Monday, March 4, 2024

Retail Is Only Property Type in Philadelphia To See Vacancy Shrink

By Brenda Nguyen Costar

The Philadelphia commercial real estate market has undergone divergent trends across its major property sectors—retail, industrial, multifamily and office—between the first quarters of 2020 and 2024. While retail defied expectations and experienced steady demand and declining vacancy, the industrial and multifamily property sectors faced interim supply challenges due to the recent development boom.

The retail property sector surprised many by showing resilience amid the pandemic, witnessing a decline in vacancy rate since early 2020. Robust consumer spending fueled by stimulus checks and growing wages, alongside limited new retail construction, had driven strong demand for store space among retailers. Low-interest rates and easy access to capital further facilitated retail business expansions, bolstering absorption performance across the Philadelphia region.

As a result, Philadelphia’s retail vacancy has declined by 0.4% to 4.2% in the first quarter of 2024, the lowest level since CoStar began tracking data in 2006.

The industrial sector also experienced substantial demand but has encountered a distinct short-term challenge. Developers swarmed into the sector, building more than 46 million square feet of new inventory in just four years, an unprecedented pace. The recent construction boom surpassed even healthy demand, which totaled over 36 million square feet during the same period. Consequently, Philadelphia's industrial vacancy rate increased by 1.4% to 6.9% in the first quarter of 2024 as new supply flooded the market.

Similar supply trends played out in the multifamily sector. While developers produced over 35,600 new apartments in the past four years, the absorption, or net change in occupied units, of 29,000 units could only partially keep up, resulting in a 1.2% vacancy increase from the first quarter of 2020 to 7% in 2024.

Meanwhile, the office sector experienced the most significant vacancy run-up during this period largely the result of deteriorating demand rather than new construction. While nearly 1.8 million square feet of new office space was still built over the past four years, over 8.7 million square feet of existing office space was returned to the market, leading Philadelphia's office vacancy rate to climb by 3.2%—the highest among all the property types in the region.

Unlike the short-term, supply-driven challenges of industrial and multifamily in early 2024, the office sector's challenges are longer-term and demand-driven.

These divergent performances across the Philadelphia commercial market suggest that each sector is navigating its own unique set of opportunities and challenges in the post-pandemic era.

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