Success of Wegmans drives continued national retailer entry in the Frederick, Maryland commercial real estate market
The sailing metaphors were employed in full force during CoStar Group’s Q1 2012 update on the retail segment of the nation’s commercial real estate market. When you hear commercial real estate economists repeating the phrase “tacking into the headwinds” you know the news isn’t going to be great.
On the national front, retailers have struggled to thrive in the face of both a lingering recession and the exponential growth of internet sales. Many—Kmart, Borders, and Best Buy, for example—have failed miserably and continue to reduce square footage, close stores, or go out of business altogether. But others who are doing very well—Walmart, Dicks, Target, and Khols included—are expanding their square footage. As a result, this is shaping up to be a flat year for retail space demand overall.
There are few retail construction projects in the national pipeline. Retailers who are successfully adapting to the growth of online marketplaces are thinking very carefully about how to use their existing physical space, and diverting funds that would have traditionally been used for space expansion into a competitive online presence.
With the exception of outlet centers, which are a hot commodity for national developers right now (according to CoStar, there are about 50 outlet centers in the construction pipeline), this trend should continue for the foreseeable future.
In Frederick County, vacancy rates ticked back up to 5% from 4.8%. In reviewing Frederick’s retail leasing transactions from the past quarter, it appears that negative absorption in the first quarter was due to a combination of smaller retailers closing and others cutting back space.
More compelling is the fact that triple net lease rates for retail space climbed to $17.70 per square foot during the first quarter of 2012, the highest rate since the 4th quarter of 2007.
What is driving the higher rents?
My take is that within all of Frederick County, Maryland, it seems to be very much related to Follow The Leader. Consider two classic cases within the City of Frederick:
The Miracle of Market Street
Drive up Market Street in downtown from just south of the Carroll Creek and head north across 3rd Street. With the exception of maybe two landlords (I’ll call them challenging) just about every retail and restaurant space along that stretch and within a block of Market Street is fully occupied with thriving businesses.
Retail, and more importantly new restaurant, space is now commanding in well excess of $20.00 per square foot NNN. Consider the obvious that draws not only us locals downtown more often, but many others from miles around: Carroll Creek Linear Park and such restaurateurs as Michael Tauraso’s The Tasting Room, Phil Bowers’ Brewer’s Alley Restaurant & Brewery, and America’s Top Chef Bryan Voltaggio’s VOLT Restaurant.
Get your KIX on Route 26
It was the busting through of Monocacy Boulevard at Route 26-Liberty Road that opened the doors to retail action several years ago when Daryl Routzhan moved the family furniture store to this virgin retail area. What followed has been like a gold rush of national retailers that peaked with the grand opening of a Wegmans at the Clemson Corner center.
Now with construction well under way at neighboring Market Square bringing another 180,000 square feet of retail space, even leaders like Walmart are taking a step up from their current location several hundred feet away at a closer and more visible spot at the former home of Frederick Trading Company now owned by the Matan Companies on the northwest corner of Monocacy and 26 with a new 120,000 square foot supercenter facility.
Landlords with anchors like these draw smaller retailers and restaurants that are willing to pay higher lease rates as much as $50 per square foot versus other locations like Frederick’s Golden Mile that is seeking better days ahead and struggles to hold on major tenants.
Other retail areas throughout the county that serve a more local and neighborhood markets on average are still in the driver’s seat when it comes to negotiating and renewing their leases.
The old adage of Location Location Location holds true for the commercial real estate business, even more so as the nation’s economy tries to pull itself into a solid recovery.
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 for TheTentacle.com.