COVER STORY, AUGUST/SEPTEMBER 2012

RETAILERS CAPITALIZE ON PHILADELPHIA MARKET
Opportunities range from grocery-anchored developments to new mixed-use projects in Center City.
By Brittany Biddy

The greater Philadelphia region boasts a diverse economy driven by manufacturing, education and import/export activity. The range of economic activity supports strong demographics, which in turn attracts vibrant retail communities. Across the region, retailers are looking to fill spaces left vacant during the recession — including quite a few retailers new to the market. There is even enough demand to fill the 1 million square feet of space anticipated to come online this year.

Filling the Void

Demand for retail space in Philadelphia is steady and picking up. According to a recent Marcus & Millichap report, retail vacancy in the area is expected to fall 30 basis points to 8.3 percent this year, despite a 0.7 percent increase in the market’s total stock as an estimated 1 million square feet of retail space will come online in the metro area.

“The bulk of small shop space that wasn’t leased when it was built in 2008 to 2010 is being absorbed at a very quick pace, while the junior boxes and vacant supermarkets left by A&P, Genuardi’s, Borders and Circuit City are being absorbed by tenants like Hobby Lobby, Big Lots and Ashley Furniture,” says Brad Nathanson, senior director of Marcus & Millichap’s National Retail Group.

Visionworks is one company looking to take over small shop space in the Philadelphia market. The company opened its first Philadelphia-area location in Gloucester County, New Jersey, during the second quarter and is expected to open an additional 25 stores throughout Philadelphia.

The proliferation of dollar stores, such as Dollar General, Five Below and Dollar Tree, also accounts for absorption of quite a few spaces, says Jeff Cohen, partner with Conshohocken, Pennsylvania-based Fameco Real Estate.

“While the rents are low, these retailers realize they have an opportunity to enter trade markets that were out of reach a few years ago,” he says.

Retail rents have remained low since they hit a 5-year low in the second quarter of 2010. At that time, the average asking rent was $19.32 per square foot in the Philadelphia area, according to a recent Marcus & Millichap report. In first quarter 2012, asking rents averaged $19.40 with effective rents averaging $17.12. The average asking rent is expected to increase to $19.57 this year. In Delaware County, Pennsylvania — where vacancy is 4.3 percent — asking rents increased to $21.71 per square foot earlier this year, while effective rents averaged $18.85.

These numbers are allowing retailers that are once again in expansion mode to enter the market or increase their presence in the Philadelphia region.

John Wilson, senior associate director of retail services for Cushman & Wakefield, says, “It’s demand. Retailers are getting comfortable with the area and are filling the void.”

According to Jerry Kranzel, senior vice president of CBRE’s Capital Markets Group, restaurants are particularly active. High-end restaurants, including Seasons 52 and Capital Grille, are opening in the area to increase the overall experience for customers. Both restaurants recently opened at Cherry Hill Mall in Cherry Hill, New Jersey.

The Shake Shack, which got its origins in New York City, opened its first Philadelphia location in June at 2000 Sansom Street. Honeygrow, a fast-casual eatery offering made-to-order stir-fry bowls and salads, opened a few blocks away at 1601 Sansom Street.

A number of fast casual restaurants are expanding across the region as well. Nathanson cites Chipotle, Panera Bread, Buffalo Wild Wings, Texas Roadhouse and Chick-fil-A as the most active in the region.

“The economy is clearly not back yet, but people are doing a bit better and they’re out there spending some restaurant dollars,” says Michael Cohen, vice president of leasing for Levin Management.

According to Greg Bianchi, vice president of U.S. Realty Associates Inc., a lot of activity is taking place within the city limits of Philadelphia. “We’re seeing a push on the outskirts of Philadelphia where retailers can come in and look in markets that weren’t necessarily viewed as optimal markets in the past.”

Grocery stores are entering areas known as “food deserts,” urban communities that do not have a supermarket within one mile and rural areas that do not have a supermarket within 10 miles.

For example Brown’s Super Stores, which owns more than 10 ShopRite locations surrounding Philadelphia, has committed to opening two stores in Philadelphia food deserts. The company works with the Pennsylvania Fresh Food Financing Initiative, which aims to provide supermarket development in underserved neighborhoods, to improve access to healthy foods in areas underserved by necessity retail.

Food deserts are not the only opportunity for grocers in Philadelphia; consolidation and redevelopment opportunities are also proving attractive. Giant Food Stores acquired 15 Genuardi’s locations in June and recently converted all the locations to Giant Food stores, making the company one of the major supermarket owners in the area.

Wegmans has opened several new stores in the region, including a 123,070-square-foot store at The Village at Valley Forge in King of Prussia, a new 122-acre mixed-use project owned by Northwestern Mutual and Realen Properties.

Attracting Retailers

Philadelphia’s demographics and stability are catching the attention of retailers, as well as the interest of a few developers.

“Low unemployment, stable population and income growth along with low state income tax create high demand nationally among institutions and private investors to acquire in South/Central New Jersey and southeastern Pennsylvania,” says Nathanson. (Pennsylvania has a flat individual income tax of 3.07 percent, while New Jersey’s tax rate ranges from 1.67 percent to 8.97 percent, depending on personal income, and Delaware ranges from 2.2 to 5.95 percent. Delaware is unique in the region in that it has no sales tax.)

According to Steve Evans, senior vice president and managing director of the retail division of High Associates Ltd., the diversified economy in South/Central Pennsylvania, including the Harrisburg, York and Lancaster markets in which the company has a retail presence, results in lower unemployment than you find in much of the United States.

