Move over Power Centers, Welcome Mixed Use.
As the cost of land continues to skyrocket, developers and planning jurisdictions alike have sought creative ways to obtain the highest and
best use for real estate. For developers, this translates into maximizing land values by
incorporating higher density; often a mix of office, hotel, and residential apartments and condos
needed to accommodate the growing employment sector and the demand for new housing. This
new wave of development comes at a time when planning jurisdictions are eager to find ways to mitigate
traffic and commutes, and provide a vital “main street” social component to the often
faceless suburbs. The apparent solution is mixed use, which in many instances, replicates
an urban node or town center atmosphere that touts a place for people to work, shop, and play.
As developers look to incorporate mixed use throughout the region, look for traditional shopping
center anchors, such as bookstores, movie theatres, and grocery stores, to headline the mixed use
tenant roster. Harris Teeter, the North Carolina based grocer with 6 existing stores in the
DC Metro area, looks to continue its torrid expansion in the Northern Virginia market, many in
mixed use centers. The upscale grocer is slated to open dozens of new stores by the end of
the decade and has faced little resistance from grocery behemoths Safeway and Giant Food, as Harris
Teeter looks to expand their market share.
Another upscale grocer, Austin, Texas based Whole Foods looks to expand their success in the region
with the addition of stores in Alexandria, VA and Fairfax, VA which are expected to open during
the first quarter 2006. In addition to entry into new markets, Whole Foods plans to relocate
and expand their existing Annapolis, MD and Rockville, MD stores into mixed use projects and possibly
open a fourth store in the District in the highly anticipated DC USA project, a multi-story retail
project in Columbia Heights.
One company that both Harris Teeter and Whole Foods will watch closely is Wegman’s. The
Rochester, New York based company with more than 60 stores hired KLNB to assist in their real estate
selections and made their market entry in the first quarter of 2004 in Sterling, VA and has created
quite a buzz with their extensive selection of prepared foods and their simulated European market
place. The 140,000 square foot grocer added additional stores in the region in Hunt Valley,
MD and Fairfax, VA and will continue their expansion in The Mills Corporation’s mixed use
project “Potomac Town Center” in Woodbridge, VA and the KLNB leased “Village
at Leesburg,” a mixed use project in Loudoun County, VA which will incorporate office and
residential components in addition to 400,000 sf of retail. Additional retail users are slated
to include Barnes & Noble, Bed Bath & Beyond, upscale fashion tenants Talbots, Ann Taylor
Loft, White House Black Market and a host of fast casual and full service dining options.
The days of the Power Center might be numbered with 30+ acre retail sites limited to the far stretches
of the region in areas such as Stafford, VA where The Silver Companies is planning a 600,000 sf
center, Culpeper, VA where Regency Centers is planning a 350,000 square foot Target anchored shopping
center, and Winchester, VA where Circuit City, Michaels, Borders, Ross and Linens N Things opened
in “Winchester Station.” The new wave of mixed use projects finds retailers getting
creative with developers and utilizing decked parking and multi-level formats. Minneapolis,
MN based Target has sought to increase its dominant presence in the market and has committed to
anchor highly anticipated mixed use projects such as Greenberg Commercial’s “Annapolis
Towne Center” in Anne Arundel County, MD, The Peterson Companies “Moorefield Station” in
Loudoun County, VA, and Grid Properties, “DC USA”. In each development, the department
store will rely on decked parking to accommodate consumers.
While the fate of mixed use centers will be determined in the future, the merger of Sears/Kmart
and the acquisition of the May Company by Federated Department Stores will likely play a major
role in more traditional forms of retail. Kmart’s purchase of Sears in 2005 has created
the Sears Holding Group. Landlords across the region anxiously wait to see which stores will
be converted to the new Sears Essentials format and which stores will close their doors, providing
an opportunity to redevelop the aging boxes. Look for Target or Wal-Mart to backfill some
of these locations.
On the department store end, mall landlords are eager to determine the outcome of the May/Federated
merger. Macy’s has announced it will replace the regional Hecht’s flag, but landlords
await to hear the fait of existing Hecht’s boxes in malls that have existing Macy’s
locations. Insiders speculate that the impending overlap will provide redevelopment opportunities. Some
mall developers such as Australia based Westfield are anticipating the recapture of Hecht’s
real estate, which is the case in the Wheaton Mall where Westfield is courting a home improvement
user and a warehouse club in a redevelopment effort to fill Hecht’s void.
With ground-up development and redevelopment across the region providing opportunities for traditional
shopping center anchors to vie for market share, fierce competition amongst a host of small tenants,
primarily banks and restaurants in the fast casual sector, have driven market rents to an all time
high. As housing growth continues to boom in the region, with Northern VA leading the way,
and interest rates at record lows, banks have evolved as the most aggressive rent payers in the
market. In highly sought after markets such as Columbia, MD and Rockville, MD, ground rents
have surpassed $400,000 annually. Leading the charge is Chevy Chase Bank, Commerce Bank,
and KLNB represented Wachovia.
As the trend of dual income families persists, which translates into more time in the office and
less time in the kitchen, fast casuals continue to evolve as the darling of the food industry. The
results are a slew of restaurants that look to gain market share in a region where vacancy for
small stores is less than 5%. Perhaps the best illustration of the competition is evident
in the Mexican food category with six chains vying for market share. Look for Chipotle and
KLNB represented Qdoba to be around for the long haul.
Other fast casuals leading the expansion wave include Pei Wei and KLNB represented Cosi . Pei
Wei, which borrows much of the Asian fusion menu from parent company PF Changs, opened its first
store in the region in Baltimore. The Scottsdale, AZ based company looks to take an early
lead in the fast casual Asian sector with additional units being added in Columbia, MD and Fairfax,
VA during 2006, but expect them to go head to head with Milwaukee, WI based Chin’s Asia Fresh
which has hired KLNB to assist in their expansion. In the sandwich and salad category, look
for Cosi to add between 6-10 units to their upscale chain during the coming 12 months.
As we push toward the future with more sophisticated shopping centers and savvy landlords looking
to achieve the highest and best use for their real estate through redevelopment, the Baltimore/Washington
DC metro area is poised for another strong year. With an expanding employment sector, scores
of new homes being constructed, low vacancy rates, and dozens of new projects proposed, look for
retailers to get aggressive to battle for market share.