WASHINGTON, DC METRO RETAIL OUTLOOK

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1 DELTA ASSOCIATES WASHINGTON, DC METRO RETAIL OUTLOOK SPONSORED BY INSIDE THIS ISSUE Economy and Outlook...2 Retail Market Conditions...4 Millennials Love Washington Wilson Blvd., Arlington, VA New Development...6 Investment Sales...7 The Bottom Line...7 How to Contact Us...9 WASHINGTON AREA ECONOMY SNAPSHOT Job growth: 10,300 new jobs during the 12 months ending August Unemployment rate: 5.6% at August Among the lowest for major metro areas. Average household income: $115,275 in 2013, 58.3% higher than the U.S. average. Projected job growth : an average of 43,800 per annum. WASHINGTON AREA RETAIL MARKET SNAPSHOT Washington, DC Metro Retail Outlook is a quarterly publication of Delta Associates, sponsored by Rappaport. Retail employment is growing: 3,700 retail jobs were added during the 12 months ending August 2014 on a net basis. Vacancy rates for neighborhood and community centers in Northern Virginia and Suburban Maryland are 5.6% and 8.3%, respectively, a decline of 30 basis points in Northern Virginia and 10 basis points in Suburban Maryland during the 3rd quarter of Neighborhood and community center effective rents rose an average of 1.0% in Northern Virginia during the 3rd quarter, to $24.97/SF. In Suburban Maryland, effective rents rose 1.1%, to $22.91/SF. Grocers and fast-casual restaurants are likely to continue to expand their presence in the Washington metro area during the balance of 2014 and into Creative uses for retail space also are gaining traction, such as educational facilities. Grocery-anchored shopping center development: 3.2 million SF is under construction at October 2014 across Northern Virginia, Suburban Maryland, and the of Columbia. 1

2 ECONOMY AND OUTLOOK The Washington metro area faced a number of challenges in early 2014, including Federal budget cuts and harsh winter weather that hindered businesses throughout the region. Despite these challenges, payroll job change still remained positive, albeit below historical averages. In more recent months, job growth has generally been stronger though still volatile, and we expect it to continue gaining strength throughout the balance of 2014 and into During the 12 months ending August 2014, payroll employment increased by 10,300, or 0.3%. However, the 12-month employment gain is below the metro area s 20-year annual average of 42,600 and compares to prior expansion cycles of 60,000 to 100,000 in job gains. As a result, this expansion continues to feel anemic by comparison. Village at Leesburg, Leesburg, VA PAYROLL JOB GROWTH Selected Large Metro Areas 12 Months Ending August 2014 THOUSANDS OF NEW PAYROLL JOBS NY LA Basin Hou DFW SF Bay South FL Source: Bureau of Labor Statistics, Delta Associates; October Atl Phx Bos Chi Denver Was As the Washington metro area adjusts to these conditions, we expect the private sector to increasingly pick up the slack. Growth in the private sector combined with pent-up demand for goods and services will help to spur job growth for the balance of 2014 and will likely continue through Job growth will keep the region s unemployment rate low; as of August 2014 the unemployment rate was at 5.6%, one of the lowest rates among major metro areas. Specifically, more job growth will be needed from the Professional/ Business Services sector, as that sector produces many of the highestpaying jobs with the greatest multiplier effect for the retail economy. Currently, the job growth is highest in the Retail Trade sector, which produces lower-wage jobs. Plans in Virginia, such as Governor McAuliffe s recently announced New Virginia Economy Workforce Initiative, are a step in the right direction. The initiative will focus on training people for middle-skill jobs that require some training past high school, but do not need a four-year degree. Governor McAuliffe has set a goal for 50,000 Virginians to graduate the program by the end of RETAIL PAYROLL JOBS Washington Metro Area YEAR RETAIL EMPLOYMENT CHANGE * 270, , , , , , , , ,600 1, (4,900) (13,900) 3,200 5,100 2,600 3,500 3, W Broad Rendering, Falls Church, VA *Employment total at August 2014; change reflects the 12 month period ending August Source: Bureau of Labor Statistics, Delta Associates; October

