SECOND QUARTER 2016 WASHINGTON, DC METRO RETAIL OUTLOOK

Transcription

1 SECOND QUARTER 2016 WASHINGTON, DC METRO RETAIL OUTLOOK 1

2 WASHINGTON AREA ECONOMY SNAPSHOT JOB GROWTH UNEMPLOYMENT RATE new jobs during 12 months at May 2016, down from 60,400 ending May % 4.5% at May 2015 INSIDE THIS ISSUE Economy & Outlook...3 Retail Market Conditions...5 AVERAGE HOUSEHOLD INCOME $121,439 in 2016, 57.7% higher than the US average PROJECTED JOB GROWTH AN AVERAGE OF 43,600 per year in Grocery Competition Heats Up...7 Second Quarter Spotlight on Lease Characteristics...8 Investment Sales...10 The Bottom Line...11 WASHINGTON AREA RETAIL MARKET SNAPSHOT About Delta Associates ,600 retail jobs were added during the 12 months ending May 2016 on a net basis. Neighborhood and community shopping center effective rents rose by 2.8% in Northern Virginia since 2nd quarter 2015, to $26.16/SF. In Suburban Maryland, effective rents in the same types of centers rose by 1.2%, to $23.32/SF. Vacancy rates for neighborhood and community shopping centers in Northern Virginia and Suburban Maryland are 5.1% and 8.0%, respectively, down 60 basis points since 2nd quarter 2015 in Northern Virginia and down 30 basis points in Suburban Maryland. 2

3 ECONOMY & OUTLOOK The Washington area economy maintained its strong positive momentum in the 2nd quarter of During the 12 months ending May 2016, the region added 60,400 new jobs. The rate of job growth of the metro area has finally surpassed that of the entire nation, after trailing for years. The Professional/Business Services sector continued to be the largest source of new jobs in the Washington metro area in the 2nd quarter, followed by the Leisure/Hospitality, Retail Trade, Government, and Construction/Mining sectors. Only Information one of the region s smaller employment sectors had net job losses over the 12-month period. The unemployment rate in the Washington metro area has continued to decrease so far in 2016 and stood at 3.6% as of May This is a 90 basis point decline from the metro area s unemployment rate at May The region s unemployment rate is the now third lowest among its peer metropolitan areas, trailing only Denver and Dallas-Fort Worth, and is well below the national average of 4.7%. The Washington metro area remains well positioned for economic growth in the period ahead. This growth will continue to be driven by the private sector, as Federal employment and procurement have both been stagnant over the past several years. By 2020, we expect that the Federal government s contribution to Washington s Gross Regional Product will decrease to approximately 27%, down from the current level of 37%. Retail sector employment growth in the Washington metro area was very strong during the 12 months ending May 2016, with a net gain of 10,600 jobs during the period. This was a 3.8% increase since May 2015, while retail employment grew 2.0% nationally over the same period. PAYROLL JOB GROWTH Selected Large Metro Areas 12 Months Ending May 2016 THOUSANDS OF NEW PAYROLL JOBS LA Basin NY DFW SF Bay Atl South FL Source: Bureau of Labor Statistics, Delta Associates; July RETAIL PAYROLL JOBS WASHINGTON METRO AREA 60.4 Chi Was Phx Phil Den Bos YEAR RETAIL EMPLOYMENT CHANGE ,500 1, ,200 1, ,500 (3,700) ,200 (16,300) TOP SECTORS for job growth ,500 4, ,800 4, ,000 3,200 Professional & Business Services Leisure & Hospitality Retail Trade Government Mining & Construction ,700 1, ,200 5, ,500 6, ,100 10,600 *Employment total at March of each year; change reflects the 12 month period ending each March. Source: Bureau of Labor Statistics, Delta Associates; July

