As Pandemic Effect Rolls On, So Do Increases In Philly Vacancies — With One Exception

Retail vacancies are in decline since the pandemic began four years ago. But that is the only sector to buck the trend of increasing emptiness across Philadelphia’s commercial real estate landscape, which is worse for wear in every other big asset class.

As of the first quarter, Philadelphia’s overall retail vacancy declined 0.4% from Q1 2020 to an overall 4.2% vacancy rate, according to a CoStar analysis.

Storefronts experienced a combination of boosts over the last four years, according to the report. Limited new construction alongside low interest rates early in the pandemic, plus a steady boost in consumer spending thanks to government stimulus checks, helped retailers survive and thrive as office, multifamily and industrial all faltered over the same period. 

Philadelphia retailers remained resilient even as interest rates increased and retail theft nudged up. Philadelphia retail’s vacancy rate represents the lowest level since CoStar began recording that data in 2006. 

The same can't be said for other asset classes in the city, where conditions have degraded since the onset of the pandemic.

Office continues to lag, with vacancy growing by 3.2% in the first quarter compared to the same period in 2020. Developers built 1.8M SF of new offices over the last four years. At the same time, 8.7M SF went back to the market. 

A February white paper from Savills showed that Philly's office vacancy sat at more than 23%.

The office sector's challenges aren't going away, according to CoStar. The market's troubles are “largely the result of deteriorating demand rather than new construction.” 

Strong retail and lagging office has been a dynamic throughout the years since the coronavirus first struck Philadelphia and shuttered stores, restaurants and offices.

“There’s this weird phenomenon of residential construction continuing at a strong pace in Philadelphia, people wanting to live in the city, wanting to play in the city, wanting to dine in the city as restaurants and retail are reemerging,” Nick Gersbach, CBRE Philadelphia senior vice president, told The Philadelphia Inquirer. “But for whatever reason, not wanting to go into an office in the city.”

Short-term overbuilding has also hurt the industrial and multifamily sectors. 

Developers added too much industrial space, about 10M SF over four years, CoStar said, building at “an unprecedented pace.” As a result, Philadelphia's industrial vacancy increased by 1.4% to 6.9% in Q1.

Like industrial developers, multifamily housing developers overestimated the demand for space. 

Despite an influx of thousands moving to Center City and other parts of the city since the pandemic began, there are more housing units than people.

Developers added over 35,600 new apartments in the past four years. Yet the total net change in occupied units in Philadelphia of 29,000 units only partially kept up with new builds. 

As a result of building too quickly for the market to absorb, multifamily vacancy increased by 1.2% from Q1 2020 to 7% in Q1 2024.