M A R K E T O V E R V I E W

RetailResearch
Washington, D.C., Metro Area Tird Quarter 2014
Private Sector Gains Momentum; Retailer Demand Rises
Private sector hiring is supporting confdence in the economy, lifting spending and encouraging retailers to expand
throughout the Washington, D.C., market. Despite federal cutbacks, the private sector has stepped up and is fueling job
creation. Te leisure and hospitality sector added over 9,000 positions in the last year, followed closely by education and
health services employers. Improving indicators are encouraging all types of developers to increase the pace of production.
A wave of new ofce deliveries and more than 20,000 apartments will be completed this year, and increased foot trafc will
beneft restaurants, bars and storefront retailers near these new developments. Additionally, retail space demand is rising,
particularly among grocers, fast and casual dining establishments, and apparel and discount stores. Expanding retailers will
push net absorption past 2.5 million square feet for a second year, putting further downward pressure on vacancy. Strong
demand will outpace an uptick in completions, which are heavily pre-leased and should not have a signifcant impact on
vacancy. As available space becomes more limited, operators will be motivated to modestly boost asking rents.
Heightened interest in the Washington, D.C., retail market is pushing up prices to new highs. Optimistic economic
outlooks and low interest rates are driving 1031-exchange activity and encouraging private investors and developers to bid
aggressively. Buyers outnumber listings, with many properties trading before coming to market. Quality inventory inside the
Beltway receives the strongest interest and is challenging to fnd. Here, net-lease assets with national-credit tenants can begin
trading in the low-5 percent range, while similar properties located outside the core trade up to 200 basis points higher. On
the multi-tenant side, institutions continue to target anchored shopping centers along major thoroughfares, which can com-
mand a 5 percent cap rate. In coming months, current owners who are on the fence will consider divesting ahead of rising
interest rates and while buyer competition remains high, lifting for-sale inventory.
2014 Annual Retail Forecast
1.0%
increase in
total
employment
2 million
square feet
will be
completed
40 basis
point
decrease in
vacancy
2.5%
increase in
asking
rents
Employment: Te private sector will fuel employment growth this year. Employers will create
32,000 jobs in 2014, expanding payrolls 1 percent. Steady hiring will keep the unemployment
rate below 5 percent. Last year, 22,600 positions were added.
Construction: After completing 1.9 million square feet of retail space last year, developers will
fnish 2.0 million square feet in 2014. Suburban Maryland will receive a large share of new
inventory with the delivery of several projects measuring more than 50,000 square feet. Retail
stock in the market will rise 0.9 percent, the largest expansion of inventory since 2010.
Vacancy: Heavily pre-leased retail additions and steady demand for space will pull down me-
trowide vacancy. Tis year, average vacancy will contract 40 basis points on net absorption of
2.8 million square feet to 4.5 percent. In 2013, vacancy also fell 40 basis points.
Rents: As rising tenant demand lowers vacancy, operators will be encouraged to lift asking
rents. Average rents will rise 2.5 percent to $25.12 per square foot in 2014, building on the 4.3
percent climb recorded one year earlier.
Employment Trends
Metro United States
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14* 13 12 11 10
Vacancy Rate Trends
Metro United States
V
a
c
a
n
c
y

R
a
t
e
2%
4%
6%
8%
10%
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Asking Rent Trends
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Multi-Tenant Sales Trends
$200
$245
$290
$335
$380
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14* 13 12 11 10
Single-Tenant Sales Trends Retail Completions
Metro United States
Employment Trends
Metro United States
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Vacancy Rate Trends
Metro United States
V
a
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R
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4%
6%
8%
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14* 13 12 11 10
Asking Rent Trends
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Multi-Tenant Sales Trends
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Single-Tenant Sales Trends Retail Completions
Metro United States
Employment Trends
Metro United States
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Vacancy Rate Trends
Metro United States
V
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R
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2%
4%
6%
8%
10%
14* 13 12 11 10
Asking Rent Trends
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Multi-Tenant Sales Trends
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14* 13 12 11 10
Single-Tenant Sales Trends Retail Completions
Metro United States
Economy
Employment in the metro expanded 0.6 percent over the past 12 months end-
ing in the second quarter, with the addition of 18,700 positions. Of the total,
11,000 workers were hired in the month of June alone. During the same pe-
riod one year earlier, 33,400 jobs were created.
Te private sector led gains during the past year, buoyed by increases in the
leisure and hospitality, education and health services, and trade, transportation
and utilities segments. However, signifcant cuts in the government resulted in
somewhat restrained retail spending. Retail sales ticked up 2.6 percent annu-
ally in June, trailing the U.S. average.