3 PAYROLL JOB GROWTH Washington Metro Area The retail sector gained 3,700 jobs on a net basis in the Washington metro area during the 12 months ending August 2014, an increase of 1.4%. This compares to a national gain of 1.7% over the same period. THOUSANDS OF NEW PAYROLL JOBS (ANNUAL AVERAGE) Year Annual Average = 42,600/Year 5-Year Projected Average = 43,800/Year Incomes in the Washington metro area grew by 43% from 2000 to 2014, compared to just 29% nationally. By 2019, the Washington metro area s average household income is projected to rise 16%, compared to a rise of 15% nationally. The elevated household incomes in the Washington area yield increased discretionary spending and support demand for retail goods and space. AVERAGE HOUSEHOLD INCOME Source: Bureau of Labor Statistics, Delta Associates; October JURISDICTION Washington Metro Area 2000 (ACTUAL) $80, (EST.) $115, (PROJ.) $133,898 U.S. $56,600 $72,809 $83,937 CONSUMER SENTIMENT United States INDEX * *At September Source: University of Michigan, Delta Associates; October Year Average = 87.9 Source: ESRI, Delta Associates; October We estimate that an annual average of 43,800 payroll jobs will be added to the Washington metro area economy during the five-year period from 2014 to Private sector firms will be the cornerstone of employment growth in the period ahead. We expect job growth in the metro area to remain tempered for an expansion cycle in the range of 25,000 to 60,000 jobs per annum. This is sufficient to support a healthy retail real estate industry, but below the levels experienced in most recent expansion cycles. We expect the Washington metro area economy to build on some of the momentum started during the 3rd quarter of the year. Consumer confidence is at its highest level in nearly seven years according to The Conference Board s Consumer Confidence Index and 60% of CEOs are optimistic about the national economy s outlook over the next year according to PwC s most recent Trendsetter Barometer report. Also, 52% of companies have expansion initiatives planned over the next year and 63% plan on hiring more workers during that period of time. We expect these national trends to have a local impact and boost the regional economy during the balance of 2014 and into Dillingham Square, Woodbridge, VA During 2015 and 2016 we expect healthy growth, though at a slower rate than seen in recent expansion cycles. As the Federal government will continue to face austerity measures during this period albeit reduced from 2013 levels we expect the source of growth to continue its shift to the private sector. Overall, employment growth will be healthy but average wages lower on an inflation-adjusted basis than what this region has experienced in the past. International business activities will benefit Washington and support payroll job growth in the National Capital Region. 3

4 NEIGHBORHOOD/COMMUNITY CENTER SPACE PER CAPITA Washington Metro Area Suburbs 3 rd Quarter 2014 NEIGHBORHOOD/COMMUNITY CENTER SF/CAPITA RETAIL PIPELINE Washington Metro Area Suburbs All Shopping Center Types October 2014 THOUSANDS OF SQUARE FEET Northern Virginia Northern Virginia Under Construction Planned Proposed Source: REIS, Delta Associates; October Metro average = 16.5 Source: REIS, Census Bureau, Delta Associates; October Suburban Maryland 15.6 Suburban Maryland The Thomson Reuters/University of Michigan index of consumer sentiment (soon to be known as the Bloomberg/University of Michigan index) for September 2014 came in at 84.6, up slightly from three months earlier and at a 14-month high, though still below its 20-year average of Lower gas prices and 4.6% annualized U.S. GDP growth during the 2nd quarter of 2014 have combined to boost consumer confidence, which, like many economic indicators, has been improving in fits and starts over the past year. RETAIL MARKET CONDITIONS The inventory of existing neighborhood and community shopping centers totaled 73.3 million SF in the Washington metro s suburbs at 3rd quarter Northern Virginia has 39.8 million SF of space in these centers, and Suburban Maryland has 33.5 million SF. On a per capita basis, Northern Virginia leads the way at 17.4 SF per capita in its neighborhood and community centers. Suburban Maryland has 15.6 SF per capita in the same types of centers. For the Washington metro area as a whole, residents enjoy 16.5 SF per capita of neighborhood/ community shopping center space. There is 1.4 million SF of shopping center space under construction across all shopping center types in Suburban Maryland, the same as in Northern Virginia. However, Northern Virginia has 4.4 million SF of planned space defined as space within centers where plans are drafted, permits and financing have been applied for, and ground break is all that remains to take place more than double the amount in Suburban Maryland. However, the amount of proposed space, where no permits or financing have been applied for, is higher in Suburban Maryland 4.3 million SF as of October 2014 outpacing Northern Virginia s 3.1 million SF. VACANCY RATES Washington Metro Area Suburbs Community/Neighborhood Centers SHOPPING CENTER VACANCY RATE 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Northern Virginia * Source: REIS, Delta Associates; October Suburban Maryland *As of August. Vacancy rates in neighborhood and community centers remain elevated relative to their pre-recession averages across the metro area, though the decline in vacancy is starting to accelerate. Vacancy rates for Northern Virginia and Suburban Maryland ended August 2014 at 5.6% and 8.3%, respectively. Vacancy rates declined 30 basis points in Northern Virginia and 10 basis points in Suburban Maryland during the 3rd quarter of Within Northern Virginia, community/neighborhood center vacancy rates at mid-year 2014 are lowest in the Suburban Fairfax County submarket, at 4.2%, and highest in Prince William County, at 7.5%. In Suburban Maryland, shopping center vacancy rates are lowest in Bethesda/Silver Spring, at 4.9%, and highest in South Prince George s County, at 13.1%. Of note, community/neighborhood center vacancy rates in Northern Virginia and Suburban Maryland began to separate during the recession of , and while both have been declining of late, the separation between the two has remained pronounced. 4

