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Who's buying retail properties in Philadelphia?

“You, me and REITs,” says Marc Cutler, vice president of NAI Mertz Corp., a Mt. Laurel, N.J.-based brokerage firm. “Private investors are unbelievable. The REITS are buying, and they've transferred lots of properties recently. Rouse, PREIT and Mills have all been active.”

In fact, PREIT staked a major claim on the city, buying six area regional malls from Rouse Co. in March for $548 million and establishing dominance in its hometown.

A short time later, PREIT obtained four more Pennsylvania malls in its Crown American Realty acquisition. Kimco also recently became a larger player in Philadelphia with its $441 million acquisition of the Mid-Atlantic Realty portfolio, which is made up of 8.2 percent Philadelphia properties.

The city's retail market is outpacing office and industrial leasing, Cutler says. In fact, retail properties in Philadelphia are offering higher returns than many other Northeastern cities. During 2002, the median sales price for multi-tenant space increased by 7 percent, to $88 per square foot. Single-tenant properties appreciated at a rate of 7.5 percent for 2002, with a median price of $119 per square foot.

Meanwhile, Philadelphia's 5 million people keep getting richer. For 2003, median personal income was $32,935, up from $31,698 in 2000.

But, there are a few dark clouds on the horizon. Unemployment is rising — to 5.6 percent this year from 4 percent last year. Population growth has slowed, with only 1.15 percent more people expected by 2007.

Overall, “things look good,” says Mark Taylor, Marcus & Millichap's national retail group director. There is solid, steady growth, with no wild gyrations.” Adds Jeffrey Algatt, regional manager of the Philadelphia office of investment advisors Marcus & Millichap: “We think rents, vacancies and property values will hold steady, if not show a couple of percentage points of improvement.”

Natural constraints and strong anti-growth movements in the suburbs kept new construction approvals in check, dropping to a projected 1.5 million square feet this year from 1.6 million last year, says Algatt. “There's not a whole lot of developable ground anyhow,” he says. “The market has really been under-demolished as opposed to overbuilt.”

While there's little new mall development, big boxers continue to grab available spaces. The locally based Goldenberg Group is developing two new projects to help Wal-Mart, Lowe's and IKEA further penetrate the market. One is a South Philadelphia power center that will accommodate a 200,000-square-foot IKEA super-store.

Big boxers are willing to go to extremes to gain share in the tight market. Though Wal-Mart already has 25 stores in the region, it is building more. In the Port Richmond district, Wal-Mart and local developer Wolfson Verrichia Group plan to file with the city for zoning changes to redevelop the former G.B. Goldman Paper Factory, now a noxious eyesore, into a 135,000-square-foot Wal-Mart.


Even with the slowdown in new construction, Philadelphia's vacancy rate has risen, though slightly, in the past 18 to 24 months, and will likely rise to 9 percent for 2003 (in the Metropolitan Statistical Area that includes Philadelphia, Montgomery, Bucks, Chester, and Delaware counties in Pennsylvania and Camden, Burlington, Gloucester and Salem counties in New Jersey). In 2002, the vacancy rate was 8.7 percent.

Retail rental rates vary, naturally, by submarket. The average currently stands at $17 per square foot for the entire metro area, climbing as high as $30 in some hotter, newer areas and dropping as low as $12 in older, blue-collar sections of town.

Grocery-anchored centers in the better suburban areas have been selling at as low as an 8.2 cap rate during the past 12 months, according to Marcus & Millichap. Unanchored centers vary greatly. “If it's a power center without a grocery anchor, you're probably still going to be in the high eight-cap range,” says Taylor. “But you can be in the 11- or 12-cap range for an older, 50,000-square-foot strip center in an older neighborhood.”

Joseph French Jr., with commercial real estate advisor Sperry Van Ness in Irvine, Calif., estimates retail space rentals at $16 to $20 per square foot outside of the city center. Space in town is renting in the $20 to $45 per square foot range, except, he says, for tony Walnut Street in Rittenhouse Row, where rents are $75 to $85.