4 AVERAGE HOUSEHOLD INCOME Washington Metro Area $80,600 U.S. $56,600 Washington Metro Area $121,439 U.S. $77,008 Washington Metro Area $131,168 U.S. $84, (Actual) 2016 (Actual) 2021 (Projected) Average household income in the Washington metro area grew by 51% from 2000 to 2016, compared to just 36% nationally, and it currently exceeds the national average by 58%. By 2021, the Washington metro area s average household income is projected to rise another 8%, compared to an increase of 9% nationally. The elevated household incomes in the Washington area yield greater discretionary spending and support demand for retail goods and space. The Washington metro economy remains well-positioned for growth in the period ahead. For years the region s economic recovery was held back by sequestration, shutdowns, and other harmful effects of federal budget instability. During this period, the region lost significant ground to its peer metro areas. Now that the Federal government has put budget-related turbulence to rest at least for the time being economic growth in the region has gained real traction. Job growth, in particular has been strong, especially in high-paying sectors. We predict that 59,800 new jobs will be created in the region in 2016, with the pace of annual job growth slowly declining in subsequent years. Overall, we expect annual job growth in the metro area to be 43,600 over the next five years. The Bloomberg/University of Michigan index of consumer sentiment in the U.S. registered at 93.5 in June While this reading is down from 96.1 in June 2015, it is the second highest level (after May 2016) in the previous 12 months and is well above the long-term average. International instability as well as the upcoming presidential election creating uncertainty and pessimistic rhetoric across the ideological spectrum have likely dampened consumer confidence despite continued domestic job growth and cheap fuel prices. PAYROLL JOB GROWTH Washington Metro Area THOUSANDS OF NEW PAYROLL JOBS (ANNUAL AVERAGE) Year Annual Average = 41,700/Year Source: Bureau of Labor Statistics, George Mason University Center for Regional Analysis, Delta Associates; July CONSUMER SENTIMENT United States - Quarterly INDEX Source: University of Michigan, Delta Associates; July Year Average = Year Projected Average = 43,600/Year Source: ESRI, Delta Associates; July

5 RETAIL MARKET CONDITIONS WASHINGTON, DC METRO RETAIL OUTLOOK Q The inventory of existing neighborhood and community shopping centers totals 73.9 million SF in the Washington metro area s suburbs as of 2nd quarter Northern Virginia has 40.3 million SF of space in these centers, and Suburban Maryland has 33.6 million SF. Northern Virginia leads the way at 13.9 SF per capita in its neighborhood and community centers, while Suburban Maryland has 13.7 SF per capita. For the Washington metro area as a whole, the average is 13.8 SF per capita of neighborhood/community shopping center space. There is more than 780,000 SF of shopping center space under construction across all shopping center types in Suburban Maryland and more than 460,000 SF under construction in Northern Virginia. Maryland also has 2.1 million SF of planned shopping center space defined as space in centers where plans are drafted, permits and financing have been applied for, and ground breaking is all that remains to take place. This trails Northern Virginia, which has 2.8 million SF of planned space. Suburban Maryland and Northern Virginia have 6.7 and 5.0 million SF, respectively, of proposed space for which no permits or financing have been applied. NEIGHBORHOOD/COMMUNITY CENTER SPACE PER CAPITA Washington Metro Area Suburbs 2nd Quarter 2016 NEIGHBORHOOD/COMMUNITY CENTER SF/CAPITA Northern Virginia Metro Average: Suburban Maryland RETAIL PIPELINE Washington Metro Area Suburbs All Shopping Center Types 2nd Quarter 2016 MILLIONS OF SQUARE FEET Northern Virginia Under Construction Planned Proposed Suburban Maryland Vacancy rates for Northern Virginia and Suburban Maryland at 2nd quarter 2016 are 5.1% and 8.0%, respectively, down 60 basis points in Northern Virginia and down 30 basis points in Suburban Maryland since the 2nd quarter of While vacancy rates in neighborhood and community centers remain elevated relative to their pre-recession averages across the metro area, they have been declining slowly since Despite the slow pace of vacancy improvement, the Washington metro area is one of the strongest performers nationally, as both Northern Virginia and Suburban Maryland are well below the national average of 10.0% vacancy, with Northern Virginia, in particular, rating as one of the strongest retail markets. Neighborhood/community center vacancy rates were 34% higher in Suburban Maryland than in Northern Virginia at their respective cyclical lows in 2007, and the difference between the two substate areas has become more pronounced as Northern Virginia continues to recover more quickly. As of 2nd quarter 2016, vacancy rates are 57% higher in Suburban Maryland than those in Northern Virginia. VACANCY RATES Washington Metro Area Suburbs Neighborhood/Community Centers SHOPPING CENTER VACANCY RATE 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Northern Virginia * Suburban Maryland *As of 2 nd Quarter NEIGHBORHOOD/COMMUNITY CENTER VACANCY Select Metro Areas 2nd Quarter 2016 Overall Vacancy Rate 16% 14% 12% 10% 8% 6% 4% 2% 0% 3.2% National Rate = 10.0% 5.1% 6.4% 6.5% 8.0% 10.2% 10.7% 11.0% 11.4% 11.8% 11.8% SF N. VA LA Bos Sub MD Phx Den Hou DFW Chi Atl Note: The rent and vacancy data referenced above are unchanged from the 1st quarter Retail Outlook due to timing and data source limitations. *Data are unchanged from 1 st quarter publication 5

