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COVER STORY, SEPTEMBER 2005
RAMPING UP RETAIL
The retail market is growing by leaps and bounds in Pennsylvania, New Jersey and Delaware.
Kevin Jeselnik
It has been stated over and over for more than a year now, but the news rarely seems to get old to commercial real estate professionals in the Northeast: the retail market is sizzling. The thriving market has created a wealth of activity in the Philadelphia area, and the growth in retail has stretched in all directions, namely central Pennsylvania, Southern New Jersey and Delaware. The markets in Central and Northern New Jersey are thriving as well. “I’ve been doing this for 30 years and this is by far the most active I have ever seen the retail market,” says James DePetris, CEO of Legend Properties, a Philadelphia area full-service commercial real estate firm based in Conshohocken, Pennsylvania.
There are a number of factors fueling the retail sector’s outstanding performance. Northeast Real Estate Business recently spoke with a collection of commercial real estate professionals in Pennsylvania, New Jersey and Delaware regarding all aspects of retail real estate.
Economics 101: Supply & Demand
In an area known for its limited land, low vacancies and high barriers to entry, demand for retail space is far outstripping supply. In Philadelphia especially, there is not enough space to satisfy retailer demand. Heavy absorption so far in 2005 has created a tight market for existing retail space. Vacancy rates have declined so far in 2005 and, mirroring the Northeast retail sector as a whole, remain very low.
“Philadelphia is still behind in terms of new development,” says Brandon Famous, founder and CEO of Conshohocken, Pennsylvania-based Fameco Real Estate. “The city currently lacks suitable available space for retailers that are expanding in our market; one of the biggest problems that we have is finding space. So what is happening is those retailers that need to expand are absorbing some of the B and C locations in our marketplace rather than waiting the year or two that it would take to get into a new development.” In an effort to meet this overwhelming demand, several power centers and mixed-use projects with large retail components are underway or in the pipeline all over the region.
In the crowded Northern New Jersey market, developers are turning to redevelopment and adaptive reuse to create new retail properties to meet demand. “There are an awful lot of older properties being redeveloped,” says Art Weiss, senior vice president of brokerage services with CB Richard Ellis in the company’s Saddle Brook, New Jersey, office. “And not just older retail properties, there are office buildings being torn down and mixed-use projects are being built in their place.” Weiss has cited a number of recent sales brokered by CB Richard Ellis — such as Hartz Mountain Industries’ recent acquisition of a Ford Motor Company plant in Edison, New Jersey — involving older corporate properties being acquired for mixed-use redevelopment, all with substantial retail components included in the plans. The overall vacancy rate for Northern and Central New Jersey stands at approximately 8.7 percent, but according to Weiss, vacancy for the existing and new high-quality properties is approximately 2 percent.
The strong demand is driving nearly all of the development occurring in these heavily populated metropolitan areas. When a major national anchor expresses desire to enter a specific market, Weiss says, multiple developers are aggressively seeking sites that can accommodate the tenant’s needs. “What’s driving the market is the tenant’s desire to be here,” he explains. And in turn, this interest from multiple developers is driving prices skyward.
The result of this fierce competition for relatively few urban locations has led many retailers to look into new markets outside the tried-and-true metropolitan areas. Throughout Pennsylvania, New Jersey and Delaware, there are retail developments underway in cities long passed over by big businesses. These underserved submarkets are proving to be ripe for growth.
Expansive Expansion
The population boom underway in Pennsylvania and New Jersey is driving a large part of the retail activity, as national and regional retailers are recognizing the solid demographics and present lack of retail in new and established outlying residential submarkets.
National big box retailers such as Wal-Mart, Target, Lowe’s Home Improvement Warehouse, The Home Depot and Ross Dress For Less are aggressively seeking to enter suburban areas all over central Pennsylvania and New Jersey. Once other national and regional businesses see the big names sign on, a flood of interest sweeps into these new markets.
“Wal-Mart Supercenter has really picked up an aggressive campaign around Philadelphia and I think that in itself is a retail trend,” DePetris says. “They are trying to get in wherever they can and where they are going, you can see a huge impact on the retail community.” The big box retailer is also creating a lot of action in areas it vacates when expanding. In towns such as Reading and Philipsburg, Pennsylvania, when Wal-Mart vacates one location to upgrade to a Supercenter, there are a host of big boxes vying for the newly vacated space.
Target has been very aggressive as well, in suburban areas and in urban markets. The company recently bought the Adams Mark hotel on City Line Avenue in Philadelphia with plans to raze the facility and build a new store in its stead. The home improvement retailers, namely The Home Depot and Lowe’s Home Improvement Warehouse, are also locating stores wherever they can.
According to Bryan Weingarten, president of Wynnewood, Pennsylvania-based WP Realty, Pennsylvania is on a lot of national retailers’ list when it comes to expansion strategies. “We have been very busy in Pennsylvania for the first time. Even though we are a Philadelphia-based company, we haven’t done a lot in the state,” Weingarten says. “All of the sudden, in the last year we’ve bought four projects.”