Two casinos, MGM National Harbor in Prince Georges County and Horse-
shoe in Baltimore, are scheduled to open by 2016 and will support job growth
in the region. MGM has plans to hire 4,000 employees, and half will be from
Prince Georges County. Additionally, Horseshoe Casino has already flled
1,900 of its 2,200 open positions.
Outlook: Metro employers will generate 32,000 jobs this year, marking a 1
percent annual increase.
Construction
Builders brought online 1.4 million square feet of retail space over the last four
quarters, lifting inventory 0.7 percent. Over the same span one year ago, 1.3
million square feet was delivered.
Te largest project completed over the last year was the frst phase of develop-
ment at Towne Centre at Laurel, which spans 80,000 square feet. Burlington
Coat Factory moved into a 70,000-square foot space. Te second phase is due
this fall with a tenant lineup that includes B.J.s Restaurant, Outback Steak-
house and Panera Bread.
Approximately 1.3 million square feet is under construction in the metro.
Smaller strip centers account for the majority of new inventory with only a
few larger developments, measuring more than 100,000 square feet, underway.
Additionally, 13 million square feet is planned. Nearly a quarter of the total
planned space has delivery dates scheduled through 2017.
Outlook: Tis year, developers will fnish 2 million square feet, expanding
retail stock 0.9 percent.
Vacancy
Metrowide vacancy was 4.8 percent in the second quarter, a year-over-year
decrease of 70 basis points. In the preceding 12-month period, vacancy inched
up 20 basis points.
Over the last 12 months, vacancy in the District and Suburban Virginia fell 70
basis points to 4.3 percent and 4.5 percent, respectively. Suburban Maryland
recorded a 60-basis point vacancy reduction to 5.3 percent.
Multi-tenant vacancy reduced 80 basis points over the last year to 5.5 percent,
the lowest rate since 2008. Last year, vacancy moved up 40 basis points.
Outlook: Strong demand and heavily pre-leased construction will pull down
vacancy 40 basis points to 4.5 percent.
page 2 Marcus & Millichap u Retail Research Report
*Forecast
Source: CoStar Group, Inc.
Employment Trends
Metro United States
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Vacancy Rate Trends
Metro United States
V
a
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R
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2%
4%
6%
8%
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14* 13 12 11 10
Asking Rent Trends
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Single-Tenant Sales Trends Retail Completions
Metro United States
Employment Trends
Metro United States
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Vacancy Rate Trends
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Single-Tenant Sales Trends Retail Completions
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Employment Trends
Metro United States
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Vacancy Rate Trends
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Single-Tenant Sales Trends Retail Completions
Metro United States
Rents
Asking rents climbed 3.7 percent over the last 12 months to $24.72 per square
foot at midyear, up from the 1.6 percent growth one year earlier. Despite the
increases, rents are 10.3 percent below the pre-recession high.
Suburban Virginia recorded the highest year-over-year rent growth in the mar-
ket, climbing 4.8 percent to $25.10 per square foot. Asking rents in the Dis-
trict and Suburban Maryland advanced 1.7 and 2.6 percent to $43.70 and
$20.99 per square foot, respectively.
Single-tenant rents in the Washington, D.C., metro surged 6.5 percent an-
nually to $26.32 per square foot, following a 1.5 percent rise last year. In the
multi-tenant segment, rents edged up 0.3 percent to $22.90 per square foot.
Outlook: Tightening conditions will motivate operators to lift asking rents for
a second consecutive year. Average rents will reach $25.12 per square foot in
2014, a 2.5 percent rise.
Single-Tenant Sales Trends**
Over the past 12 months, sales activity remained at the same level as last years
heightened activity. Investors targeted casual-dining and fast-food assets with
strong tenants.
Te average price for assets located in the District during the past year was
$650 per square foot. Properties in Suburban Virginia and Suburban Mary-
land sold at an average price of $520 and $435 per square foot, respectively.
Overall, average cap rates for properties sold in the last year were in the mid- to
high-6 percent range. Cap rates vary signifcantly depending on property loca-
tions and tenant quality.
Outlook: Investors are scouring the market for well-located properties with
credit tenants that provide stable cash fows. Tese listings are a challenge to
fnd and typically receive bids at list price. National fast-food tenants, such as
McDonalds or Chick-fl-A, command cap rates in the low-4 percent range.
Multi-Tenant Sales Trends**
Transaction velocity for multi-tenant assets jumped 40 percent over the past
year as more investors entered the market. During the period, deal fow in-
creased the most for properties located in Suburban Virginia.