6 Effective rents in neighborhood and community shopping centers have been climbing slowly since 2010, with effective rents rising 2.8% in Northern Virginia and 1.2% in Suburban Maryland during the 12 months ending June Average effective rents at 2nd quarter 2016 are highest in Northern Virginia, at $26.16 per SF. In Suburban Maryland, average effective rents are $23.32 per SF. VACANCY RATES & ASKING RENTS NEIGHBORHOOD/COMMUNITY SHOPPING CENTERS WASHINGTON METRO AREA VACANCY RATES WASHINGTON METRO TOTAL 6.5% VACANCY RATE 12.8% 7.8% 7.0% 6.3% 5.8% 5.8% South Prince George County Frederick County Gaithersburg/Rockville/Germantown North Prince George County Prince William County Arlington/Alexandria EFFECTIVE RENTS Washington Metro Area Suburbs Neighborhood/Community Centers 5.6% 4.6% Loudoun County Bethesda/Silver Spring $30 Northern Virginia Suburban Maryland 4.6% Suburban Fairfax County EFFECTIVE RENT PER SF $28 $26 $24 $22 $20 $18 $ * ASKING RENTS WASHINGTON METRO TOTAL $22.39 ASKING RENT 4.1% $30.74 $26.86 $26.75 $25.91 Southeast Fairfax County Arlington/Alexandria Gaithersburg/Rockville/Germantown Bethesda/Silver Spring Suburban Fairfax County *As of 2 nd Quarter $24.88 Southeast Fairfax County $21.78 Loudoun County $17.49 North Prince George County $16.75 South Prince George County $16.62 Prince William County $15.82 Frederick County Note: The rent and vacancy data referenced above are unchanged from the 1st quarter Retail Outlook due to timing and data source limitations. 6

