What a difference a year makes.
Around this time in 2019, the Philadelphia retail market was experiencing something of a Renaissance. Driven by forward-thinking projects in chic neighborhoods, such as Fashion District Philadelphia, as well as the delivery of new phases of retail at destinations like Schuylkill Yards and the Philadelphia Navy Yard, the market was embracing new users, customers and spaces alike.
The evolution of Philly’s retail market at this time inevitably bred winners and losers. Six months later, the onset of a global pandemic would give rise to political policies that crushed capacities and foot traffic for retailers and restaurants. Add in a healthy dose of elevated online shopping, and the result was a one-two punch that was simply too much for some retailers to survive.
Such is the scene playing out today in the City of Brotherly Love. But real estate professionals are quick to point out that the demise of some retailers was unavoidable before COVID-19 came around, and that ultimately the city’s strong demographics will usher its retail market through the recession.
“We shouldn’t lose sight of the fact that pre-COVID, several categories of retailers were not thriving or were irrelevant or burdened with too much debt that made them difficult to operate,” says Steve Gartner, CBRE’s executive vice president of retail for the greater Pennsylvania region.
“COVID-19 has separated weaker retailers and made closures happen more readily,” adds Robin Zeigler, executive vice president and COO of Cedar Realty Trust, a grocery-anchored shopping center REIT with multiple centers in the Philadelphia area.
“But the strong demographics and resiliency of Philadelphia will facilitate a bounceback,” she adds. “Some elements will be sustained in terms of how public spaces are treated or how seating in restaurants is spaced out. But ultimately people will return to some semblance of normalcy — it’s just a question of when.”
Urban Core Pivots
Residential density has been key to the survival of retailers and restaurants in the city’s downtown area, sources agree. However, the degree to which retail vacancy will increase in the second half of 2020 hinges on several unknowns, primarily the extent to which Philadelphia’s office and tourism markets rebound.
“Pre-COVID, we saw a vibrant and vital downtown Philadelphia market across all commercial property types — a healthy ecosystem of living, working, shopping and playing,” says Gartner. “But our downtown core relies on conventioneers and business travelers, and with those and office users sharply diminished, retailers are left to survive off residents and occasional visitors. We’re lucky we have a densely populated downtown area that is walkable and not overly reliant on public transit.”
At Fashion District Philadelphia, a redevelopment of the former Gallery at Market East mall by Pennsylvania Real Estate Trust (PREIT) and Macerich, operations are slowly returning to normal after a turbulent summer. In addition to welcoming some new tenants like Designer Shoe Warehouse and Kate Spade Outlet into the fray, Fashion District Philadelphia recently reopened several of its core entertainment attractions, including AMC Theatres, Candytopia and Round1 Bowling & Amusement.
As of mid-July, all of PREIT’s malls throughout the state had reopened at some level of reduced occupancy. (For more information on how the company managed the disruption caused by COVID-19 and supported its tenants, see page 21.)
“Things are definitely getting back to normal at Fashion District, and we’re thinking about how we can celebrate our one-year anniversary both digitally and in-person,” says Heather Crowell, PREIT’s executive vice president of strategy and communications. “But what we’re noticing — and this has been pervasive across the industry — is that people are coming out with purpose and leaving with multiple bags as opposed to lingering and hanging out as they normally would.”
Prior to the pandemic, mixed-use lifestyle projects like Fashion District built their brands through placemaking — creating destinations with food, drink and entertainment that fostered interaction and new experiences among shoppers. In the post-COVID-19 world, that paradigm has shifted toward purpose-driven shopping that includes online ordering and curbside pickup options.
Crowell says PREIT is working within the new guidelines, even to the extent that it impacts the fundamental real estate.
“During this period we’ve realized that stores can still be useful spaces for fulfilling online orders even when the mall is closed,” she says. “We’re focused on finding new ways to deliver to customers, and we’ve stopped conceiving of our properties as just retail, dining and entertainment. Malls can be great last-mile fulfillment centers. So we’re throwing open the gates in terms of repurposing our real estate to be multi-functional and to take advantage of locations that can service dense populations.”
More than 1.6 million square feet of retail space was under construction or completed in Center City in 2019, with another 234,000 square feet proposed in new projects, according to the Center City District. New retail space is centered around the area’s historic department store corridor on Market Street East, says Michelle Shannon, vice president of marketing for Center City District. There, National Real Estate’s East Market project added 105,000 square feet of retail in 2018. The Lits Building, redeveloped by Brickstone, added 100,000 square feet of retail to the area. With the inclusion of Fashion District Philadelphia, the corridor has seen $780 million in new investment, according to Shannon.
“Fashion District boasts popular national retailers, entertainment and dining, including some first-to-market concepts such as Wonderspaces, City Winery and a collection of local retailers,” says Shannon. “In addition, Market East, a multi-use development which began opening parcels in 2018, continue to add retail and restaurants, and just recently the new Canopy Hotel and restaurant.”
