Philadelphia’s 61-million-square-foot community-neighborhood shopping center market is still in the doldrums, with weak demand and competition from new formats. Although the problem is less acute in metro Philadelphia than in other markets that experienced more exuberant development, there is still too much space chasing too few consumer dollars in the wake of the American debt binge. According to Colliers “weak consumer spending, persistent vacancies and retailer instability have continued to impact the market.”
The community-neighborhood shopping center vacancy rate was 9.7% as of the second quarter of 2012 according to Reis, unchanged from the prior quarter and the quarter before. The rate finally ticked down from the high point of the current cycle in July, to 9.6%. Though high for Philadelphia and the Northeast, these rates are low compared with the second quarter U.S. average of 10.8%. For power centers, Philadelphia’s second quarter vacancy rate was just 5.3%, down 30 basis points from the prior quarter and 50 from a year earlier. It is below the U.S. averages and Northeast Region averages at 6.3% and 5.8%, respectively.
Colliers reports a vacancy rate of 7.9% for all types of shopping centers in a broader market extending from central Pennsylvania to Delaware, unchanged from six months earlier. “Vacancy decreases in Southern New Jersey and the Lehigh Valley were offset by vacancy increases in the Central Pennsylvania counties and the inner-ring suburban Philadelphia counties,” according to this source. For community-neighborhood centers, Reis predicts the vacancy rate will end 2012 at 9.7%, the same rate as at the start of the year. From that point, however, the rate is forecast to fall fairly rapidly to 9.1% at year-end 2013 and 7.4% at year-end 2016. The latter rate would still be higher than the low vacancy in the prior two cycles, at 6.1% and 5.4%.
SUPPLY AND DEMAND
Community-neighborhood shopping center net absorption turned positive at 26,000 square feet in the second quarter of 2012 following two slightly negative quarters, but 42,000 square feet of new space completed construction during the quarter and the vacancy rate failed to decrease. The rate finally fell in July thanks to 40,000 square feet of net absorption; 245,000 square feet remains under construction as of the date of this report. Net absorption had been negative each year from 2008 to 2010, but in 2011 there was little new supply and limited but positive net demand. Reis predicts a repeat for all of 2012.
From 2002 to 2011 this market averaged just under 600,000 square feet of new community-neighborhood space per year, but from 2013 to 2016 Reis predicts an average of 764,000 square feet per year will be added. The vacancy rate is nonetheless expected to fall because net absorption is forecast to average more than 1 million square feet per year, the best stretch of demand since the late 1990s. For now, however, Colliers reports “discount and other ‘new reality’ retailers were heavily represented on the list of larger leases, and the area supermarket chains were engaged in a complicated cycle of expansion, contraction and musical chairs. Struggling retailers continued to close underperforming locations.”
Much of the current retail action is in other retail formats. Reis reports the completion of 294,000 square feet of retail space in three mixed-use projects in the first half of 2012, leaving two projects under construction. One is the 745,000-square-foot Uptown Worthington Square in Malvern, which had been stalled by the recession. Also stalled but still moving forward is the 768,000-square-foot Providence Town Center lifestyle center in Collegeville. These huge projects are partially built and open, as development continues. Reis reports one power center with 400,000 square feet under construction, but 3.3 million square feet of additional power center space is planned and proposed. The planned/proposed total for community-neighborhoods space is 3.0 million square feet.
Community-neighborhood shopping center rents are edging up very slightly, but then the rent decreases during the Great Recession were small as well. In the second quarter the average asking rent increased 0.2% to $19.80 psf, while the average effective rent edged up 0.1% to $17.50 psf. The year-over-year change was 0.4% asking and 0.3% effective; there was no change by either measure in July. Reis predicts a modest increase of 0.7% by both measures for all of 2012, following an even smaller increase in 2011.
These small gains, however, are similar to the U.S. and Northeast region averages, and Philadelphia’s rents fell far less than the U.S average during the recession. Unlike previous economic upturns, moreover, Reis does not expect Philadelphia’s community-neighborhood center asking rent gains to trail the U.S. average from 2013 to 2016. While the local increases are forecast to be modest, rising from 1.5% asking and 2.3% effective in 2013 to 3.4% asking and 4.3% effective in 2016, small rent increases are expected to be typical during the forecast period.
Power center rents continue to be somewhat stronger according to Reis data. The $22.89 psf average asking rent in Philadelphia in the second quarter of 2012 was up 0.6% from the prior quarter and 1.6% year-over-year. The year-over-year gains were 1.1% for the Northeast Region as a whole and 0.6% for the U.S. For all retail space in a broader region, however, Colliers reports that “asking rents remained flat and there is no anticipated increase in the near term.” Reporting on “prime retail rents” for street retail in the city Philadelphia, Cushman & Wakefield reports rents up in West Philadelphia/University City and stable elsewhere. “The Philadelphia retail market is heading in a favorable direction as 2013 approaches with some significant proposed developments in the pipeline,” according to this source.