7 GROCERY COMPETITION HEATS UP Publix is poised to enter the Washington area market and is working with several local brokers to find suitable spaces for their first stores in the region, beginning with Northern Virginia. In addition, the popular Florida-based grocer has purchased 12 existing stores in the Richmond area. CEO Todd Jones aggressive growth plan for the Commonwealth of Virginia seems to be fully underway after the grocer s first expansion into a new state in four years. WASHINGTON, DC METRO RETAIL OUTLOOK Q NEW DEVELOPMENT There are four notable groceryanchored shopping centers, totaling 518,000 SF, under construction in the metro area at July 2016, and many more are in the planning stages. Target has signed a lease for a 35,000 SF small format store at the Shops of Wisconsin in Bethesda. The store, which will include a grocery and pharmacy section, is planned to open in March 2017 once renovations to the shopping center are completed. Weis Markets is expanding its presence in the metro area by purchasing 17 Food Lion stores across the region as part of a larger purchase of 38 Food Lion locations throughout Maryland, Virginia, and Delaware. Acquired stores include locations in Gaithersburg, Mitchellville, Upper Marlboro, Accokeek, La Plata, Stafford, and Fredericksburg. Lidl has purchased four Northern Virginia sites in recent months, setting its sights on Leesburg, Dumfries, Woodbridge, and Bristow as it prepares for its entrance into the U.S. market. While the value-focused German grocer has been highly secretive about its expansion plans, the Washington metro area figures to play an important part in the strategy given that Lidl decided to locate its US corporate headquarters in Arlington. Lidl has already applied to open stores in both College Park and Bowie as well. NOTABLE GROCERY-ANCHORED SHOPPING CENTERS UNDER CONSTRUCTION WASHINGTON METRO AREA JULY 2016 SHOPPING CENTER JURISDICTION RBA (SF) ANCHOR Commonwealth Centre Regency Fairfax 173,000 Wegmans Aquia Town Center Stafford 160,000 Harris Teeter Bowie Marketplace Bowie 110,000 Harris Teeter Apollo H Street District 75,000 Whole Foods Total 518,000 Source: WBJ, Washington Post, Delta Associates; July There are additional groceryanchored shopping centers in the planning stages that are not included in the adjacent table, some of which may deliver by However, given the long-term demand for retail goods in the Washington metro area, projects will deliver before and after that window. On July 27, Harris Teeter celebrated the grand opening of its new 60,000 SF store in the mixed-use development at 301 West Broad in Falls Church, which includes another 3,470 SF of complementary retail space and 282 residential units. The store will be open 24 hours a day. On July 21, Aldi held a ribbon cutting ceremony for the opening of its new location at 425 East Monroe Avenue in Alexandria. This is the German grocer s second store in Alexandria, with a third slated to open at 4850 Duke Street before the end of the year. 7

8 WASHINGTON, DC METRO RETAIL OUTLOOK Q SECOND QUARTER SPOTLIGHT LEASE CHARACTERISTICS This section explores facts and trends related to the average length of lease terms, tenant improvement allowances, and free rent periods in shopping centers across the Washington metro area. All of the following data apply to neighborhood and community centers. The average lease term for neighborhood and community centers inclusive of both anchor and nonanchor space and weighted by total submarket rentable building area AVERAGE LEASE T ERM Washington Metro Area Neighborhood/Community Centers 14.0 is slightly longer in Northern Virginia than in Suburban nd quarter 2015, when they averaged 8.7 years and 8.1 years, respectively. YEARS years, whereas in Suburban Maryland they average 7.6 both Northern Virginia and Suburban Maryland since Nonanchor 12.0 Maryland. Lease terms in Northern Virginia average 8.1 years. Average lease terms have shortened slightly in Anchor The average lease term for anchor space is longest in Northern Virginia, where tenants agree to an average 11.2 year lease, down from 11.9 years at 2nd quarter In Suburban Maryland, anchor tenants agree to 0.0 Gthsbg./ Rkvle./ Germ. SE Fairfax Sub. Fairfax Arl./Alex. PW N. PG Frederick Beth./ Silver Spring S. PG Loudoun *As of 2nd Quarter 2016 an average 10.9 year lease, down from 11.4 years at 2nd quarter Leases for nonanchor space are longest in Northern Virginia, at an average of 5.0 years. Conditions for nonanchor space favor tenants a bit more in Suburban Maryland, where the average length of nonanchor leases is just 4.3 years. Nonanchor leases averaged 5.5 and 4.9 years in Northern Virginia and Suburban Maryland, respectively, at 2nd quarter Anchor leases most favor owners in the GaithersburgRockville-Germantown submarket, where tenants are agreeing to an average of a 12.0-year lease. Loudoun County currently has the shortest average lease term for anchor space, at 9.8 years. DE LTA ASSOCIATES 8

