Each Part Of The Philadelphia Market Is Affected By Millennials

When you take stock of a commercial real estate market as a whole, like we did at Bisnow’s Philadelphia State of the Market event at 1735 Market St, something becomes crystal clear—the necessity of fitting Millennials’ needs and whims dominates every decision of developers, no matter the sector.

Retail

The effects of the sea change in retail to online shopping are still being felt everywhere. As Dean Adler of Lubert Adler Partners (above, right) put it, “We’re in the second, huge transformational period in retail.”

The first transformation took place in the 1960s with the rise of big, indoor malls centered around large department stores like Macy’s and J.C. Penney. Now, those institutions are “pretty much crashing” and giving way to online retailers who can more nimbly suit customer demands, according to Dean.

“Probably only 150 of the 800 malls developed in that period are going to remain relevant,” Dean said, singling out the large malls in King of Prussia and Cherry Hill as the safe malls in the Philadelphia region.

While that may leave millions of square feet across the country in what feels like sinking ships, Dean says that, for some, repurposing a mall building to make it either a more attractive outside shopping center or a different use entirely is a good investment.

“Buying a Class-B mall with Macy’s, J.C Penney and such and trying to keep it alive is a slow death," Dean said. "Is there a way to ‘de-mall’ and take an inside mall which isn’t relevant, open it up and make it live again with a significant discount to replacement costs?”

Among the possibilities for what one would make out of a mall, Dean mentioned a property in Florida that he helped to convert into an amphitheater.

For the retailers themselves, it is crucial to better integrate their brick-and-mortar stores with their e-commerce and social media presences to create more experiential shopping dynamics—all to find more effective ways of connecting with Millennials, now the most powerful consumer demographic in the country.

Meanwhile, restaurants and entertainment continue to be the biggest driving factors in getting Millennials out of the house, according to Post Brothers’ Matt Pestronk (above, left).

“We’re really seeing those businesses rush into the market,” Matt said.

Multifamily

Millennials continue to flood urban centers, and Philadelphia is just beginning to see Class-A multifamily properties opening up to accommodate them. Korman Communities’ Brad Korman (above, center) noted that even with the new construction, the market is “under-apartmented.”

“If [the Philadelphia market] added 10,000 units, it might take a minute to absorb it, but it will be absorbed and development could continue,” said Brad.

And yet, Aramark’s new headquarters building no longer possesses the apartments it was initially slated to have, and Mack-Cali pulled out of a multifamily project in Center City, so there appears to be real concerns from investors about too much, too soon. That doesn’t mean the whole market will start heading in the wrong direction, however.

“We’re taking a break [from building],” Brad said. “There’s been a lot of new construction in Philadelphia, we’ve added some supply, and once that supply gets absorbed and people feel good about it, you’ll see construction again.”

And of course, in discussing what works in new multifamily projects, the focus is once again on anticipating the needs of Millennials. For that, one word comes up every time: amenities. Whether with fitness centers, dog runs and other tenant-exclusive features, or with a ground floor for retail (especially restaurants), amenities are a consistent draw that justifies higher rents.

Those prices have been going up over the past few years, but they may not keep doing so.

“I don’t think tenants can pay much more in Class-A developments than they are, because developers have pushed the envelope so much,” says Matt.

With rent possibly flattening and construction “taking a break,” developers can load up with more ideas for the next wave—like getting creative with green space, which will be a crucial amenity as urban density increases.

Office

Developers and investors in office space in the Philadelphia market are just as concerned, if not more so, than residential groups when it comes to attracting Millennials, but the game is slightly different. How do you create office space that make businesses more appealing to the Millennial talent pool?

Once again, the refrain is amenities. 1735 Market, which hosted the event (below), is a shining example of a modern, amenity-driven office space. Equity Commonwealth COO David Weinberg (above, second from right) claimed “1735 Market St will have the world’s best amenities when we’re done [with renovations].”

“It’s all about talent [for businesses]” Brandywine Realty Trust’s Jeff DeVuono (above, far left) said. "Physical environment is a more important component to that decision process than it was five, 10 and 20 years ago."

Even as new office product is on the horizon at the new Comcast Tower and Schuylkill Yards, amenities are a crucial weapon in the competition for talent, which means existing office product has to adjust with renovations.

“You have to create this experience to differentiate your product,” David said. “That means, unfortunately in the office business, buying your building again over a period of time.”

The good thing is that Philadelphia is attracting and keeping talent like never before, a testament to the growing strength of its eds and meds industry. Philly is now retaining its students at a greater rate than Boston, long considered the gold standard in that department, according to HFF’s Doug Rodio.

As the workforce changes, office tenants’ demands change with it—not just because workers need more amenities, but also because they use space differently, and need less of it. Philadelphia is poised to benefit from this trend because unlike many other markets, its major new construction office buildings coming online in the near future will not be built on spec.

“You’re seeing glimpses of new supply in Philadelphia," David said, "but not nearly as dramatic as what you’re seeing in other markets across the country.”

As a result, optimism is as strong in the Philadelphia office market as it is in any sector.

“I expect 2016 to be the high watermark in terms of office sales in Philadelphia’s central business district,” Doug said. “We do see new capital sources coming in here in a big way, driven by true rent growth and improved fundamentals.”

As good as the market looks now, though, indicators predict it could look even better in a couple of years—a reason why some Philadelphia-based companies are selling off property today to load their war chests.

“We think having cash 12 to 18 months from now will prove to be a much better strategy than buying today,” said David.

When those companies are ready to buy, they might be looking at a more diversified market, with viable properties outside of Center City and University City; a positive development, and one spurred by the Millennial workforce’s demand for amenities.

“Instead of being a city of neighborhoods, tenants will have a much broader search for space because the buildings will be amenitized and there will be many more options,” said Doug.