Central Pennsylvania is currently one of the hottest retail markets in the Northeast. The U.S. Highway 422 corridor, leading from Philadelphia to Harrisburg, continues to grow. According to Fameco’s Famous, the area has more than 2 million square feet of new retail space planned.
The success of projects in middle markets such as Harrisburg has opened a lot of retailers’ eyes, Weingarten notes. “All of the sudden, because retailers are doing well [in mid-sized markets], they are going into secondary and tertiary markets like York or Chambersburg.” Kimco is developing the Target-anchored Chambersburg Crossing in Chambersburg and CBL & Associates is developing the 300,000-square-foot York Town Center at Mount Zion Road and U.S. Route 30 in York. York Town Center will be anchored by Dick’s Sporting Goods when it opens in fall 2006.
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WP Realty is redeveloping an older retail property in York, Pennsylvania, into the $40 million Delco Shopping Center, a power center anchored by Lowe’s Home Improvement Warehouse and Giant Food.
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Located just south of Harrisburg, York is a great example of a town benefiting from retailers’ desire to expand across the region. Recently, WP Realty purchased a dilapidated, 95 percent vacant shopping center located on a corner on Route 30 and began work to reposition the property. The company quickly attracted Lowe’s Home Improvement Warehouse to the site, which led to Giant Food deciding to open a 72,000-square-foot supermarket there. Now under construction, the $40 million Delco Shopping Center boasts a roster of national and regional tenants including T.J. Maxx, OfficeMax, Ross Dress For Less, Hollywood Video and Panera Bread. “We just finished demolition and we are 95 percent pre-leased,” Weingarten says. “It’s an exciting project and the town has been very supportive.” The stores are expected to open summer 2006. The project shows that once the big box or grocery retailer makes a move into a new area, the mid-sized boxes and secondary tenants swarm.
“Retailers talk to each other,” DePetris says. “There is no question that it is a small circle and retailers ask each other how they are doing in these new markets.” If one company finds success in an unproven market, the others will follow. Where demographics alone do not justify a project or where drive-time statistics don’t project success, retailers are assessing the viability of entering the market and taking chances.
The results these companies are experiencing in these newly tapped markets is undeniable. Throughout the region, retailers are enjoying considerable success and looking all over for expansion opportunities. Specific areas seeing a lot of fresh interest include southern Chester County just southwest of Philadelphia in Pennsylvania, the U.S. Highway 422 corridor stretching from Philadelphia to Harrisburg in central Pennsylvania, lower Delaware and the Jersey shore.
It is no surprise that these areas are either undergoing significant population growth or located near heavily populated cities. “We are basically mirroring what is going on in residential development,” says Colleen Healy, a property manager at Pettinaro, a Newport, Delaware-based developer and manager of commercial real estate properties. “In southern Chester County, lower Delaware and Southern New Jersey, we are seeing huge amounts of development because we just don’t have room anywhere else.” In Delaware, the southern end of the state is receiving increased interest from national and regional boxes as the population continues to spill down from the Philadelphia metro area and Wilmington, Delaware.
While new projects are underway in central Pennsylvania, redevelopment is still the easiest path for developers in the crowded metro Philadelphia and New Jersey retail scene. Thanks to the innovations of smart growth and New Urbanism, developers are relying on townships’ improved attitudes towards zoning changes when converting older commercial product to new mixed-use and retail projects. “It used to be that rezoning was very difficult,” DePetris explains. “You are now seeing townships look very favorably upon mixed-use projects.”
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Legend Properties is managing the leasing duties for Delco Development’s Willingboro Town Center, which includes the redevelopment of 50,000 square feet of retail space that once housed Sears.
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In Delaware County just below Philadelphia in Pennsylvania, there is a proposed redevelopment that will convert the Franklin Mint into approximately 1 million square feet of retail and a great amount of residential units. Also, Arsenal Associates is redeveloping a portion of the Frankford Arsenal in northeast Philadelphia into a 500,000-square-foot power center. In Willingboro, New Jersey, Delco Development is taking over the revitalization and redevelopment of the Willingboro Town Center. A 21,000-square-foot strip center, anchored by Bob Evans, is underway, as is the redevelopment of the 50,000-square-foot former Sears property. It seems that once a redevelopment is underway and an anchor is signed, the project fills itself.
WP Realty specializes in redeveloping and repositioning underperforming retail assets, and the company has found great success turning around older properties located in the smaller markets in Pennsylvania and New Jersey. The company recently began renovating a property in South Brunswick, New Jersey, first adding a Stop & Shop. “Once Stop & Shop was in place, we attracted The Home Depot, which decided that with all the growth in Central New Jersey, they needed another store. So that totally turned the project around. We demolished about half of the shopping center and now, opening around November, all of the sudden we have this great 400,000-square-foot property.” Other retailers quickly signed on to WP Realty’s South Brunswick project after The Home Depot, including Bob’s Stores and Dollar Tree.
