NORTHEAST SNAPSHOT, JANUARY 2005

Philadelphia Retail Market

The retail market in and around Philadelphia has grown into a thriving and viable major market in recent years. High-end retailers are occupying more and more space within the city and big boxes and lifestyle tenants are cropping up throughout the major suburban markets on the city’s periphery. According to Steve Gartner, president of Conshohocken, Pennsylvania-based Metro Commercial Real Estate, there’s a blurring of retail categories occurring. “There is no longer a clear distinction between pure lifestyle centers, power centers and community centers,” he says. “It’s not uncommon to find large developments containing a discounter such as Target, a grocery store, and typical lifestyle retailers such as Talbot’s, Chico’s, or Gap and The Limited concepts.”

Within the city, new retailers such Zara and IKEA are finding success. With the big boxes having difficulty entering the dense downtown market at this time, they are finding success in many towns outside the city. “We’re seeing a lot of interest by developers in several projects in the Lehigh Valley, although one is skeptical that they will all occur,” Gartner adds. “Even markets previously considered ‘fringe’ are seeing increased development, such as Stroudsburg, Pennsylvania, as this region morphs from simply a vacation area into a bedroom community for the Lehigh Valley and even the New York metro area.” This fall, approximately 1.5 million square feet of new power retail came on-line just outside Philadelphia in three projects: one in northeast Philadelphia and two in south Philadelphia.

“As successful retailers expand, they need to find untapped opportunities,” Gartner explains. “Sometimes that means going further out into the country, or it means going further into the city. I think you’ll start to see retailers nibble on the edge of downtown in Philadelphia, so they can tap the urban dweller, but not pay heart-of-Center-City rents. Whole Foods has done this with its two downtown stores here, and the big box developments in south Philadelphia are providing those stores to Center City residents.”

According to Gartner, larger retailers have yet to enter downtown and Center City for two reasons. “One is the lack of availability of large development parcels. Second, is the enormous cost of developing in the city — primarily from the cost of land, but also higher costs of construction and operation. Simply stated, city sites are expensive, so the expected sales better be quite high. You don’t see any big boxes in Center City right now, but it’s certainly not for lack of desire by them. They will go there when the benefits of revenue outweigh the costs of the site.”

Larger projects (of 500,000 square feet or more) are changing the shopping patterns in many communities, further eroding malls as the multi-faceted shopping destination. Retailers and developers are also recognizing the importance of demographics beyond the traditional residential population; they are looking for daytime populations and unique factors such as activity that may be generated by a nearby university, hospital, and sports complex, for instance. The big boxes continue their expansion, clearly driven by their success in the Philadelphia market and their success as retailers in general. These retailers drive new shopping center development. At the other end of the size scale, drug stores, banks, and casual dining continue to pay for prime locations.

Overall, the retail market in Philadelphia is healthy and development activity and interest from retailers is increasing as opportunities are explored in and around the city. “Retail will continue to grow, as long as the retailers want to be there,” says Gartner. “It’s all demand driven.”

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