Experiential Retail Takes Philly by Storm

by Taylor Williams

The evolution and transformation of Philadelphia’s retail real estate market is in full swing, as evidenced by the arrival of several long-awaited shopping and dining concepts, the growth of retail in mixed-use settings and the balanced levels of demand between urban and suburban submarkets.

According to the latest data from CoStar Group, over the last three years the Philadelphia metro area’s retail inventory has grown by about 1.3 million square feet per year. The development pipeline is leveling off, with less than 700,000 square feet of retail product currently under construction, and steady demand has pushed the market’s vacancy rate down to 4.2 percent.

While the quantity of annual new space added has been on par with the national average for primary markets, the quality of that space and the fundamentals that drive demand for it have made Philadelphia a key market for expanding and new-to-market retailers.

“Philadelphia is a market with many millennials and college students, a dense residential downtown area and a thriving tourism industry,” says Doug Green, managing principal at brokerage firm MSC Retail. “If you’re Bonobos, Warby Parker or Untuckit, Philadelphia is going to be one of your stops, because we check all the boxes that new-age retailers keeping up with the times look for.”

Green adds that Philadelphia’s pace of rent growth remains an attractive feature to new retailers as well. Per CoStar, the average asking rent in Philadelphia grew by just 1.1 percent over the last 12 months, effectively eliminating one barrier to entry for new retail and restaurant concepts.

“Owners that push rents above market rates will be sitting on vacant spaces; for existing inventory, space that is priced right will lease,” says Jim Savard, executive vice president of leasing and management at Metro Commercial. “We have seen a slight uptick in vacancy but a steady pace of absorption in new developments, and we expect rent growth to stay at or close to its current pace over the next 12 months.”

Despite a healthy supply-demand balance and a revitalization of key neighborhoods, the Philadelphia market has still faced many of the same
e-commerce-related issues as other major cities, from vacated anchor spaces in regional centers to the dissipation of older, less innovative brands. But key to the market’s future health is the adaptation — the willingness of many retailers to evolve rather than die.

“The biggest source of optimism is that omnichannel retail sales are positive,” says Savard. “To completely understand the health of retail, you have to look at both in-store and digital sales. Retail today is a blend of both.”

Center City Leads

Philadelphia is experiencing retail development in the fringe submarkets around its urban core, known as Center City. But the Center City area remains the epicenter of the city’s retail real estate scene, and will soon welcome an array of new tenants to the market.

Pennsylvania Real Estate Investment Trust (PREIT) is at the forefront of this activity, starting with its Fashion District Philadelphia project that is redeveloping a former urban mall, The Gallery at Market East, into a 1 million-square-foot shopping and dining destination. PREIT expects to open the development late this month.

“We’re excited to introduce a diverse collection of retail, dining and entertainment tenants, including several first-to-market and unique-to-Philadelphia concepts,” says Joe Coradino, CEO of PREIT. “Fashion District Philadelphia will be a key component in the transformation of the city’s Market East neighborhood into a robust destination for residents, commuters and tourists.”

With its connections to three stations on the SEPTA commuter rail line, Fashion District Philadelphia serves as a transit-oriented center, and its proximity to hotels and the city’s convention center positions it for tourism traffic as well. The center will house national retailers that have woven engaging, interactive features into their shopping experiences. These retailers include Skechers, Nike Factory Store, GameStop and Sunglass Hut.

In addition, the development will showcase  “Uniquely Philly,” which will consist of distinctly local concepts. Users in this space will include apparel and comic book store South Fellini and art jewelry and clothing store The Sable Collective. Entertainment users at Fashion District Philadelphia will include AMC Theatres, City Winery and Round1, a concept that combines bowling, arcade games and karaoke.

“The opening of the Fashion District and revitalization of the Market East neighborhood this fall will be the
‘ta-da’ moment for retail,” says Michelle Shannon, vice president of marketing and communications for the Center City District. “It’s the most transformational retail development we’ve seen since Liberty Place was built.”

With new restaurants that offer outdoor seating joining the fray, as well updated landscaping and lighting, the back side of Fashion District Philadelphia will “feel like a completely different street,” says Shannon. She also points to recent growth in multifamily development as a catalyst for greater demand for retail space.

Multifamily projects like 1300 Fairmount Avenue, which houses 486 units and a ground-floor supermarket, as well as Lincoln Square, which features 322 apartments and 100,000 square feet of retail space, both speak to this trend.

