NORTHEAST SNAPSHOT, AUGUST/SEPTEMBER 2010

PHILADELPHIA RETAIL MARKET

Q&A with Steven Gartner, president of Metro Commercial Real Estate, Inc., which serves the greater Philadelphia area with offices in Conshohocken, Pennsylvania, and Mt. Laurel, New Jersey.

How has the Philadelphia retail market changed in the last year or so?

The development pipeline has pretty much shut off completely. There is virtually no talk of new out-of-ground developments, with the exception of perhaps a supermarket or free-standing discounter. This is not new, this cessation of new projects started in 2008, but we’re really just now seeing the last few projects make their way through the pipeline. Therefore, the industry for the foreseeable future will be primarily focused on existing real estate, not developments that may deliver space years in the future. It has also made everyone in the industry think in much shorter timelines.

Please describe the current demand for retail space in Philadelphia.

We’re finally seeing demand by retailers — both locals and nationals — that are realizing that they must expand with new stores to stay vibrant. Also retailers are seeing that the Philadelphia area, unlike other parts of the country, has been a market where retail sales have stayed relatively strong.

What are the current vacancy rates? How does this compare to last year?

The retail industry does not keep accurate vacancy rates like the office and industrial sector (and if they do, they are incredibly inaccurate), but our gut-check is that vacancies are decreasing rapidly. In the Philadelphia region, many vacancies in regional shopping areas are being leased up. The sectors that seem to be continually suffering are small-shop vacancies in neighborhood settings, as well as street vacancies, except for those in Center City Philadelphia.

What are the current rental rates? How are they trending?

With a few exceptions, rental rates are definitely down from where they were. A former electronics box that went for $22 per square foot in 2006 may now fetch half of that. Center City is holding its rents strong on Walnut Street and even Chestnut Street, but this is due to strong demand and a very finite supply of acceptable store spaces.

How would you characterize property values?

There is finally some good news in this segment. Some sales are occurring, which is allowing buyers and sellers to have comps to set valuations more accurately.

Please name any retailers new to the market.

In 2009, the electronics stores have made a major dent in the market, filling the void left by Circuit City. These include Ultimate Electronics, PC Richards & Son, 6th Avenue Electronics, and HH Gregg. Also, opening this year will be a grocery concept new to the area. The concept, Bottom Dollar, is owned by Food Lion and has taken a variety of locations.

Have any retailers made a significant impact by exiting the market?

There were dire predictions for more retailer closings, but none of significance have occurred to date.

What are your predictions for the Philadelphia retail market for next year?

This may begin the year that the pendulum swings back in favor for landlords. With vacancies tightening up, retailers will have fewer alternatives. Many will stay put, exercise options, and this could mean a stabilization of rent. The days of deep rent reductions for retailers are over. Most have pared down their bad stores and are left with a core of thriving locations.

What will it take to create significant improvement in the retail market in Philadelphia?

Whether it’s Philadelphia or the entire country, our industry in the last decade has been built on the expansion of national retailers. The consumer needs to spend again, so these chains can resume their expansion.

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