DC Tops List of Best Retail Markets

It looks like some major metro areas are seeing favorable conditions. Marcus & Millichap have named Washington, DC, San Diego, and San Francisco as the three best retail markets in the country.

March 8, 2010
By Allison Landa, News Editor

It looks like some major metro areas are seeing favorable conditions. Marcus & Millichap have named Washington, DC, San Diego, and San Francisco as the three best retail markets in the country.

The firm’s 2010 National Retail Report reports Washington as the number-one market, followed sequentially by San Diego and San Francisco. Washington’s low vacancy rate and strong job market were credited as factors in the strong retail performance.

“A healthy balance between demand drivers and supply are common themes in Washington, San Diego, and San Francisco,” Marcus & Millichap senior vice president and managing director of the real estate investment services’ national retail group Bernie Haddigan told CPE. “As a result, of the 44 markets covered in the National Retail Report, these markets are forecast to have the three-lowest vacancy rates in the country by the end of 2010 and rank at the top of the National Retail Index.”

Marcus & Millichap’s 2010 forecast retail vacancy rate for the three cities is as follows: San Diego at 6 percent, San Francisco at 4.3 percent, and Washington at 6.6 percent. The U.S. forecast vacancy rate is 10.4 percent. Haddigan pointed out that all three markets benefit from above-average household incomes that support retail spending, particularly in Washington and San Diego. Tourist dollars are also a boost for these markets.

“Retail fundamentals in San Diego and San Francisco are also supported by impediments to new development, limiting the competition that comes from the construction of new space,” he said.

Washington’s median household income is $85,925, while San Francisco’s is $74,724. San Diego’s is $60,230.

These three top markets, however, have not been immune to the recession, according to Haddigan. From year-end 2007 to year-end 2009, San Diego and Washington recorded respective vacancy increases of 240 basis points and 280 basis points, in line with the nation’s average 280 basis-point increase. However San Francisco’s retail vacancy has tightened 10 basis points since year-end 2007, dropping from 4.2 percent to 4.1 percent, albeit with lower rents and landlord concessions.

“While the rate increases in these two markets were similar to the national average during the recession, the overall vacancy rates were much lower, and retail operating conditions were far tighter in San Diego at 5.7 percent and Washington, D.C. at 6.4 percent than in the U.S. at 9.9 percent,” Haddigan said.

He anticipates strong retail property performance over both the short- and long terms in the three markets, with employment growth expected to outpace the national average this year.

Over the longer-term, many of the healthy supply and demand features of these markets will persist,” he said. “Incomes in all three metro areas will remain elevated. Household and employment growth in Washington, D.C., will continue to advance steadily, while the limited availability and elevated land costs in both San Diego and San Francisco will prevent overbuilding. As such, vacancies should remain low, which will ultimately drive NOI growth.”