9 SECOND QUARTER SPOTLIGHT Average tenant improvement allowances at 2nd quarter 2016 are lowest in Northern Virginia, at an average of $15.40/SF (up 7.0% since 2nd quarter 2015). In Suburban Maryland, average TIs are $18.05/SF (up 8.7% since 2nd quarter 2015). Among submarkets across the region, Bethesda/Silver Spring has by far the highest average tenant improvement allowances, at $33.75/SF and $32.24/SF for anchor and nonanchor space, respectively. Average TIs are lowest in the Prince William County submarket, at $12.57/SF and $12.19/SF for anchor and nonanchor space, respectively. Free rent periods at 2nd quarter 2016 average 5.0 months in Northern Virginia (down 3.8% from 2nd quarter 2015) and 3.9 months in Suburban Maryland (down 4.9% since 2nd quarter 2015). Conditions favor tenants most in the Arlington/Alexandria submarket, where tenants receive an average of 6.4 and 6.2 months of free rent for anchor and nonanchor space, respectively. Conditions most favor landlords in the Gaithersburg/Rockville/Germantown submarket, where free rent averages 4.2 months for anchor space, and 1.9 months for nonanchor space. For the third consecutive year, the Southeast Fairfax County submarket is performing best out of the 10 submarkets in the adjacent charts in terms of landlord favorability. Southeast Fairfax County ranks 2nd among all submarkets in terms of landlord favorability for average free rent, lease terms, and tenant improvements. This submarket has benefitted from the influx of consumers to the Fort Belvoir area following the Department of Defense s recent Base Realignment and Closure (BRAC) initiative. The Arlington/Alexandria submarket has the most favorable conditions for tenants. Its rankings among the 10 submarkets in terms of landlord favorability for average lease length, tenant improvement allowances, and free rent are 8th, 9th, and 10th, respectively. WASHINGTON, DC METRO RETAIL OUTLOOK Q AVERAGE TENANT IMPROVEMENT ALLOWANCE Washington Metro Area Neighborhood/Community Centers $/SF AVERAGE FREE RENT PERIOD Washington Metro Area Neighborhood/Community Centers MONTHS $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $ Beth./ Silver Spring Sub. Fairfax Arl./Alex. N. PG PW S. PG Gthsbg./ Rkvle./ Germ. Anchor Arl./Alex. Frederick S. PG Gthsbg./ Rkvle./ Germ. Anchor Nonanchor Sub. Fairfax Loudoun N. PG PW SE Fairfax Nonanchor Beth./ Silver Spring *As of 2nd Quarter 2016 Frederick SE Fairfax Loudoun *As of 2nd Quarter

10 INVESTMENT SALES There was one notable investment sale of a grocery-anchored shopping center during the 2nd quarter of In April, Crow Holdings purchased the New Grand Mart-anchored New Grand Shopping Center in Alexandria for $25.5 million ($390/SF) from Grand Shopping Center LLC. Several other full and partial interests in groceryanchored shopping centers were sold as parts of larger portfolio transactions during the 2nd quarter. The yearto-date dollar volume of investment sales of grocery-anchored shopping centers through the 2nd quarter of 2016 totaled $445.9 million ($281/SF). All signs point to retail centers continuing to be a favored investment in While investor returns (income and appreciation) on retail properties fell in the 12 months ending March 2016, the Washington metro continues to outpace the nationwide average. In addition, retail properties had the highest investment returns of any property type in the Washington metro area over the past 12 months. TOTAL RETAIL INVESTOR RETURN Washington Metro vs. U.S TOTAL RETURN (INCOME + APPRECIATION) U.S. Washington Metro 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 Source: NCREIF, Delta Associates, July While investor returns (income and appreciation) on retail properties fell in the 12 months ending March 2016, the Washington metro continues to outpace the nationwide average. GROCERY- ANCHORED SHOPPING CENTER INVESTMENT SALES Washington Metro Area Suburbs SALES IN MILLIONS $600 $500 $400 $300 $200 $100 Northern Virginia Note: Excludes properties under contract. Source: Real Capital Analytics, graphic by Delta Associates; July Suburban Maryland $0 2005* ** Total: $796 M $401 M $429 M $85 M $79 M $178 M $454 M $476 M $644 M $323 M $710 M $446 M *Includes large portfolio sale by CalPERS. **As of 2nd Quarter TOTAL INVESTOR RETURN, SELECTED PROPETY TYPES Washington Metro vs. U.S. 12 Months Ending March 2016 TOTAL RETURN (INCOME + APPRECIATION) 16% 14% 12% 10% 8% 6% 4% 2% 0% U.S. Source: NCREIF, Delta Associates, July Apartment Industrial Office Retail Washington Metro 10

