Market East's New Retail Developments Are Bucking Against Negative National Trends

Philly remains a strong market overall for retail real estate, swimming against the national current — and the Market East area is providing a strong kick.

Though retail indicators continue to decline at a national level, total retail sales increased by 4.3% from the fourth quarter of 2016 to the same period last year in Philadelphia, according to a Cushman & Wakefield report. Sales are projected to increase again by 4.7% by the end of this year, in large part due to the significant new deliveries in Market East.

Situated just across the street from each other and a block away from the Pennsylvania Convention Center and Reading Terminal Market, the concurrent developments East Market and Fashion District Philadelphia will deliver around 1M SF of new retail space between them when completed in an area that was previously considered blighted.

Even before PREIT and Macerich decided to shutter and redevelop it into Fashion District, the Gallery had been dying a slow death as an inward-facing hodgepodge of outdated spaces. Around it, little was there to activate the street level at what was already one of the busiest areas in the city for foot traffic.

“Market Street East had been a notable retail location for nearly 150 years, but as retailers executed their expansion plans, they looked at areas like the South Philly waterfront where they could get parking and large spaces to satisfy the Center City customer base,” CBRE Managing Director of Retail Steven Gartner said.

As many retailers change their design strategy to use space more efficiently and the percentage of Center City residents without cars continues to rise, that equation has changed. Center City’s population density and round-the-clock activity has prevented it from experiencing the crushing blows many other retail markets have experienced.

“We’re seeing time and again that Philadelphia garners a lot of retailers’ attention,” Gartner said. “We continue to have a rare and enviable downtown vibe that few cities have, where we have hundreds of thousands in population in the center, where other cities will boast about having a 10th of that.”

East Market, an office-hotel-multifamily-retail development spread across multiple buildings, is being developed by National Real Estate Development over multiple phases. The earliest of its retail components, a MOM’s Organic Market grocery store, has already opened and is the first piece of a puzzle designed to provide all the essential retail components to the tenants in the towers above.

“We knew we needed a Wawa and a grocery store, and we knew we needed a gym and a place to grab a burger and a beer,” National Managing Director Dan Killinger said. “So that is all part of the vision to make it one community with what you can do downstairs when you’re done with work upstairs.”

East Market will indeed have a Wawa, as well as a City Fitness, an Iron Hill brewpub and restaurant, an AT&T Store and a new loocation for Fishtown-based Little Baby’s Ice Cream. Of the 125K SF or so of retail in the development’s first phase, over 70% has been leased. What space remains is along Ludlow Street beneath apartment buildings, which Killinger said will be “smaller-scale, food-and-beverage, neighborhood-making shops and services.”

“They will be things you want outside your front door as you leave your apartment, more akin with [existing retail along] 13th Street than on Market,” Killinger said.

Fashion District, meanwhile, will be a traditional shopping center akin to the Gallery Mall, but this time with more restaurants and with modern floor plates, as well as increased street frontage.

“The project started out as outlet-driven, but they decided there wasn’t as much of a need, so it became more of a hybrid," MSC Retail Senior Vice President Stanton Brown said. “It’s not unlike what’s happening in every mall, which is about experiences more than anything, including with more food uses.”

Fashion District’s Filbert Street side will be a restaurant row, and the third floor will contain an AMC movie theater, a lease that MSC Retail brokered. Among other notable leases is TJ Maxx, perhaps the most notable of the discount national retailers that continue to expand as most other soft-goods brands recalibrate in the face of the industry’s e-commerce transformation.

Both Fashion District and East Market, as well as other locations a block over on Chestnut Street, have had strong records of recruiting national tenants in an area where there previously were none. A big reason for its success has been its position as a less expensive counterpart to the high prices of Walnut Street, which saw year-over-year rent decline in the fourth quarter, according to Cushman & Wakefield.

“[Walnut Street rents] are falling because there are fewer retailers chasing spaces, with apparel retailers slowing their expansion and less able to pay top dollar,” Gartner said. “The value retailers are the ones that are really doing more vibrant expansions, and those are the ones that can go east of Broad Street.”

As with most new development, rents at East Market and Fashion District are outpacing anything else in the area so far.

“Our rents [at East Market] are probably in line with Chestnut Street [west of Broad],” Killinger said. “We knew that we could achieve rents that were not being achieved east of Broad, and we’ve done that. We still think that from a sales and traffic standpoint, there’s plenty of room to grow, but it’s come a long way from four years ago.”

Although the true effect of the new developments will likely not be felt for a few years, confidence is brimming that all the new retail will have a “transformative effect,” as Killinger put it. It may not change the hierarchy of Center City retail, but it will change the landscape.

“East of Broad is still a level below the traditional corridors, but the gap has narrowed significantly,” MSC Retail Sales Specialist Josh Weiss said. “I would expect west of Broad to remain at a premium, because most of the spaces west of Broad are more manageable, boutique spaces. The smaller the space, the higher per-SF rent you’ll get. And retail around Rittenhouse still benefits from the residential and office density of that neighborhood.”

Restaurants and some e-commerce retailers like Warby Parker and UNTUCKit that are new to brick-and-mortar have kept the strength of Walnut and Chestnut streets west of Broad, but east of Broad is where new development is delivering retail spaces in line with the current moment, giving the area a growth story completely out of step with the national retail moment.

“Philadelphia tends to have a wait-and-see attitude toward new projects, meaning some will be watching for the effects once they’re opened, rather than getting in there early,” Gartner said. “But retailers are making significant commitments where they didn’t exist before, so how could it not be better than it is now?”