By Taylor Williams
Relative to a year ago, life is much better right now for many retailers and restaurants in Philadelphia’s Center City district, but the recent surge of transmission of the Delta variant is keeping a key ingredient of the demand recipe at bay: office users.
According to CBRE’s second-quarter report on the Philadelphia office market, the most current data available at the time of this writing, the marketwide vacancy rate was 18.9 percent at the end of that period. Specifically with regard to the downtown area, the largest office submarket by far in terms of inventory, vacancy stood at 14.7 percent at the end of the second quarter.
Office metrics aside, as Philadelphia grappled with the novelty of COVID-19 in 2020, its merchants and food purveyors adapted, adjusting inventory levels, rolling out improvised outdoor seating areas and expanding takeout and curbside pick-up options.
The colder months saw the introduction of igloos — enclosed, heated nooks for private dining — as well as larger, city-led efforts to clear major retail corridors for street-side experiences, known locally as “streateries.”
The innovations saved many-a-retailer and restaurant and are likely here to continue through 2021 and beyond. Yet within the city’s most historically significant, culturally vibrant and unquestionably dense neighborhood — Center City — the relative dearth of office users hangs over the district like a black cloud.
“While igloos and street closures can cause some traffic problems that people are generally willing to live with, the bigger problem facing the downtown Philadelphia retail market is the fact that we have 60 million square feet of office buildings that’s barely occupied,” says Larry Steinberg, senior managing director at Colliers International.
“Pedestrian traffic levels at night are excellent, but daytime traffic has traditionally supported a lot of retail and restaurant users in office-heavy areas,” continues Steinberg, who has more than 25 years of experience representing both retailers and landlords in Philadelphia. “A few months ago, we were confident that office workers would return in the fall, but Delta has put a big crimp on that.”
Indeed, CBRE’s second-quarter Philadelphia office report pegged Tuesday, Sept. 7, the day after Labor Day, as an official “return-to-office” day. Yet the authors of the report also conceded that the mass movement of workers back to office buildings might underwhelm — Delta variant impacts notwithstanding — as companies experimented with semi-permanent flex and hybrid work schedules. Specifically, the report postulated that on average, office employees would work onsite three to four days per week.
A big part of the reason for this optimism is that Philadelphia has a strong vaccination rate. As of early September, the Philadelphia Department of Public Health had reported that more than two-thirds of eligible recipients were fully vaccinated and that 80 percent had received at least one shot.
Paul Levy has served as CEO of Center City District (CCD), the nonprofit business improvement district that provides services and promotes and tracks commerce throughout the downtown area, since 1991. He agrees that the latest events in the COVID-19 saga have put a damper on the widely anticipated — if not staggered — return of the area’s office workers. But given how much the district has rebounded over the last 12 months, he feels that the pain from this impediment will be short-lived.
“The spike in cases from the Delta variant is a setback to the expectation that most office users and employees would be back by Labor Day,” Levy acknowledges. “And while we remain cautiously optimistic that it will only be a 30- to 60-day delay, there’s no question that retailers and restaurants are extremely interested in when office users are going to return.”
Levy says that most of the users that have already returned are smaller companies whose workforces require less coordination, while larger companies with multiple locations and shareholders are moving more slowly. Many of these employees continue to stick to hybrid work schedules in which they still work remotely two to three days each week.
“Right now we have about 35 percent of our office workers back, on average three days per week,” Levy says. “When you include residents, tourists and business travelers, our average total pedestrian count is somewhere between 280,000 and 300,000 people. But on a good day in 2019, that total figure would have been between 450,000 and 500,000.”
The absence of CCD’s office workers is particularly glaring when one considers that hundreds of thousands of Philadelphia’s college students are returning for on-campus classes, driving consumer spending both in University City and portions of Center City. In addition, the city’s performance halls and convention centers are all in the process of reopening. Public transit ridership is up, and tourists even began to return during the summer.
“Our office is very close to the Liberty Bell, and we’ve seen lines outside it, so we know tourism is coming back,” Levy says. “But the return of office workers for power lunches and business meetings over breakfast is a big indicator of industry success that we’re impatient to get back.”
Retail sales and tenant demand for space is strong in multiple areas of Philadelphia that are less reliant on spending from office users, says Steve Gartner, executive vice president at CBRE. In addition to University City — home of Drexel University and the University of Pennsylvania — these pockets include the Walnut and Chestnut Street corridors, as well as South Philadelphia, where the city’s major sports teams play.
“Not only do tenants near the venues thrive when there are home games, but so too do those in Center City,” says Gartner. “But the biggest question for that area still centers on when the office users will return and whether that will drive demand for retail, restaurant and entertainment space back to
pre-pandemic levels.”
Market Misalignments
Gartner says that there are numerous retail and restaurant users that want to be in Center City and the surrounding submarkets but that can’t find the right kind of space — and vice versa.
“Right now, it’s practically impossible to find 2,000 square feet of clean, conventional, at-grade, well-located space in major retail corridors,” he says. “Conversely, there are several large vacancies that are struggling to find long-term occupants. Just like with office, there are a lot more users that have smaller space requirements.”
Sources say that to bridge these gaps, landlords are keeping with the pandemic-established trend of flexibility and accepting shorter lease terms from tenants that also want to avoid being trapped under heavy long-term deals should another force majeure episode befall them.
“Lease terms have gotten shorter; whereas 10 years used to be the standard, we’re seeing more five-year and in some cases three-year deals being made,” says Steinberg. “The idea is to eliminate some of the risk for retailers and restaurants, and landlords are accepting of this, which wouldn’t have happened five years ago.”
Part of the reason that users’ space requirements and available locations aren’t syncing up is that many retailers have had to significantly adjust their inventories in response to muted demand during various parts of the pandemic. In doing so, many have pivoted to new, often digital, channels of sales and distribution, thus reducing the need for physical storage space inside their stores.
“For some retailers, websites have begun to function as showrooms,” says Michelle Shannon, marketing director at CCD. “These are stores that have long had personal relationships with customers and have found ways to continue those relationships while augmenting their channels of delivery. But they’re not really doing e-commerce.”
Shannon explains that many of these retailers are leveraging their websites and social media platforms strictly for marketing purposes, not actually transacting business through them. “This is because customers still want the personal attention and interaction they get from calling salespeople on the phone or coming to the store for curbside pickup rather than actually shopping online,” she says.
A couple of examples of local businesses that have undertaken these shifts in product delivery and customer service are Duross & Langel, a provider of soaps and skincare products and women’s apparel retailer Kimberly Boutique.
— This article originally appeared in the August/September issue of Northeast Real Estate Business magazine.