5 EFFECTIVE RENTS Washington Metro Area Suburbs Community/Neighborhood Centers EFFECTIVE RENT PER SF 35% 30% 25% 20% 15% 10% 5% 0% $30 $28 $26 $24 $22 $20 $18 $16 $14 $12 Source: REIS, Delta Associates; October TOP METRO AREAS FOR MILLENNIAL HOMEBUYERS Major Metro Areas % Northern Virginia Millenials' Share of Movers Suburban Maryland * Millennials' Share of Local Population Washington Denver Seattle Minn./St. Paul Dallas Source: National Association of Realtors, Delta Associates; October Average of 100 Largest MSAs *As of August. Effective rents at neighborhood and community centers have been climbing slowly since 2010, and they continued to do so in the 3rd quarter of Effective rents rose 1.0% during the 3rd quarter in Northern Virginia and 1.1% in Suburban Maryland. Average effective rents are higher in Northern Virginia, at $24.97 per SF. In Suburban Maryland, average effective rents were $22.91 per SF. Effective rents are up 1.7% in Northern Virginia and 1.5% in Suburban Maryland since year-end MILLENNIALS LOVE WASHINGTON One of the trendiest topics of the last year across a wide range of media has focused on the latest generation to reach adulthood: The Millennials. Millennials, loosely defined as Americans born between 1980 and 2000, have been deemed, depending on the source, the laziest, most entrepreneurial, least independent, and most enterprising generation ever to come of age in this country (or not). Wherever the truth may lie, two facts are clear: first, the Millennial generation is large. There are more Millennials (over 80 million) than there are Baby Boomers (about 75 million). Second, and more important for local commercial real estate, Millennials love the Washington metro area. A few stats: The two counties in the United States with the largest percentage increase in Millennial population between 2007 and 2013 were Arlington County and Alexandria City, according to a September 2014 report by RealtyTrac. Those counties saw increases of 82% and 81% percent, respectively. Between 2000 and 2012, 30.9% of all movers to the Washington metro area were Millennials, according to a July 2014 report from the National Association of Realtors. No other major metro topped 30.0%. Washington also led the nation in the Millennials share of the local population, at 15.7% (tied with Denver). Washington has the largest concentration of Millennials with at least $100,000 of household income, according to a February 2014 report by Nielsen. San Francisco, Boston, New York, and Baltimore made up the rest of the top five. Millennials prefer walkable areas with low unemployment rates. Washington has low unemployment and the highest concentration of office and retail space in walkable urban places of any major metro area, according to a June 2014 report from the Center for Real Estate and Urban Analysis at the George Washington University School of Business. Camden South Capitol, Washington, DC That Washington has proved to be such a magnet for the Millennial generation that it has already had a profound impact on retail in the area. The influx of mixed-use, urban-feel apartment developments with ground-floor retail is only going to continue, as evidenced by planned developments like Apollo H Street, The Galvan, Hecht s Warehouse, and The Kingsley, just to name a few (as detailed in the next section of this report). And the success of restaurants, particularly 5

