Retail Research

Market Report Second Half 2018

Washington, D.C., Metro Area

Growing Population and Reduced

Construction Lift Retail Rents Retail 2018 Outlook

D.C. retail operations rebound after subdued 2017. A positive 1.2 million sq. ft. Construction:
surge in absorption during the second quarter of 2018 pushed the Annual completions slow for the
will be completed
vacancy rate slightly down during the first half of this year. Last second straight year to 1.2 mil-
year, a series of store closures contributed to rising availability. The lion square feet. Between 2013
closures were primarily attributed to changing shopping patterns and 2016, annual arrivals aver-
and not consumer demand. In 2018, the capital’s population is aged 2 million square feet.
expected to expand by 59,000 people, underpinning another year
of growing retail sales. Increased demand paired with less vacant 10 basis point Vacancy:
space will continue to support gains in the marketed rent for the Net absorption for 2018 im-
decrease in vacancy
sixth straight year. Asking rental rates should appreciate most proves over last year, facilitating
notably in Montgomery and Fairfax counties, given sub-4 percent a small decline in metrowide va-
vacancy and few completions in these areas. cancy to 4.5 percent. Last year,
vacancy rose 60 basis points.
Development contraction aids retail. Construction reaches its
lowest level observed so far this economic cycle, largely due to a 1.9% increase Rents:
drop in deliveries in suburban Maryland. Northern Virginia continues Asking rents are improving by
in asking rents
to host the most retail development, with almost 600,000 square a greater degree in 2018 than
feet of completions projected in 2018, led by upcoming projects they did last year as the average
along the Dulles Corridor and in the Fredericksburg area. The monthly marketed rate appreci-
District will add about 200,000 square feet of retail, led by two ates to $27.39 per square foot.
developments that are each over 50,000 square feet. Both are
mixed-use components of upcoming office projects in East End
and Northeast D.C.

Investment Trends
• More mixed-use retail assets changed hands over the past four
Local Retail Yield Trends
quarters than in the last few years. The average cap rate for
Retail Cap Rate 10-Year Treasury Rate
a store in an office building is about 200 basis points higher
than for one in a residential complex. Investors seeking higher
12%
initial returns could consider office storefronts, while residential
storefronts are more suitable for long-term holds.
Average Rate

9%

• The redevelopment of the Wharf and the anticipated

6%
revitalization of Buzzard Point are beginning to draw investors
3% to the Capitol Riverfront and Southwest D.C. Heightened
prospects may be impacting pricing, as the average sale price
0% in those neighborhoods surpassed $1,000 per square foot
00 02 04 06 08 10 12 14 16 18*
this year. Prices above that level are normally associated with
Georgetown, NoMA, Downtown, and the East End.
• A relatively more affordable cost of living is drawing more
residents to Alexandria, adding appeal to nearby retail assets
including restaurants. Investment there is at a five-year high.
* Cap rates trailing 12 months through 2Q18; 10-Year Treasury up to June 29.
Sources: CoStar Group, Inc.; Real Capital Analytics
Washington, D.C.
2Q18 - 12-MONTH TREND
Employment vs. Retail Sales Trends EMPLOYMENT:
Employment Growth Retail Sales Growth
1.6% increase in total employment Y-O-Y
12%
Year-over-Year Change

• Since July 2017, area employers hired 52,900 individu-

6% als, led by the professional and business services sector,
which added about 15,300 employees. The education
0%
and health services sector expanded staffs by a similarly
-6%
high 14,700 workers.
• During the same time, the market’s unemployment rate
-12% contracted 20 basis points to 3.5 percent.
08 09 10 11 12 13 14 15 16 17 18*

Retail Completions CONSTRUCTION:

Completions Absorption
981,000 square feet completed Y-O-Y
6,000
Square Feet (thousands)

• The development pipeline contracted over the past four

4,000 quarters as about 1.4 million fewer square feet of retail
space opened compared with the previous annual period.
2,000
• Approximately 800,000 square feet is under construc-
0 tion for delivery this year, led by the Field at Common-
wealth, a 120,000-square-foot Wegman’s-anchored
-2,000 shopping center in the Dulles Corridor.
08 09 10 11 12 13 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States 20 basis point increase in vacancy Y-O-Y
12%
• Market vacancy rose during the past 12 months, moving
9% up to 4.5 percent. In the previous annual period, metro
Vacancy Rate

vacancy fell 10 basis points.

6%
• Despite receiving the largest share of completions,
vacancy in suburban Maryland fell 30 basis points
3%
year over year to 4.7 percent. In both the District and
0% Northern Virginia, vacancy increased.
08 09 10 11 12 13 14 15 16 17 18*

Asking Rent Trends RENTS:

Metro United States 1.2% increase in the average asking rent Y-O-Y
Year-over-Year Change

12%
• Asking rents maintained a steady pace of appreciation
6% this year as the metro’s average monthly rate improved to
$27.10 per square foot.
0%
• Recent rent growth has been highest in Northern Virginia,
-6% with monthly payment amounts increasing by more than
10 percent in the Greater Fairfax County, Manassas and
-12% Woodbridge submarkets.
08 09 10 11 12 13 14 15 16 17 18*

* Forecast
 Retail Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 JOB GROWTH* FIVE-YEAR POPULATION GROWTH** FIVE-YEAR HOUSEHOLD GROWTH**

