Frederick’s T.J. Maxx deal was not enough to prevent the worst retail segment quarter since 2007.
When MacRo last reported on Frederick’s retail segment of commercial real estate, things were looking rosy. Retail rental rates in Frederick had hit a five-year high, and national retailers were continuing to invest in the area.
But…once again…the economy stutters in the second quarter after a promising start to the year. Retail sales growth slumped, like nearly everything else in the economy, during the 2nd quarter of 2012. CoStar Group economists attribute this to expiring unemployment benefits, hiring slowdowns, and rising gas prices.
And continued growth in e-commerce doesn’t help, at least not where the retail segment of commercial real estate is concerned.
CoStar reported that retail downsizings and store closings across the U.S. were the highest since 2009, and the Frederick market was no exception. With continued vacancies in hard-hit strip centers like the Vista Shops on the Golden Mile, the overall square footage of occupied retail space in Frederick declined by over 70,000 sq. ft. this past quarter.
Retail vacancy rates in Frederick jumped to 5.6% from 4.7% this time last year … Still, not bad compared to other sectors of the local real estate market.
Even in 2009, Frederick’s worst quarter was a loss of nearly 50,000 sq. ft. of occupied retail space. You have to go back to 2007 to find a quarter where Frederick’s retail segment performed more poorly than this past one.
The good news is that the “average” commercial rental rate remained stable with only a very minor drop to $17.62 from $17.70 last quarter. This is in part because national retailers are seeing the untapped potential of the Frederick market … and of course rental rates in centers with national anchors will yield rates well in excess of that “average.”
Nationwide discount chains like Dick’s Sporting Goods, Walmart, Target, and Kohl’s continue to be the bright spots of the retail segment.
Frederick had a big win on that front, with T.J. Maxx signing a lease last month for the 25,000 sq. ft. space in Riverview Plaza where Borders was formerly located. (Rumor has it that their partner HomeGoods will be opening near Wegmans’ part of town. We haven’t confirmed that, yet.)
Speaking of Wegmans, just across the street Market Square continues to be a big draw, with a new 42,000 sq. ft. Sport and Health breaking ground there this summer and expected to open at the end of this year.
But what about locally owned retail businesses?
When we interviewed commercial real estate appraiser Michael Pugh for MacRo’s industrial segment post last week, we also asked him what he is seeing in Frederick’s retail segment.
“If you don’t secure a national brand, it’s very hard to fill vacant retail space in Frederick right now,” said Pugh. “What I am hearing from local commercial brokers is that they cannot rely on smaller spaces to be filled with new local retail businesses that typically lease 1,200-1,500 sq. ft. spaces. They are going after national brands such as Subway, Starbucks, and Kinkos to fill spaces in smaller strip centers without big-box retailers.”
No doubt the loss of local start-up retailers in Frederick’s major retail centers reflects in large part the uncertainty we are all feeling in the face of expiring tax cuts and what is shaping up to be a tight presidential race.
An interesting tidbit from CoStar’s 2nd quarter retail update concerned the grocery business. Walmart and Target are currently enjoying considerable market share at the expense of traditional grocers. In fact, CoStar reported that on a national level big box retailers account for a shocking 70% of grocery market share, a huge increase from just 15% in 1990.
The exceptions to this are high-end grocers like Wegmans, and organic markets, both of which according to CoStar have experienced huge growth since 2007. Furthermore, CoStar reports that growth in ethnic grocery stores nationwide is literally “off the charts.”
Clearly, the state of the economy is contributing to where national retailers and the locals each find their geographic niche. With change always the constant in real estate, expect continued dynamic shifts in Frederick’s retail real estate market … stay tuned!
Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes forTheTentacle.com.