and Chevy Chase are the other submarkets rounding out the list.