6 WASHINGTON, DC METRO RETAIL OUTLOOK fast-casual, seems likely to continue as well. According to a June 2014 report from The Hartman Group, 49% of Millennials eat out at least once a week, and 36% order takeout at least once per week. Both of those percentages lead Generation X and the Baby Boomers. Millennials preferences for other kinds of retail are less clear. Conflicting studies and articles abound, declaring that the generation has moved its consumption habits entirely online, that brick-andmortar retail remains essential, that Millennials consume more on a tight budget than any other generation, and that Millennials are constantly looking for ways to avoid ownership, be it of cars or homes or even clothing, by participating in the sharing economy. Whatever the case may be, the riddle of the Millennials has been presented to retailers here more than anywhere else. How it gets solved will go a 1000 Connecticut NW, Washington, DC long way toward shaping the future of Washington. NEW DEVELOPMENT There are 17 notable grocery-anchored shopping centers, totaling 3.2 million SF, under construction in the metro area at October 2014, and many more are in the planning stages. Apollo H Street: After several years of rumors and discussion, Insight Property group broke ground in September on a mixeduse development called The Apollo that will bring 431 apartment units (398 market-rate, 33 affordable) along with 75,000 SF of retail to the 600 block of H Street NE. The development s anchor will be a 40,000 SF Whole Foods on the former Murry s grocery site. The route of the H Street and Benning Road Streetcar, which began simulated service at the end of September and will begin full service before the end of the year, passes directly in front of H Street Redevelopment, Washington, DC the building. Whole Foods will be the H Street Corridor s second full-size grocery store and is scheduled to open in late New Jersey Avenue: Developer WC Smith began construction in June on 800 New Jersey Avenue SE, another Whole Foodsanchored mixed-use development that will include three residential buildings at the intersection of H Street and Second Street SE. 800 New Jersey Avenue itself will include 336 residential units and a ground-floor 35,000 SF Whole Foods along with a rooftop pool and an indoor lap pool. When the above-mentioned H Street NE location and the New Jersey Ave SE location have opened, the will have six Whole Foods stores. There are additional grocery-anchored shopping centers in the planning stages that are not included in the adjacent table, some of which may deliver by Developers generally view as the sweet spot for delivery during this cycle, but given the long-term demand for retail goods in the Washington metro area, projects will Station 650 at Potomac Yard Redevelopment, Alexandria, VA DE LTA AS S OCIATES R AP P AP O R T deliver before and after that window. 6

7 NOTABLE GROCERY-ANCHORED SHOPPING CENTERS UNDER CONSTRUCTION Washington Metro Area October 2014 SHOPPING CENTER JURISDICTION RBA (SF) ANCHOR Dulles Landing Loudoun 600,000 Walmart Towne Centre Laurel N. Prince George s 400,000 Harris Teeter Skyland Town Center 342,000 Walmart CityCenterDC 325,000 TBD Hilltop Village Center Fairfax 265,000 Wegmans Hecht s Warehouse 250,000 MOM s Organic Market University Mall Fairfax 140,000 Giant Fort Totten Square 130,000 Walmart Bull Run, Manassas, VA The Galvan Montgomery 130,000 Safeway Cathedral Commons 128,000 Giant Dunn Loring Metro Fairfax 125,000 Harris Teeter The Yards 88,000 Harris Teeter Apollo H Street 75,000 Whole Foods The Kingsley Alexandria 52,000 Harris Teeter 8300 Wisconsin Bethesda 50,000 Harris Teeter 800 New Jersey Ave 35,000 Whole Foods Verde Pointe Arlington 15,000 MOM s Organic Market Total: 3,150,000 Source: WBJ, Washington Post, Delta Associates; October INVESTMENT SALES Springfield Plaza, Springfield, VA GROCERY-ANCHORED SHOPPING CENTER SALES Washington Metro Area Suburbs SALES IN MILLIONS $500 $400 $300 $200 $100 $0 Northern Virginia Suburban Maryland * ** Total: $342 M $796 M $401 M $429 M $85 M $79 M $178 M $454 M $476 M $644 M $272 M Note: Excludes properties under contract. *Includes large portfolio sale by CalPERS. Source: Real Capital Analytics, graphic by Delta Associates; October **January through September. There was one notable investment sale of a grocery-anchored shopping center during the 3rd quarter of In September, Laurel Lakes Avenue LLC purchased the Food Lion-anchored Laurel Gardens at 410 Sandy Spring Road in Laurel for $3.4 million ($111/SF) from Black Oak Associates. Sales volume for the first three quarters of 2014 reached $271.7 million ($434/SF) after totaling $644 million ($201/SF) in all of THE BOTTOM LINE The trends of the 3rd quarter of 2014 bode well for the economic prospects of the region and for the retail real estate market in general. The number of retail jobs increased by 3,700 positions over the 12 months ending in August 2014 and is projected to grow by another 10,000 jobs by Aided by growing employment in other sectors particularly the Professional/Business Services, Construction, and Education/ Health Services sectors the retail sector will continue to add workers to satisfy demand for retail goods. The Professional/Business Services sector generates high-wage jobs that tend to create enough disposable income to support a growing retail industry in this area. 7

