WASHINGTON — Tucked in the center of the nation’s capital, a hot market for retail expansion, is a virtual retail no-man’s land in prime downtown real estate where boarded-up storefronts are neighbors with hotels, museums and high-brow law firms.
The several-square-block area running east of the bustling Metro Center subway stop has beguiled city planners for decades. While they’ve been able to attract hip restaurants and bookstores to the neighborhood, apparel merchants have been timid about making the move. Instead, merchants such as city newcomers Zara, Kate Spade and Target are choosing locales like longtime retail-hub Georgetown or up-and-coming urban-chic Columbia Heights.
Even two years ago, a $40 million city subsidy extended to Macy’s wasn’t enough to lure the chain to open in the old Woodward & Lothrop department store downtown, with its own Metro Center entrance, in a deal city officials said would have covered a second location north of downtown.
“Typically retailers don’t make a move until a neighborhood is already happening,” said Mike Pratt, a partner with Madison Retail Group, a local broker.
Now, the city has a hot apparel retailer on the hook — Swedish retail juggernaut Hennes & Mauritz — which opened earlier this month in a corner of the old Woodies site. Local officials peg H&M’s urban pioneering as serving notice to competitors that the neighborhood, recently named the East End, is finally ready to start dressing the legions of office workers and tourists who come to the area daily.
To sweeten the prospects of doing business downtown, H&M’s costs to rehab and build a 28,000-square-foot store in a corner slice of the historic Woodies building are being subsidized by the developer, which in turn will receive — from newly minted city grants — as much as half of the estimated $5 million to $6 million renovation and build-out costs. The grants are based on future sales tax revenue, generated by the expected $350 a square foot in sales local officials expect H&M to generate.
“It’s a chance we’re taking here,” acknowledged H&M chief executive officer Rolf Ericksen, who considered the Sept. 5 downtown store opening important enough to attend and to bring a cadre of executives from Sweden along. “We got an offer and we said, ‘Let’s try to do it.’ Hopefully, others will join us. I think it will take a couple of years.”
The two-story store at the corner of 11th and F Street, N.W., carries H&M’s full line of value-priced, trendy women’s, men’s, girls’ and boys’ apparel and is the chain’s second city location. The other store, in Georgetown, is only 8,000 square feet and carries just young women’s and men’s lines.
Walking the perimeter of the downtown H&M before its opening, Ken Gustafson, the retailer’s operations manager, surveyed the construction and looked down F Street — a series of 19th- and early 20th-century vacant storefronts that pockmark an otherwise prosperous business district dotted with office buildings and tourist stops like the new Spy Museum, National Portrait Gallery, FBI headquarters and Ford’s Theater, where President Lincoln was shot.
“For us, coming from Europe, it’s very strange that a downtown like this was dying,” Gustafson said.
The East End has been a tough sell, in part because the neighborhood hasn’t been tested by modern-day retailing. Until the late Eighties and early Nineties. the area was still somewhat bustling with mom-and-pop apparel and footwear retailers dotted along F Street from 7th to 14th Streets, where a Borders Books now fills the defunct Garfinckel’s department store. The only retail survivor is the Hecht’s flagship, a May Co. division, which enjoys little competition in the area, with the exception of an Ann Taylor, Banana Republic, Filene’s Basement and Casual Corner a block away.
There is about 300,000 square feet of existing vacant retail space in the targeted East End, including about 120,000 square feet still at the Woodies’ site, which also will include office space. Another 300,000 square feet of retail is planned in coming years, which is in addition to upward of about 1 million square feet for retail in neighborhoods nearby, like the adjacent Gallery Place area abutting Chinatown, where Benetton and Ann Taylor Loft just announced pending store openings.
So far, the only apparel retailer with plans to put down roots near H&M is a Joseph A. Bank men’s wear store, which will share an 11th and E Street location with an independent movie cinema.
Despite being bypassed by apparel retailers for decades, city officials said they’re bullish about the neighborhood becoming a fashion shopping district and filling the equivalent of a regional shopping mall in vacant or planned retail space. They cite as a key economic attribute the relatively stable Washington economy, with low unemployment, which is girded even in lackluster economies, like now, by the city’s main industry, the federal government.
Another economic draw is the city’s 7 percent office vacancy rate, the lowest in the country where double-digit vacancies are now common. Retailers also are running out of space to expand in the close-in suburban neighborhoods and city officials said 8 to 15 percent of all purchases by the city’s 571,142 residents — amounting to $275 million a year — are now made outside Washington.
In addition, 5,000 downtown condos and apartments are under construction or being planned for the housing-starved city. Further increasing foot traffic will be an additional 3 million square feet of office space planned in buildings rising behind some of the boarded-up East End retail.
Then there are the new city grants specific to the East End and designed to steer developers from renting to less-risky banks and restaurants. The size of the grants are based on a point system assigned to a store’s various attributes. For example, more money is given to developers to rehab spaces for retailers with expressive window displays, are unique to the city and have high sales volume.
“Office buildings haven’t been interested in smaller tenants,” said Joe Sternlieb, deputy director of the Downtown District of Columbia Business Improvement District. “It’s been, ‘Get the best user.’”
According to Economics Research Associates, which studied the East End’s potential for the city, “leasing economics” have provided the biggest hurdle to retailers and, the consultant said, the new city rehab grants should help alleviate them.
“Rents for highly productive small stores occupied by national credit tenants can be as high as $75 to $80” a square foot, the report, issued in May, concluded. “Generally, however, a persistent gap appears to exist between the rents and tenant improvement costs that a retailer is willing to pay and that the landlord can afford to offer. This is especially true, according to the brokers surveyed, for those moderate-to-larger soft goods tenants.”
The consultant estimated women’s apparel sales at existing retail in the area ranges from $179 to $250 a square foot.
H&M’s Ericksen, spotted across the street eyeing crowds of office workers flooding into his new store just after its noon opening, said he has expectations the location will thrive like the chain’s Midtown Manhattan units.
“In the future, Washington will be very important to us,” Ericksen said. “We believe in the U.S. market and we love the Americans.”
For Sarah Fitzgerald, a tax counsel at the U.S. Chamber of Commerce, who left H&M with a bag bulging with $56 in merchandise, opening day was cause for celebration. She said, “We can actually shop during lunch time.”