Other projects also demonstrate the retail revival. East Market, located across from Fashion District, recently welcomed several new concepts — Ironhill Brewery, City Fitness and District Taco — that all share the common bond of internet resistance.

Peripheral Action

West of Center City, Schuylkill Yards, a joint venture between Brandywine Realty Trust and nearby Drexel University, is rapidly taking shape and will ultimately feature 7 million square feet of residential and commercial space.

The retail component of that project is in high demand due to proximity to the university and a regional transit hub in Amtrak’s 30th Street Station. Schuylkill Yards will also feature outdoor communal green space for social gathering, as well as space for organized events.

Schuylkill Yards, located in the University City submarket, represents another large-scale project that is ushering in a new age of retail in Philadelphia. (Image courtesy of Brandywine)

In South Philadelphia, the expansion of the Navy Yard is converting a former Navy shipyard into a 1,200-acre waterfront business campus that will house retail and restaurant space, as well as festivals and other organized activities.

“The city is in a period of strong, strategic growth with projects like Fashion District, Schuylkill Yards and the expansion of the Navy Yard, which are all happening simultaneously,” says Coradino of PREIT. “These three projects are changing their respective sectors of the city, yet they complement each other and diversify Philadelphia’s retail and restaurant offerings as a whole.”

The growth of brick-and-mortar retail away from the downtown area speaks to the newfound gentrification of certain pockets of the city, where some land for new development can actually be found. According to Green of MSC Retail, the proximity of Philadelphia’s suburbs to the urban core and an efficient public transit system have facilitated this outward push among new retail and restaurant concepts.

“For decades retailers and restaurants only wanted to be in Rittenhouse Square,” he says. “That area had the daytime populations, affluence, residential density and tourism that everybody wanted. Now there are pockets on the fringe that retailers are targeting, and we’re seeing funkier, harder-to-find brands expand to the suburbs.”

New York-based Kimco Realty Corp. recently retained MSC to lease Suburban Square, a shopping center in Ardmore that was originally built in the late 1920s. Green says trendy retailers that would have traditionally targeted higher-priced infill locations — Trader Joes, Apple, SoulCycle, Urban Outfitters — are drawn to the property’s feel and walkability of an urban center.

Pushing further away from Center City, Philadelphia boasts several Class A malls that continue to post strong sales and field healthy demand. Located west of Philadelphia, Simon’s King of Prussia continues to be one of the nation’s best-performing malls. On the east side of the city in New Jersey, Cherry Hill Mall is benefitting from the addition of an incubator space that caters to local startup businesses.

But some malls are feeling the pressure to reposition and revamp tenant rosters. At Plymouth Meeting Mall in Pennsylvania and Moorestown Mall in New Jersey, both owned by PREIT, projects to convert anchor spaces previously occupied by Macy’s into new uses were recently executed. Michael’s, Miller’s Ale House, Burlington, Edge Fitness and Dick’s Sporting Goods have replaced the former box tenants at Plymouth Meeting Mall, while Michael’s, HomeSense, Sierra, and Five Below have backfilled anchor space at Moorestown Mall.

Investment Heats Up

According to CoStar, retail investment in the Philadelphia area over the last 12 months has surpassed the long-term average with some 15 million square feet trading hands during that period. Cap rates have held lowest on grocery-anchored centers, typically clocking in between 5 and 6 percent as opposed to 8 to 9 percent for comparable, non-grocery-anchored product.

As a sector, grocers are making more aggressive pushes into Philadelphia via the growth of vertical, large-format mixed-use projects in both urban and suburban neighborhoods, sources say. Players in the market include Sprouts, which opened recently at Kimco’s new Lincoln Square project, which also includes Target, PetSmart and Starbucks.

REITs have been particularly active in the market, with the likes of Brixmor Property Group, Acadia Realty Trust and Inland Institutional Capital all closing acquisitions in the last 12 to 18 months. According to Green, the influx of this type of capital represents a change for the market.

“Institutional capital has been in Philly for many years, but on the office and multifamily sides,” he says. “The issue for institutional investors in the past was deal size, but for the first time, we’re seeing those buyers come in and invest, whether through portfolios or large projects, and that’s a big evolution for this market.”

— By Taylor Williams. This article first appeared in the August-September issue of Northeast Real Estate Business magazine. 

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