Retail construction dwindles to new lows in Philadelphia

 By Brenda Nguyen CoStar Analytics

While Philadelphia has seen a steady construction pipeline in recent years, construction starts on new retail developments have fallen to a new low in 2024. With one quarter left in the year, 2024 is on track to record the lowest level of retail groundbreakings seen in decades, reflecting a similar trend observed nationwide.

Construction commenced on only 200,000 square feet of retail space this year across the Philadelphia region—a fraction of the more than one million square feet of retail construction starts that characterized previous years. The decline sets the stage for a record-low level of new retail inventory in the coming years, further constraining the availability of modern retail spaces in high demand.

Despite ongoing demand from retailers, new retail development has been underwhelming as developers increasingly focus on more quickly expanding sectors such as industrial and multifamily. Additionally, the combination of high borrowing costs and a slowdown in consumer spending have contributed to the sharp pullback in construction starts.

Consequently, national and local retailers face intensifying competition in securing in-demand locations due to a diminishing supply pipeline. Only 5% of the region's retail inventory was built within the last decade. Of this, a low 3.5% of this modern retail space is vacant, underscoring strong demand for this type of space. Given the limited availability, retail tenants increasingly find leasing opportunities by backfilling space that becomes available when retailers shutter existing locations due to bankruptcy or a company-wide restructuring.

Despite the current slowdown in retail construction, more than 6.5 million square feet of retail developments are listed in the proposal stage across the region. The retail sector's surprisingly strong performance in recent years has created pent-up demand for new projects.

While not every proposed project is guaranteed to break ground, the Philadelphia region should anticipate a pickup in new retail developments as interest rates gradually decline and consumer spending continues to strengthen. This should slowly alleviate the tight market conditions in coming years.

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