11 THE BOTTOM LINE The Washington metro area has added more than 50,000 jobs on a year-over-year basis for fourteen consecutive months and more than 60,000 jobs for the last eight months. Unemployment remains low for a major metropolitan area and 110 basis points below the national rate of 4.7% as of May Additionally, the Washington metro area has been steadily adding a healthy number of jobs in the Professional/Business Services sector, where wages tend to be highest, a trend that is likely to increase demand for retail goods. 10,600 retail jobs were created on a net basis during the 12 months ending in May, and retail employment is projected to continue to grow in the region. We expect job growth in the metro area to remain steady in the range of 30,000 to 60,000 jobs per year for the period The regional economy is performing better at the moment than it has since 2008, and the retail real estate market in the Washington metro area is showing consistent, if modest, improvement. Among neighborhood/community shopping centers, the decline in vacancy rates continues, while rents have been rising steadily since Tenants seeking space are interested in newer, Class A space, and the rise of the District as a destination for living, working, and shopping represents a unique opportunity for retailers in the region. We predict that the trend toward mixeduse projects in core submarkets with a more urban feel will continue for the foreseeable future, although recent plans for new centers and renovations of old ones in the outer suburbs indicate that developers expect lifestyle centers with a sense of place to thrive throughout the region. Prior to 2015, the Washington metro area s economy had yet to experience the sustained surge of above-average job growth that typically follows a recession. Now, in 2016, the region has clearly turned a corner and is in midst of a solid expansion. Washington s private sector is strong and accounts for a growing share of the economy, making the region less vulnerable to future federal spending cuts. Retail real estate in the region avoided disaster during the recession and lackluster recovery, which is remarkable considering the dual pressures of slow job growth and booming online merchandising. Now that the demand side of the retail sales equation has improved, we expect improvements in retail real estate to continue apace. Although the economic outlook for the region remains positive, there is still some uncertainty related to the current election season. Depending on the outcome of the national elections in November, there could be major changes in store for the role and the size of the federal government or not. Still, any major alterations to the government would not take place immediately, so the status quo is likely to persist at least through 2016 and During this period, the private sector will continue to show its strength, and the public sector will at least maintain its position. Overall economic growth in the Washington area over the next two years is therefore expected to be robust. The Washington metro area has a wealth of assets a highly skilled workforce, access to international markets, high quality education, and vast cultural resources that will continue to give it a competitive advantage over other large metro areas in the long run. 11

12 ABOUT Delta Associates is a firm of experienced professionals serving the commercial real estate industry for over 35 years. The firm s main practice areas are: 1. Consulting, research, and advisory services for all property types throughout the United States (including market feasibility studies, highest and best use analysis, market entry strategies, asset performance enhancement studies, market due diligence, white papers on special topics, valuation analysis, and litigation support); and 2. Subscription publications for selected metro areas for the apartment, condominium, office, retail, and housing markets. For more information on Delta Associates, please visit DeltaAssociates.com. CONTACT US 1717 K Street, NW, Suite 1010 Washington, DC Info@DeltaAssociates.com Delta s Washington, DC Metro Retail Outlook team includes: David Parham, Editor and Senior Vice President Dylan Jones, Associate Dylan.Jones@DeltaAssociates.com Sallie Drumheller, Graphic Designer For information about Delta s consulting services, please contact David Weisel, CEO: David.Weisel@DeltaAssociates.com or For information about Delta s subscription publications, please contact Jennifer Glaser, Director of Operations: Jennifer.Glaser@DeltaAssociates.com or 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, Real Capital Analytics, REIS, University of Michigan, Washington Business Journal, Washington Post, NCREIF. 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. 12