Metro 1.4% 291,900 or 0.9% Annual Growth 156,000 or 1.3% Annual Growth
U.S. Average 1.6% U.S. 0.7% Annual Growth U.S. 1.1% Annual Growth

2Q18 RETAIL SALES PER MONTH

$3,747 Per Household

U.S. $3,925
2Q18 MEDIAN HOUSEHOLD INCOME RETAIL SALES FORECAST**

Metro $100,022 $1,402 Per Person Metro 20.4%

U.S. Median $60,686 U.S. $1,506 U.S. 20.0%

* FORECAST **2017-2022

Lowest Vacancy Rates 2Q18 Appeal of Prominent D.C. Neighborhoods

Supports Rising Single-Tenant Prices
Y-O-Y
Vacancy Asking Y-O-Y %
Submarket
Rate
Basis Point
Rent Change • Multi-Tenant: Transaction velocity was essentially un-
Change
changed from the year before while the average cap
rate advanced into the high-6 percent zone.
Greater Fairfax County 2.6% 30 $35.65 12.8% • Single-Tenant: Trade velocity and the average sale
SUBMARKET TRENDS

price both moderately increased over the 12-month

Southeast Fairfax County 3.0% 140 $28.66 -9.5% period ended in June. Now at $420 per square foot,
SALES TRENDS

the average sale price was influenced by more George-

Alexandria/I-395 Area 3.3% 20 $36.45 15.5% town/Uptown deals, which draw above-market pricing.
Outlook: Competition for visitors among Old Town Alex-
I-270 Corridor 3.3% -20 $28.79 3.6%
andria and other D.C. waterfronts is spurring investment
in new tourist attractions, benefiting riverfront retail.
Southeast Montgomery
3.5% 0 $29.15 2.6%
County
Price Per Square Foot Trends
Leesburg/Route 7 Corridor 4.0% 10 $30.51 2.8%
Single-Tenant Multi-Tenant
Year-over-Year Appreciation

Woodbridge/I-95 Corridor 4.3% 40 $18.67 11.7% 30%

15%
Charles County 4.5% -30 $16.33 -2.6%

0%
North Prince George County 4.6% -80 $21.04 -5.9%
-15%
Georgetown/Uptown 4.8% 20 $44.29 -11.9%
-30%
Overall Metro 4.5% 40 $27.10 1.2% 08 09 10 11 12 13 14 15 16 17 18*

* Trailing 12 months through 2Q18 over previous time period.

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Retail Research | Market Report

By DAVID SHILLINGTON, President,

10-Year Treasury vs. 2-Year Treasury
Yield Spread Tightens Marcus & Millichap Capital Corporation
10-Year Treasury 2-Year Treasury
Fed raises benchmark rate, plans for additional increases.
8% The Federal Reserve recently increased the federal funds rate by
230 bps

25 basis points, lifting the overnight lending rate to 2 percent at the

280 bps

6%
conclusion of its September meeting. The Fed noted inflation has
260 bps
Rate

20 bps
4% broadly reached its target, while household spending and corporate
investment remain robust. The Fed indicated an additional rate

CAPITAL MARKETS
2% hike this year and projects as many as three increases in 2019.
0%
04 06 08 10 12 14 16 18* Lending costs rise alongside Fed rate increase. As the Fed
lifts rates, lenders have been tightening margins to compete for
loans. Despite these efforts, borrowing costs remain on an upward
Retail Mortgage Originations by Lender trajectory, which is tightening returns and pushing some investors
100% to seek greater yields in secondary markets. However, though
buyers may try to push back on pricing due to increased loan costs,
75% some sellers remain convinced that the strong economy and sturdy
National Bank
NOI performance substantiate aggressive pricing and a widening
Percent of Total

International Bank
50% Regional/Local Bank expectation gap is the result. If interest rates rapidly surge upward,
CMBS this gap could quickly widen, slowing transaction activity.
Insurance
25% Financial
Private/Other The capital markets environment remains competitive. As the
0% Fed tightens policy, global investors have been acquiring Treasurys
13 14 15 16 17 in order to capture a considerable yield premium, keeping the
10-year Treasury near 3 percent. Portfolio lenders are providing
* Through Sept. 26 debt for retail assets, with leverage typically capped at 60 to 65
Sources: CoStar Group, Inc.; Real Capital Analytics percent. The sector has become increasingly nuanced, with deals
more scrutinized due to e-commerce competition. Ten-year loan
structures will range between 4.95 and 5.25 percent, depending
on tenancy, location and sponsorship. Continued consumer
National Retail Group spending underpins U.S. growth, supporting retail demand and
driving a 10-basis-point decline in vacancy to 4.9 percent this year.
Visit http://www.MarcusMillichap.com/Retail

Scott M. Holmes
Senior Vice President, National Director | National Retail Group
Tel: (602) 687-6700 | scott.holmes@marcusmillichap.com

Prepared and edited by

Washington, D.C., Office:
Cody Young Matthew Drane Regional Manager
Research Associate | Research Services 7200 Wisconsin Avenue, Suite 1101
Bethesda, MD 20814
For information on national retail trends, contact: (202) 536-3700 | matthew.drane@marcusmillichap.com
John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline;
U.S. Census Bureau