Increasing expenses put squeeze on retailer profits in Philadelphia

 By Brenda Nguyen CoStar Analytics

Philadelphia's retail market showed signs of softening heading into 2025, with annual net absorption, the net change in occupied retail space, falling well below the historical average. Despite this slowdown, the local market remains relatively tight, especially in the suburbs.

While retail locations in Center City face challenges from reduced office occupancy, limited new construction and fewer demolitions of older retail space have kept the market stable. Here's what CoStar market analytics is hearing from local industry players in the Philadelphia retail market in early 2025.

Restaurants, gyms, beauty salons and daycare centers are the most common types of retailers seeking urban locations below 2,500 square feet

Several urban retail brokers report that restaurant and daycare centers have consistently signed leases in the past decade, but fitness and beauty businesses have gained in popularity in recent years. Second-generation restaurant spaces remain high in demand, given that a commercial kitchen build-out could cost over $200,000. Meanwhile, grocers and some banks have re-entered the downtown retail leasing market in search of available big-box locations.

Retailers are scrutinizing pro forma projects and construction costs more than ever

A developer commented that retailers are more actively engaged with the development process due to heightened costs. While hard construction costs have eased in the past year, they’re still at least 20% to 25% higher than in 2020. Additionally, extended development timelines further add carrying costs. As a result, retailers are making more construction site visits than in past years.

Operating expenses have increased faster than rent growth

A broker noted that while retail operating expenses haven’t increased as much as multifamily and industrial, tepid retail rent growth has squeezed profit margins for landlords with a higher proportion of caps on in-place CAM or common area maintenance expenses, referring to the charges a tenant pays to the landlord in addition to the base rent to cover the costs of maintaining shared areas of a property. Property taxes still make up the largest share of landlord expenses, but insurance has also increased significantly over the years. Since most retail leases are on a triple-net basis, tenants are still primarily responsible for footing the bill.

Insurance companies are scrutinizing claims more and require security measures by the insured to be eligible for claims

A retail landlord commented that insurance companies typically require tenants to enhance lighting, security personnel coverage, camera systems and secured access controls by the landlord or tenant to qualify for claims. Philadelphia tends to see higher claims frequency than Boston and Washington D.C. and similar levels as Chicago, Baltimore, New York City and Los Angeles in terms of frequency of claims and geographic concentration.

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