Limited inventory and strong demand resulted in aggressive bidding, pushing
up values over the last 12 months. Properties traded at an average price of $360
per square foot, up 44 percent from the low in 2010.
On average, frst-year returns for anchored centers are in the low-5 to low-6
percent range, while unanchored assets can trade up to 300 basis points higher,
depending on tenant quality, lease term and location.
Outlook: Institutions will continue to search for Class A assets and widen
their preferences to stabilized Class B shopping centers in the District and in
afuent suburban neighborhoods in Arlington and Fairfax.
Marcus & Millichap u Retail Research Report page 3
* Forecast
** Trailing 12-month period
Sources: CoStar Group, Inc., Real Capital Analytics
Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation
According to the minutes of the most recent FOMC meeting, the Fed will
cease asset purchases associated with the third round of quantitative easing in
October this year. Te tapering was announced in late 2013 and commenced
in January. Healthy economic indicators encouraged the Fed to pare $10 bil-
lion in asset purchases during each meeting thus far in 2014. Employment
reached pre-recession levels in the second quarter and the unemployment rate
has fallen into the low-6 percent range.
While the latest round of quantitative easing comes to a close, little impact on
interest rates is anticipated until 2015. Investors long ago reacted to the taper
and any potential increase in Treasurys has been baked into current prices.
Recently, the 10-year Treasury dipped below the 2.5 percent threshold as for-
eign and local investors sought a safe haven for capital because of international
conficts. Te rate is anticipated to stay in the current range until early 2015,
when the Fed lifts targets on the discount and funds rates.
In the single-tenant arena, nearly all lenders are active for properties occupied
by national credit tenants. Many national banks have been aggressive in specif-
ic areas, which has pushed national LTVs between 65 and 80 percent. Interest
rates for single-tenant, net-leased properties range from the mid-3 percent to
the high-4 percent areas, depending upon tenant creditworthiness and length
of lease.
Underwriting is loosening in the multi-tenant arena as strong evidence of health-
ier property fundamentals emerges and lenders awash with capital seek to provide
loans. CMBS is a growing presence in the $10 million-plus asset class, joining
life companies as the primary loan issuers for larger deals. Interest rates for these
transactions are in the mid- to high-4 percent area for 10-year terms. Below $10
million, national and regional banks ofer loans in the low-4 to high-4 percent
range on fve- to seven-year terms.
Local Highlights
Developers are planning a $250 million mixed-use project named Stadium
Square in Sharp-Leadenhall near M&T Bank Stadium. Te development will
add 300,000 square feet of ofce space, up to 70,000 square feet of retail and
several hundred apartments. Stadium Square is expected to generate 1,000
construction jobs and 1,200 permanent jobs upon completion.
Whole Foods is increasing its local footprint. Te grocer signed the largest
lease this year, 132,000 square feet in Riverdale Park Station in Maryland. In
August, the company opened a 50,000-square foot store in Columbia, Mary-
land. Additionally, Whole Foods committed to 40,000 square feet in Loudoun
County, Virginia, which is slated to open in 2015.
Economic and residential growth are attracting fast-food and casual restau-
rants to the market. CaliBurger is opening its U.S. headquarters in Washing-
ton, D.C., and is expected to open 10 stores in Maryland. Meanwhile, Steak n
Shake is opening its frst Maryland location in the fall with plans for a total of
10 stores in the state.
Te information contained in this report was obtained from sources deemed to be reliable. Every efort 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 using seasonally adjusted quarterly averages. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted.
Triple-net rents are used. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Real Capital Analytics, TWR/Dodge Pipeline, U.S. Census Bureau.
COLOR LINE VERSION
BLACK TEXT VERSION
WHITE TEXT VERSION
Visit www.NationalRetailGroup.com or call:
Bill Rose
Vice President, National Director
National Retail Group
Tel: (858) 373-3100
bill.rose@marcusmillichap.com
Prepared and edited by
Jessica Glick
Research Associate
Research Services
For information on national
retail trends, contact
John Chang
First Vice President, Research Services
Tel: (602) 687-6700
john.chang@marcusmillichap.com
Washington, D.C., Ofce:
Bryn Merrey
Vice President, Regional Manager
bryn.merrey@marcusmillichap.com
7200 Wisconsin Avenue
Suite 1101
Bethesda, Maryland 20814
Tel: (202) 536-3700
Fax: (202) 536-3710
Price: $150
Marcus & Millichap 2014
www.MarcusMillichap.com
BLACK TEXT VERSION
WHITE TEXT VERSION