MAR KE T F O R E C AST

RETAIL
Washington, D.C., Metro Area

Q2/ 19

Northern Virginia Development Weighs on Vacancy;

High Demand for Retail Space in Core D.C. Retail 2019 Outlook

Modest development improves rents in District of Columbia and va- CONSTRUCTION:

cancy in Maryland. Steadily increasing population density inside the Dis-
Construction activity picks up year over
trict continues to raise the demand for retail services, which is enabling
year in 2019 but falls below the annual
rents to appreciate faster than in most other parts of the market. Vacancy 1.3 MILLION
average for this cycle. The development
is also expected to improve as construction delays push new development SQ. FT. pipeline expands in Northern Virginia
to one of its lowest levels in more than a decade. Of the space opening in will be completed
but contracts in Maryland and D.C.
2019, about half is ground-floor retail within larger mixed-use projects.
Supply growth is also moderating in suburban Maryland. Worman’s Mill
Town Center in Frederick mark’s the region’s largest single delivery at
VACANCY:
68,000 square feet. As retail construction declines in Maryland, tenant
demand will continue to compress vacancy here. However, the unoccu- Vacancy will rise to 4.4 percent this year
pied space left is generally older and in less-central locations, skewing the 10 BASIS after remaining flat at 4.3 percent in
average asking rent in the downward direction this year in Maryland. POINT 2018. A construction-driven increase in
increase in vacancy Virginia is impacting the metro average.
Developers remain Price Per Square
primarily focused on Foot Trends
Northern Virginia. Tyson’s
Corner continues to grow as the retail component
Single-Tenant of Capital One’s new
Multi-Tenant
corporate campus opens later this year. Other nearby construction
30% RENTS:
Year-over-Year Appreciation

projects include The Boro, a live-work-play marketplace, and the third

phase of the15%Tyson’s West shopping center. Both benefit from proximity to The average asking rent will tick up to
highway access ramps and mass transit. Other developments in the pipe- 0.3% INCREASE $26.79 per square foot in 2019. Asking
line include the
0% Lidl-anchored Ashbook Marketplace located off Route 7 in asking rents rates have improved less than 1 percent
between Leesburg and Reston. The new arrivals are raising the vacancy over the past three years.
rate in these-15%
two submarkets, but operations in Northern Virginia remain
generally tighter than in D.C. or Maryland.
-30%
* 09 10 11 12 13 14 15 16 17 18 19*
Investment Trends

• Trading velocity increased inside the District for the 12-month period
Local Retail Yield Trends
ended in March. Much of this rise was due to more properties changing
Retail Cap Rate 10-Year Treasury Rate
hands in the Capitol Hill submarket. High levels of foot traffic in the
12% historic neighborhood generated revenues that contributed to a be-
low-market average cap rate of mid-5 percent.
9%
• In Maryland, Frederick was the most frequent target for acquisitions
Average Rate

6% as several smaller properties with floor plates under 5,000 square feet
were exchanged. Investors seeking low entry costs can obtain assets
3% built over 100 years ago with upside potential at an average sale price of
$110 per square foot, some of the lowest prices for the whole market.
0%
01 03 05 07 09 11 13 15 17 19*
• Old Town Alexandria remains a popular Virginia investment destina-
tion while buyers are also entering into Fredericksburg and the I-66
Corridor with greater frequency. High returns are a motivating factor,
as properties in both submarkets traded at cap rates in the low- to mid-
7 percent range, 50-100 basis points above the market average.

* Cap rates trailing 12 months through 1Q19; 10-year Treasury up to March 29

Sources: CoStar Group, Inc.; Real Capital Analytics
 Employment vs. Retail Sales Trends Price Per1Q19
Square–Foot
12-Month
Trends Trend
Employment Growth Retail Sales Growth Single-Tenant EMPLOYMENT
Multi-Tenant
12% 30%

Year-over-Year Appreciation
0.9% increase in total employment Y-O-Y
Year-over-Year Change

6% 15%
• The pace of hiring slowed slightly year over year in March with
the creation of 29,800 positions. The professional and business
0% 0%
service sector as well as the leisure and hospitality sector added
-15%
the most jobs with a combined total of 29,700 slots.
-6%
• Payrolls modestly contracted by 4,300 roles in the trade,
-30%
-12% transportation, and utilities industry. Another 3,500 financial
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*
activities jobs vacated the market in the past 12 months.