8 Rock Creek Village, Rockville, MD The fiscal cutbacks of sequestration now feel like old news, and it appears safe to say that reduced Federal spending has had less of an impact on the local economy than most analysts predicted, though it continues to suppress economic growth. The federal budget deficit declined 22% during the 12 months ending August 2014, and while it is true that the Washington metro area relies in a big way on federal spending, fiscal stability is also very important. A federal government with its fiscal house in order is more likely to avoid dramatic shocks like sequestration in the future. While the Federal government is unlikely to resume its historical spending and hiring habits for at least several more years, it is likely to remain a stable source of wellcompensated jobs over the long term, and the area s private sector is growing rapidly enough to support a strong retail environment. Like the rest of the regional economy, the retail real estate market in the Washington metro area is showing consistent, if slow, improvement. The decline in vacancy rates now is accelerating, while shopping center rents have been rising gradually since We expect these trends to gather momentum in 2015 and Tenants seeking space are interested in newer, Class A space. The demand for new or renovated space with residential projects and other amenities nearby remains strong, and we predict that the trend toward mixed-use projects with a more urban feel will continue for the foreseeable future. Muddy Branch, Gaithersburg, MD Given its high incomes and well-educated workforce, we expect the Washington area retail market to continue to perform as well as or better than any other large retail market in the nation. The region s fundamentals are likely to remain strong due to its high household incomes; its attractiveness to young, educated professionals; and its diversified employment base. 8

9 DELTA ASSOCIATES Delta Associates is a firm of experienced professionals offering consulting, valuation, and data services to the commercial real estate industry for over 30 years. The firm s practice is organized in four related areas: 1. Valuation of partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. 3. Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties. 4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. For more information on Delta Associates, please visit DeltaAssociates.com. Delta s Retail Practice Team includes: Alexander (Sandy) Paul, Executive Vice President; David Parham, Senior Vice President; Luke Gelber, Associate; and Michele Frazzetta, Graphic Designer All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. Sources: Bureau of Labor Statistics, Census Bureau, Center for Real Estate and Urban Analysis at the George Washington University School of Business, Center for Regional Analysis, Delta Associates, ESRI, The Hartman Group, National Association of Realtors, Nielsen, Real Capital Analytics, RealtyTrac, REIS, University of Michigan, Washington Business Journal, Washington Post. Although the information contained herein is based on sources which Delta Associates (DA) believes to be reliable, DA makes no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice. 500 Montgomery Street, Suite 600 Alexandria, VA Info@DeltaAssociates.com 9

10 RAPPAPORT For 30 years, Rappaport has provided Washington, D.C., Maryland and Virginia with professional real estate services centered exclusively on the retail segment. Founded by Gary D. Rappaport, CRX/CMD/CSM/CLS/CDP, Rappaport provides the following services for some of the area s most prominent landlords, retailers, asset managers, commercial real estate companies and financial institutions: Property Management Landlord & Tenant Representation Construction Management Institutional JV s Marketing Consulting & Receivership Services Development Mr. Rappaport is a past Chairman and Trustee of the International Council of Shopping Centers (ICSC). He is the author of Investing in Retail Properties, which explains how to structure real estate partnerships for sharing capital appreciation and cash flow. The information contained in the book is the basis for classes he teaches for ICSC s University of Shopping Centers and Interactive Learning Series and as a guest instructor at Johns Hopkins, Georgetown, American and George Mason universities. Led by President Henry Fonvielle, the Rappaport leasing team of Steve Carboni, Bill Dickinson, Michael Howard, Melissa Webb, Susan Bourgeois, Will Collins, Kristin Perry, Pat O Meara, Jim Farrell, Michael Kang, Jason Yanushonis, Shawn Carrington, and Lindsey Barden includes the region s top experts in the retail industry. PROPERTY MANAGEMENT, CONSULTING & RECEIVERSHIP: Charlotte Strain Senior V.P. of Asset Mgt cstrain@rappaportco.com CONSTRUCTION MANAGEMENT & DEVELOPMENT: Larry Spott Executive V.P. Dev lmspott@rappaportco.com LEASING & BROKERAGE: Henry Fonvielle President hfonvielle@rappaportco.com 8405 Greensboro Drive Eighth Floor McLean, Virginia