Strip shopping centers are selling at approximately $102 per square foot, he adds, and mall properties for about $98. He says Walnut Street is the hottest market, with rents doubling in the past 12 months.

Leading buyers, French says, have included CBL & Associates, Allied Properties, Cedar Income Fund, Inland Retail Real Estate and First Washington Realty Trust. The top sellers are Lend Lease RE Investments, Vesterra Corp., Orix Real Estate Equities, Dream Associates and Ronus Properties.


One factor separating Philadelphia from similar-sized markets is the vibrancy and viability of its urban core. Since 1997, at least 3,500 new apartments were added in Center City, creating a consumer base that has attracted retailers such as Borders to the area. Now, Metro Development is attempting to lure a major grocery chain to fill a 30,000-square-foot, three-level space in its luxury apartment redevelopment, The Grande. Specialty grocers Whole Foods, Fresh Grocer and Food Source all passed on the site, due to its unconventional footprint. Plus, there's no parking, meaning the store would have to rely on support from residents within walking distance. Metro says it will have a retailer in place by spring 2004.

Queen Village, which adjoins the eclectic South Street area, is a “very hot” neighborhood for both residential and retail property, according to Taylor. Million-dollar-plus homes are going up within walking distance of both nightlife spots and office space. The local population consists largely of empty nesters and young professionals.

Another solid area is Chestnut Hill, a high-end community on the city's northwest side. Also, the city's far-northeast section features post-war development, a densely populated and strong middle class, and high barriers for entry. “When spaces become available there, they're taken,” says Taylor, “and when properties come on the market for sale, they're bought.”

Suburban Philadelphia contains several strong growth areas, including Mt. Laurel in Burlington County, N.J.; Bucks County; lower Makefield; Yardley; Newtown; and Chester County out beyond Exton. Montgomery County along the Route 422 corridor is another area, says Algatt, “that is seeing significant growth in single- and multifamily development. When you have a lot of new roofs the amenities will follow, and the amenities typically are shopping centers.”

Wealthy consumers are being encouraged to move back to town, “but there are more who are moving to the suburbs because it gives them an opportunity to take a very low interest loan on a mortgage and buy a really neat home,” says NAI Mertz's Marc Cutler. On the other hand, he notes, “I wouldn't say the shift is moving back to Philadelphia, but there are still pockets of Philadelphia County and the suburbs where people want to be close to the city.”

Market Profile/Philadelphia


  • Population 2002: 5.149 million

  • Estimated Growth Through 2007: 1.15%

  • Median Home Price 2002: $162,000 (+25.7% YOY)

  • Median Personal Income 2003: $32,935

  • Unemployment Rate December 2002: 5.6%


  • Vacancy Rate 2003: 9%

  • Average Cap Rate for Grocery-Anchored Center: 1.15%

  • Rent Range Per Sq. Ft. For Downtown Space: $20-$45

  • Rent Range Per Sq. Ft. For Suburban Space: $16-$20

  • Total Retail Completions 2003: 1.5 million

  • Median Home Price 2002: $205,000 (+17.4% YOY)

Source: NAI; Marcus & Millichap;

Shopping Center Sales - Philadelphia MSA
Sale Date Property Name Sale Price Price Per SF (Gross)
6/9/2003 The Rouse Mall Portfolio $469,000,000 $109
6/9/2003 The Rouse Mall Portfolio $80,400,000 $38
5/12/2003 Swede Square $8,000,000 $78
4/17/2003 Hillview Shopping Center $24,800,000 $119
4/3/2003 Pine Grove Plaza $8,300,000 $109
3/7/2003 Village at Cambridge Crossing $22,000,000 $169
2/27/2003 The Overlook At King Of Prussia $57,000,000 $305
1/13/2003 Market Square & Brandywine Town Ctr $137,000,000 $141
Source: Marcus & Millichap
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