Retail Completions Local Retail Yield Trends

Completions Absorption Retail Cap Rate CONSTRUCTION
10-Year Treasury Rate
6,000
12%
907,400 square feet completed Y-O-Y
Square Feet (thousands)

4,000
9%• Deliveries slowed down over the past 12 months from the 1.4
Average Rate

million square feet of retail space delivered the prior year. More
2,000 6%
than 400,000 square feet of space came to Northern Virginia,
0 3%
with slightly fewer openings in suburban Maryland.

• Development activity inside the District was highlighted by the

-2,000 0%
completion of the retail component of Square 450, which added
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*
80,500 square feet to the Mount Vernon neighborhood.

Vacancy Rate Trends

Metro United States VACANCY
12%
10 basis point decrease in vacancy Y-O-Y
9%
• Vacancy mildly contracted year over year in March to 4.3 percent
Vacancy Rate

as availability declined in Northern Virginia and the District but

6%
stayed flat in suburban Maryland.
3% • Operations in Northern Virginia remain tighter than in other
parts of the market, with vacancy rates at or below 3 percent in
0%
Alexandria and portions of Fairfax County.
09 10 11 12 13 14 15 16 17 18 19*

Asking Rent Trends

Metro United States RENTS
8%
0.6% decrease in the average asking rent Y-O-Y
Year-over-Year Change

4%
• Asking rents continue to advance in D.C. while taking a step back in
Maryland and Virginia, producing a market average of $26.66 per
0%
square foot in March, a little below where it was a year before.

-4% • Monthly rates improved above the national pace in several sections of
the metro, including Capitol Hill, Georgetown, and the I-95 Corridor.
-8% Negative net absorption across several submarkets contributed to
09 10 11 12 13 14 15 16 17 18 19*
lower asking rents, impacting the overall metro average.

*Forecast
Sources: CoStar Group, Inc.; Real Capital Analytics
Demographic Highlights

2019 Job Growth* Five-Year Population Growth** Five-Year Household Growth**

Metro 1.3% 273,100 or 0.9% Annual Growth 149,600 or 1.2% Annual Growth
U.S. Average 1.3% U.S. 0.6%Annual Growth U.S. 1.0%Annual Growth

1Q19 Retail Sales per Month

$3,719 Per Household

U.S. $3,971
1Q19 Median Household Income Retail Sales Forecast**

Metro $103,389 $1,425 Per Person Metro 17.2%

U.S. Median $64,259 U.S. $1,544 U.S. 16.9%
* Forecast ** 2018-2023

SUBMARKET TRENDS SALES TRENDS

High-Yield Potential Draws New Buyers to Market,
Lowest Vacancy Rates 1Q19* Maintaining Competition for Single-Tenant Assets
• Multi-Tenant: Multi-tenant transaction velocity over the past 12
Y-O-Y Average
Vacancy Y-O-Y % months remains about on par with the previous three years as buyers
Submarket Basis Point Asking
Rate Change
Change Rent targeted less-central, higher-yield Virginia submarkets, helping lift
the marketwide average cap rate into the low-7 percent zone.
Greater Fairfax County 2.5% -10 $34.38 -4.3%
• Single-Tenant: Single-tenant trading activity rose over the past four
Southeast Fairfax County 2.5% 70 $29.17 1.2% quarters as more older assets changed hands, limiting the average sale
price increase to 1.5 percent, sustaining a 6.3 percent average cap rate.
Alexandria/I-395 Area 3.0% -10 $36.62 1.5%
Outlook: Initial yields regularly above 6.0 percent are motivating some
local buyers to enter the retail landscape from other sectors, including
Leesburg/Route 7 Corridor 3.0% -70 $29.92 -3.4%
multifamily, where yields can be 150 or more basis points lower.

