Q&A: KLNB’s Jake Levin on the 2022 DC Retail Market
The death of retail has been widely exaggerated—as the famously misquoted saying goes—particularly in the D.C. metro area. That’s certainly been the experience of Jake Levin, a principal at KLNB, who specializes in retail.
The D.C. retail market experienced 1.4 million square feet of net absorption with 4 percent annual rent growth and a vacancy rate at a near all-time low of 5 percent, according to data from Co-Star.
At KLNB, the fallout from the pandemic appears to be over, the retail market looks as strong as ever heading into 2023, Levin said.
The retail broker spoke with Commercial Observer about the specific trends he’s seen in the retail sector over 2022, and predictions for 2023.
How would you characterize the retail market in the D.C. region for 2022? How did the segment perform for the firm?
It was a banner year. KLNB’s retail brokers contributed to 449 new deals in 2022, which is a 13 percent increase from 2021 and on par with pre-pandemic numbers. We saw the largest rent growth in small shops—8 percent year over year growth in deals under 3,000 square feet. We also doubled the number of junior anchor deals (up to 10,000 square feet) in 2022 to 209, and more than doubled our anchor deals (above 10,000 square feet) to 116 deals in 2022.
Malls, however, remained an outlier at 10.9 percent vacancy. We’ve found our tenant clients continue to demand grocery-anchored and freestanding properties, where vacancy remains under 5 percent.
Where are the headwinds?
Time, both for permit review and construction, as well as costs for build outs are the biggest headwinds in our market. Permit reviews, supply chain delays, and difficulties with staffing/hiring have led tenants to ask for at least an additional 30 days in build out time from this time last year.
In the immediate aftermath of COVID, and particularly in the urban retail sector, landlords tried to incentivize tenants with long ramp-up periods that were heavy on percentage rent. While those deals may still be available for a small fraction of CBD product; in general, they do not exist.
What are you seeing as far as rent prices?
Major landlords, with concern about inflation, have tried asking for three-to-four percent annual increases. While these requests are now standard practice in 2022, regional and national tenants have resisted successfully. Anchor deals nearly 100 percent of the time contain 10 percent increases every five years, but some of the local service-oriented tenants have had little success negotiating against the rising escalation requests.
So, how are things looking as we head towards 2023?
In general, the market still has very little retail vacancy, particularly for A space in small shop and anchor retail sectors. Landlords are under very little pressure to concede on rents or concessions because demand is high and supply is low. It’s a good time to be a landlord of retail in the D.C. market—but it hasn’t always been.
What are your predictions for 2023?
More of the same. High demand, low supply, rent growth and tenants frustrated that there aren’t 2,500-square-foot end-caps with drive-thru available for lease in A markets for the same price they found something in Cleveland.
We predict that the market, particularly for strong grocery-anchored and freestanding retail in suburban and urban fringe markets will continue to outpace its competitive set. Our complaint from our 110+ tenant clients is that there’s not enough good space in the market—the market is just so tight. We’re constantly having to try to dig up off-market and pre-market opportunities for our clients in order to meet their development goals, but demand is high and we expect rents to continue moving upward.
Keith Loria can be reached at Kloria@commercialobserver.com.