Monday, October 12, 2015

Growing Demand for High Street Retail in Philadelphia

by Steve Lubetkin,
Investment demand and pricing for retail properties in Philadelphia have skyrocketed, and rents have reached their highest levels along Walnut Street.

The report cites “the secular reemergence of our inner cities,” as a driver of demand for high street retail shops, and predicts “an upward trajectory for the foreseeable future.”

Center City Philadelphia’s average household income increased 52 percent between 2000 and 2015, and the number of households earning more than $500,000 a year nearly quadrupled in that time period. Households between $200,000 and $500,000 jumped 454 percent.

Increasing numbers of professional workers occupying 27 million square feet of class A office space also are contributing to new demand for upscale shopping opportunities.

But even with the obvious demand, a blizzard of announcements by retailers and developers, and all the ribbon cuttings and groundbreakings going on, it wasn’t very easy to document it with data.

In the report, Surging Demand for Urban Retail, Anderson says with all modesty that his research into urban retail of all kinds in many large cities was groundbreaking, because very little data had ever been collected on high street retail economics.

“I have dug about as deep as anyone to find out data about this property type, and it is extremely difficult to break into,” Anderson tells exclusively. “It sheds some light on a very non-transparent property type, in fact one of the most opaque property types out there.”

Trying to find rent histories for retail properties in cities like New York or Chicago is difficult, as there is no central data collection for this kind of information, he says.   Anderson assembled what he describes as “one of the nation’s first true High Street retail rent indices, based upon actual lease transactions.” He says he spent months digging up and reviewing actual lease documents to assemble the data.

The index will be valuable for investors because now they will know volatility and rent growth in high street retail vs. shopping centers, offices, or apartments. “It helps a lot with decision-making.”

For prospective tenants, knowing about rent histories and rental rate growth could help in the decision to sign a lease.

“I don’t know if it’s going to deter you from signing a lease, but certainly if you’re at the top of the market, you may want to see what your risk is from signing at this point in the market, and what kind of downside there might be."

Prime rent in Philadelphia has grown at the second-fastest rate for cities since the first quarter of 2008. The 88 percent increase in prime Philadelphia rents has only been exceeded by growth in Miami prime rents, which were up 141 percent in the same period. Still, even with the robust growth, Philadelphia prime rental levels at the end of 2014 were at $225 per square foot, a fraction of the $3,600 rate in New York.

“Part of it is that more retailers and more investors are getting comfortable with Philadelphia’s high street and a lot of the dynamics that are occurring in Center City. That’s pushed up rents.”

From 2001 to 2014, Philadelphia's High Street Retail Rent Indicator, which accounts for actual ground-level lease transactions under 10,000 square feet along Walnut Street, increased 108 percent. Through the first six months of this year, the index rose 15 percent to $154 per square foot, its highest level ever, and a big jump vs office rents, which only went up eight percent in the same time period.

Visitor spending will also contribute to high street retail sales. The Philadelphia Convention and Visitors Bureau indicates that overseas visitors to the city increased 70 percent from 2003-2013, and the recent successful visit of Pope Francis to the city did much to enhance the city’s worldwide reputation for being able to manage large-scale events.

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