Calvert County 3.2% 10 $20.27 -14.9%

Georgetown/Uptown Employment
3.4% vs.-100
Retail Sales
$47.83 Trends
4.8%
Price Per Square Foot Trends
Employment Growth Retail Sales Growth Single-Tenant Multi-Tenant
I-270 Corridor 12% 3.4% -40 $28.56 -1.7%
30%
Year-over-Year Appreciation
Year-over-Year Change

Northeast/Southeast D.C.
6% 3.8% -50 $23.20 -12.1% 15%

Woodbridge/I-95 Corridor 3.8% -10 $18.68 12.2% 0%

0%

Southeast Montgomery County 4.4% 70 $30.74 3.4% -15%

-6%

Overall Metro 4.3% -10 $26.66 -0.6% -30%

-12%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*
* Includes submarkets with more than 2.5 million square feet of inventory
* Trailing 12 months through 1Q19 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Retail Completions Local Retail Yield Trends
Completions Absorption Retail Cap Rate 10-Year Treasury Rate
6,000
 CAPITAL MARKETS
1Q19* Retail Acquisitions Capital Markets
By Buyer Type
By DAVID G. SHILLINGTON, President,
Cross-Border, 34.9% Marcus & Millichap Capital Corporation
Other, 2.2%
• International pressures weigh on domestic outlook; Fed remains
patient. Amid ongoing trade disputes between the U.S. and China
and slowing growth throughout the European economy, the glob-
Private, 47.2% Equity Fund al economic outlook has become more cautious. Market volatility,
& Institutions, 11.9%
combined with muted sentiment, has sponsored a flight to the safety
of Treasurys, pushing the 10-year yield below 2.6 percent. While
Listed/REITs, 3.7%
domestic growth has moderated recently, the waning impact of the
tax cut stimulus will likely trim forward estimates further. As a result,
Retail Mortgage Originations the Fed decided to cease reducing its balance sheet reduction through
By Lender quantitative tightening by September and removed the potential for
rate increases through the remainder of the year. The bond market
100%
has begun to price in a much more dovish Fed, with flattening interest
Percent of Dollar Volume

rates reflecting more caution. Fed officials will likely focus on the
75% CMBS
Reg'l/Local Bank intersection of a global growth slowdown and continued labor market
50% Nat'l Bank/Int'l Bank strength to refine their plans moving forward, keeping interest rates
Financial/Insurance stable for the foreseeable future.
Pvt/Other
25% • Malls, legacy big-box players cloud otherwise optimistic retail
landscape; underwriting remains conservative. Uncertainty sur-
0%
rounding legacy retailers and the ongoing shift of consumer pur-
14 15 16 17 18
chasing preferences to online sources have begun to weigh on retail
* Trailing 12 months through 1Q19 sentiment, with lenders proving more cautious and conservative
Include sales $2.5 million and greater than in prior years of the cycle. Active lenders include local, regional
Sources: CoStar Group, Inc.; Real Capital Analytics and national banks, and insurance companies, with a primary lender
focus on net-leased assets and premier mixed-use structures being
highly desirable. Meanwhile, outlying malls and non-credit tenants
will undergo much more scrutiny. This has created a two-tier market
National Retail Group structure, with loan-to-value (LTV) ratios in the 55 to 75 percent
Scott M. Holmes range depending on borrower, asset and location factors. Mezzanine
Senior Vice President, National Director | National Retail Group and bridge loan structures have been more frequently used in this
Tel: (602) 687-6689 | scott.holmes@ipausa.com
environment, with owners undertaking capital improvements at high-
er leverage ratios on the short-term debt before seeking long-term
Prepared and edited by
Cody Young financing options once their operations have been proved.
Research Associate | Research Services

For information on national retail trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700 | john.chang@ipausa.com

Price: $250

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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 intended 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