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Delco Development is constructing a 21,000-square-foot strip center as part of Willingboro Town Center, a community center underway in Willingboro, New Jersey.
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Rental rates have increased over the past few years as retailer demand has markedly grown. “For the first time ever, rental rates along Walnut Street in Philadelphia are topping $100 per square foot; 5 years ago, we would never have imagined they would get that high,” Famous says.
Outside of Center City Philadelphia, for space up to approximately 10,000 square feet, rental rates are in the low to mid-$20s per square foot. According to DePetris, some of the newer projects in the 422 corridor and in central Pennsylvania are fetching rents in the $15 to $19 per square foot range, compared to $10 to $12.50 per square foot as recently as 5 years ago.
According to CB Richard Ellis|Torto Wheaton Research, rental rates are dramatically increasing in Northern and Central New Jersey. Prices are expected to rise from the $22.70 per square foot average recorded at the end of 2004 to $27.35 in 2006.
Everything seems to be growing in this area of the Northeast, whether it’s the population, retailer’s presence or rental rates. The retail sector is giving an outstanding performance so far in 2005 and as new submarkets are tapped in underserved areas, the market will only get better. As long as the demand exists, developers and retailers will continue to work together to find viable ways for the retail sector to grow.
Living Legend
In 15 years, Legend Properties has grown from a family business to a market leader.
In 1990, Conshohocken, Pennsylvania-based Legend Properties started as a family affair in the truest sense. The DePetris family — brothers James, David, Michael and Steven, and sister Donna — along with Maria Rita Aristone, Alan Dinenberg and Andrea Cedrone, launched the full-service commercial real estate company right in the middle of a real estate recession. The company, however, was successful from the start and has since grown into far more than a run-of-the-mill family business. Although Donna moved on in the 1990s, all four of the DePetris brothers are still with the firm. The company is now one of the premier brokers in the market.
“Since we started, we are very proud that we have grown considerably,” says James DePetris, Legend’s CEO (Michael serves as president; Steven and David are senior vice presidents). “Legend, today, is no longer a family business.” That doesn’t mean that there is no sense of family left in the company. “One of the things that we are proud of here is that, even though we’ve expanded, there is still the culture of a close family within our company ranks,” James explains. The entire company meets once a month and strives hard to work together as a team to close deals.
As it celebrates its 15th anniversary, the company now operates six regional offices in Pennsylvania and New Jersey and has a team of 35 brokers serving the Philadelphia metro area, central and eastern Pennsylvania, Central and Southern New Jersey, and Delaware. The company has worked hard to create a strong inter-office network through which Legend’s brokers can operate. The full-service firm works in every aspect of commercial real estate, from tenant and landlord representation to investment sales. And Legend Properties is looking to expand. “We expect to open offices in Central New Jersey and central Pennsylvania in the near future,” James says.
With all that experience, it is no wonder Legend Properties has established itself as a major player in the commercial real estate scene by its 15th anniversary. But James is as excited by the youth the company has in its ranks as he is by the experience of the tested professionals. “We have a lot of experience and maturity, but we also have some youth now, which is a great thing,” he says. “It brings energy and enthusiasm to the company, and that new blood helps push some of the seasoned veterans like myself to new heights.”
— Kevin Jeselnik |
Still A Seller’s Market
With historically low cap rates, retail investment sales in Pennsylvania, New Jersey and Delaware are at a premium.
With cap rates as low as they have ever been, the retail investment sales market in Pennsylvania, New Jersey and Delaware is red hot. Cap rates have dropped approximately 125 to 150 basis points in the last year and investors from the West Coast, overseas and the tenant-in-common arenas are paying huge prices for retail properties across the region.
“Sales activity is way up,” says Troy Peple, president of Conshohocken-based Fameco Real Estate. “And what is interesting is that supply is actually increasing in response to demand.” Investors are paying such high prices that owners that typically would not consider selling their properties are now willing to entertain discussions.
“This incredible excess demand is actually creating some additional supply as typical holders are now bringing product to the market that they otherwise would have kept,” Peple explains. Since cap rates have been measured, they have never been this low. “We are telling a lot of our clients that if they’re ever thinking about selling, now is the time.”
The demand is so high that retailers are finding it very difficult to locate in the market, but that same demand is creating a active investment sales environment. “We’re seeing a lot of foreign and West Coast money come into the market,” Peple says. Though originally the main focus was on the New York City metropolitan area, the lack of product there has led investors into Central and Southern New Jersey and Pennsylvania.
Many are beginning to ask how long the market can sustain this level of activity. “At some point, the rates are going to go back up and there’s going to be a significant adjustment,” he says. Yet, Peple believes that the retail investment sales market is going to hold up for a while longer.
— Kevin Jeselnik |
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