Center City District has been making strides to keep retail thriving in the district during the pandemic. Many retailers in the area have re-opened, while others have appointment-only service.
“With office workers not back in large numbers, walk-in foot traffic is a challenge, but pedestrian volume have significantly increased since Labor Day,” says Prema Gupta, vice president, parks and public realm, for Center City District.
Many restaurants changed their models to focus on carryout and curbside business. In May, state legislators temporarily relaxed liquor laws paving the way for takeout cocktails, which was a boost to many restaurants. Shortly thereafter, outdoor dining was permitted in Philadelphia and the city made way for new options, allowing for the expansion of outdoor seating into the curb lane of many streets.
“In addition, several areas have closed streets to automobiles so that restaurant customers could occupy the entire cartway,” says Gupta. “Restaurant customers are enjoying the variety of outdoor options.”
Philadelphia’s restuarants are allowed to have indoor seating at 25 percent of their former capacity at present, but Gupta estimates this will move to 50 percent within the next few months. Center City District has created several programs to encourage residents to shop and dine in Center City. Center City District Restaurant Week will run September 13-25, allowing diners to choose between indoor and outdoor dining, with a takeout option included for the first time. The District will also host Shop Center City Saturday on September 26, with more than 40 retailers and restaurants participating with in-store promotions and discounts.
Also important, interest in retail space is still active.
“We’re continuing to see retailers of all dimensions look for space opportunities in Center City,” says Shannon. “While only a few are looking to take advantage of a rent dip, those that are looking seriously are those who see long-term revenue from our diverse customer base. Our residents have not gone away, as many are choosing to shop and dine closer to home.”
West of Center City, retail and restaurant users in the thriving University City neighborhood face a similar challenge with regard to diminished traffic and customer volume. In August, both Drexel University and the University of Pennsylvania opted to cancel in-person classes for the fall semester.
These institutions are major drivers of retail and restaurant usage in University City, which has also seen a surge in medical and life sciences development in recent years, and have helped Philadelphia establish a favorable “meds and eds” demographic reputation.
Schuylkill Yards, Brandywine Realty Trust’s mixed-use development that features office, residential and retail space, was another one of the larger and more desirable retail developments to see new phases come on line last year.
The developer declined to be interviewed for this story, but noted in its second-quarter earnings report that some positive leasing activity has persisted through the pandemic. Since mid-March, Brandywine has executed about 216,00 square feet of leasing with 28 commercial tenants. Construction on all of the firm’s new projects has also continued uninterrupted.
Moving away from that neighborhood, much of the city’s retail scene in areas like Rittenhouse, Fishtown and Midtown Village has also shown strong resiliency to the pandemic, source say.
“These centrally located areas have the “high street” retail districts with great mixes of local and national retail and restaurants and core service retail, and that’s the real driver of the health of the Philadelphia retail market,” says Jacob Cooper, partner and managing director at local brokerage firm MSC Retail. “These neighborhoods have real walkability and historic character and strong cross-traffic between them.”
The fact that COVID-19 has forced people to patronize local establishments near their homes as opposed to more upscale, trendy stores at mixed-use destinations has helped some local retailers thrive during the pandemic. In addition, with retail rents falling, opportunities for certain users to expand in the market are being created.
“We are seeing a good amount of activity on the high streets from tenants that are looking to reposition themselves and take advantage of the climate,” Cooper says. “Athleisure, luxury goods, jewelry, cosmetics — we’re actively working with tenants in all of those industries to secure space within these high-street areas.”
“Though the streets are showing a lot of vacancy and closure, we’re seeing a lot of new-to-market, high-quality retailers that are interested in Philadelphia that are mitigating risk by having leases with short-term flexibility to test out spaces — maybe a one- to two-year initial term with the option to convert to a more permanent lease,” he adds.
Sources interviewed for this story agree that brick-and-mortar retail is not going away as a result of the pandemic. And while newly established protocols like social distancing and heightened sanitation may last well beyond the crisis, the basic human desire to socialize and engage with others will not evaporate in its aftermath.
The impacts of variables that represent key drivers of retail growth in this market — office usage, tourism, in-person academic classes — are yet be seen. But the simple fact remains that retailers and restaurants in Philadelphia are no different from those in other major markets in the sense that their successes and failures will always hang on their abilities to adjust to changes in consumer preferences.
COVID-19 has radically accelerated the importance of having this operational flexibility in a business model. Moving forward, the ability to incorporate wiggle-room into lease structures, inventory management, sales projections and operating costs will be paramount to the market’s full recovery.
“As we enter 2021, it will be really important to remain nimble and to pay attention to consumer patterns and to be able to adjust to them,” says Zeigler. “Whether the consumer is looking for more curbside pickup or outdoor seating or more outdoor areas for entertainment or gathering — wherever consumer sentiment lands coming out of this, that’s where the owners and the operators have to be.”
— By Taylor Williams. This article appeared in the September issue of Shopping Center Business.