At 8.9 percent, the unemployment rate for the Philadelphia-Camden-Wilmington MSA in June was just slightly over the U.S. unemployment rate of 8.4 percent (not seasonally adjusted). According to the Bureau of Labor Statistics, 65 metro areas reported unemployment rates of more than 10 percent in June; 207 metros reported jobless rates of less than the national average, while 161 reported jobless rates of greater than 8.4 percent.

Average household income for the Philadelphia region is $62,245, according to a second quarter retail snapshot from Cushman and Wakefield. Center City offers some of the strongest demographics in the MSA. In the last decade, Center City’s average household income has increased by 53 percent to $59,345.

Many retailers are opening locations within this market because it’s affordable and desirable second to Manhattan and Washington, D.C., says Nathanson.

Center City is located at the center of a nine-county region that includes more than 5 million residents, according to the Central Philadelphia Development Corporation (CPDC).

According to the CPDC, the total demand for shoppers’ goods within one mile of city hall is approximately $710 million. Many restaurants benefit from locations in this trade area. Center City has experienced a 234 percent increase in the number of fine dining restaurants in the last decade. There are also 205 outdoor cafés, 59 bars/nightclubs and 49 coffeehouses, according to the CPDC.

Following the Investments

According to a Marcus & Millichap second quarter report, the median price for multi-tenant retail sales rose 9 percent year over year to $115 per square foot.

“With our market being controlled by some of the best grocery operators in the country, cap rates have compressed into the low to mid-6 percent range for these assets, supported by aggressive financing with interest rates in the high 3 percent to low 4 percent range,” says Nathanson.

In south central Pennsylvania, retailers new to the area are filling spaces. High Real Estate Group’s 285,000-square-foot Mill Creek Square in Lancaster offers the area’s first Ross Dress For Less, Bed Bath & Beyond, Christmas Tree Shops, Petco and Shoe Carnival. The Kohl’s-anchored center is 90 percent occupied.

He adds, “Given the generational and institutional ownership of some of the best core properties within our marketplace, we tend to see a lack of velocity among those properties compared to the demand to transact on the secondary and tertiary product that’s trading often.”

This is also an optimal economic environment for redevelopment projects. Developers are investing in the redevelopment of existing centers to appeal to more retailers.

For example, Levin Management redeveloped Hamilton Plaza, which offers 185,000 square feet of retail in Hamilton Township, New Jersey, and includes a newly renovated 80,000-square-foot ShopRite. The company also helped bring the project up to date by renovating the common areas and the façades of the center. Levin Management also added outparcels to accommodate a Texas Roadhouse and Moe’s Southwest Grill.

Mixed-Use Prevails

There are few new projects hitting the greater Philadelphia area, and the developments that are gaining traction combine the “eat-work-play” concept that includes restaurant, office and retail space.

Will Simpson, an associate with Federal Capital Partners, says, “The concept is very common in urban real estate these days — people want to work and play where they live.”

This concept is especially relevant to Center City, where approximately 38 percent of residents walk to work, according to the CPDC, which notes that a business located on the 1400 block of Walnut Street in Center City can expect to see an average of more than 2,000 people every hour.

Federal Capital Partners will deliver a mixed-use project at 1616 Walnut Street in the second quarter of 2014. The development will include 150,000 square feet of residential units and 27,000 square feet of retail.

The company previously capitalized on the mixed-use concept with another project at 1701 Arch Street in Philadelphia that delivered at the end of June. The project includes 111 residential units and 9,000 square feet of retail. The retail component of the development is anchored by a 5,221-square-foot Wawa, which serves as a flagship urban concept for the convenience store chain.

Pearl Properties is developing The Granary, which will be complete in July 2013. The project will include 40,000 square feet of retail, 250 apartments and an underground parking garage.

Pearl Properties also has two developments in the pipeline known as The Granary and The Sansom, both of which are expected to be complete in July 2013. The Sansom, located in Center City at the intersection of 16th and Sansom streets, includes 104 apartments and 10,000 square feet of retail.

The Granary is located in Center City at the intersection of 20th and Callowhill streets. The project includes 40,000 square feet of retail, 250 apartments and an underground parking garage. President Jim Pearlstein says the company is targeting neighborhood-type retailers to occupy the retail component. He notes that the company chose the location for the project because of the dense population, high pedestrian traffic and strong economic drivers of the Logan Square neighborhood.

Logan Square/Art Museum is a submarket of Center City with a population of approximately 8,500. Also, 40 percent of residents within Logan Square work within the core of Center City, helping to increase the number of people that walk to work and increase pedestrian traffic for retail developments in the area.

The 164,000-square foot Bakers Centre, developed by U.S. Realty Associates Inc., was financed in part with a $12 million Redevelopment Assistance Capital Program grant from the state of Pennsylvania.

Despite the heavy population growth and strong economic drivers of the area, U.S. Realty Associates’ Bakers Centre took a while to get off the ground because of a lack of financing that was ultimately satisfied thanks to the state. The project was subsidized through the state of Pennsylvania with a $12 million Redevelopment Assistance Capital Program grant, which supports projects that show significant potential for economic growth and creating jobs.

The 30-acre site is the former headquarters of Tastykake Baking Company. The center will include 220,000 square feet of retail and will be anchored by a 71,000-square-foot ShopRite when it opens in summer 2013.

“Governmental agencies are creatively coming up with programs that are funding opportunities to help put these projects together,” says Bianchi. “So in turn, the developer can go back to the retailer and make them a very competitive rent deal.”

Competitive rent deals encourage retailers to provide quality products at low prices that not only benefit the area’s economy, but continue to reap benefits for the customer.

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