‘Not Just The Sum Of The Parts’: Philly Retail Embraces DNA Over NOI

Ground-floor retail serves as something like the open front door of a mixed-use project, telling the story of what is happening above and behind it, just out of sight. 

But telling that story well now takes more than rounding up a ragtag group of disparate tenants willing to pay the highest rents, panelists at Bisnow’s Philly Restaurant, Retail and Mixed-Use Summit said. In a harsher economic environment for developers, landlords and tenants alike, it means curating the right mix of tenants, creating synergies between them and embracing the mantra of “DNA over NOI.”

It also means sometimes saying no.

“It really begins at the inception of the project,” Toll Brothers mixed-use development associate Taylor Wos said at the Nov. 1 event, held at Broad & Noble. “It’s making sure that not only is the retail at the ground floor accretive to the residential, that it's an amenity, but it also needs to have its own identity that blends with the overall project.”

How a building “meets the ground” has become one of the most challenging parts of getting a project right in a harsher climate, Barton Partners principal and Director Seth Shapiro said. Most Philly-area mixed-use developers are erring on the side of experiential over convenience retail, but panelists said assets need to be looked at individually, and neighborhood amenities taken into consideration to pull together ingredients for a successful recipe.

At The Laurel on Rittenhouse Square, a 48-story skyscraper in Philly’s toniest neighborhood, Southern Land Co. is planning to give the people what they want, Vice President Brian Emmons said. That includes “best-in-class health and wellness, and then some of the best-in-class F&B.” The first three floors of The Laurel will offer 44K SF of retail space, including the first Philadelphia location of upscale fitness chain Equinox and a new restaurant concept from high-end restaurant group Schulson Collective.

At the other end of the market, a student housing project, Toll Brothers is offering an esports gaming lounge Wos described as Star Trek-like to lucrative effect, one that “drove rents substantially” and set it apart from competitors.

Federal Realty, which manages about 4.5M SF of mostly grocery-anchored shopping centers in Greater Philadelphia, is also embracing the DNA over NOI philosophy at properties like the Lawrence Park Shopping Center in Broomall, which completed a full renovation in 2022. Vice President of Asset Management Kari Glinski said that meant the creation of an outside-in experience that begins from the moment shoppers drive onto the property, including new landscaping, access and facade improvements.

The upgrades batted down vacancy, boosted sales and drew attractive and complementary tenants like J.Crew Factory, P.J. Whelihan's and Crumbl Cookies.

“It goes back to the [idea that the] sum of the parts is not just the sum of the parts. It truly is synergistic,” Glinski said. “We've created almost a snowball effect, if you will.”

Creating buzz and synergy means knowing when to say no, even when the money is right, Emmons said, offering the example of Southern Land’s mixed-use tower at 1620 Sansom St., where it is leasing up more than 15K SF of retail. 

Southern Land turned down numerous would-be tenants that offered concepts the company felt wouldn't add value. Southern Land is instead looking for partners it knows will perform and push rents up to the $3.70 per SF range.

“These fads and entertainment venues and, you know, crazy stuff. I mean, while they're going to pay rent, I don't think anybody wants to live below those types of amenities,” Emmons said. 

A slower, more deliberate approach makes sense amid higher interest rates, constricted capital, elevated construction costs and what Shapiro described as a local government that has overregulated itself and made itself inhospitable to new development over the last 18 months. Both he and Emmons said they are focusing on suburban developments as a result.

But Glinski, who described herself as a newcomer to the city, pointed to the city’s rapid rebound from the pandemic compared to peer cities like Washington, D.C., Boston, Seattle and Denver; the fact its retail vacancy is at its lowest point in a decade, about 7.5%; and a small pipeline of new product coming online.

“Despite all those headwinds and the big, bad boogeyman of retail, which is the internet … we have really strong fundamentals,” she said.

“We can tell that you're not born and bred here because that was very positive,” Shapiro joked.

Strong fundamentals or not, Wos said that moving forward, it is no longer enough to be a coffee shop that just sells hot drinks or a barbershop that only offers haircuts. Coffee shops are now pouring cocktails by night, while salons and barbershops are also selling food and beverages as businesses clamor to expand offerings and foot traffic.

“Whether you're in a plant store that also has a speakeasy that also has, like, a tea room, I think more of that is going to be prevalent in terms of retail activation and creating spaces that people can be in at multiple times a day [or] can stay there,” she said.

And while people might be getting activated, the opposite is true of cars. Panelists pointed to a broadening recognition that cities everywhere have been “overparking,” setting minimum requirements that may no longer make sense. Shapiro cited a September Rutgers Center for Real Estate white paper saying stringent parking minimums correlate strongly with higher rents.

The curbside pickup popularized during the pandemic, a far greater number of people working from home and the rise of ride-sharing has also eroded the importance of parking and opened up previously inaccessible neighborhoods to more development.

“Who amongst us has been in Fishtown in the last six weeks? Probably all of us. And if you went for dinner, you probably took an Uber,” MSC University Vice President Matt Stein said. “Ten years ago, you weren't going to dinner there.”

Convenience has its drawbacks, though. Mixed-use projects with residential are having to adapt quickly, creating spaces for ride-share pickups and drop-offs as well as lanes for food delivery. In some cases, Emmons said, projects with 100 to 200 apartments are seeing up to 40 to 50 food orders trucked in each night, creating traffic jams in front of buildings.

“It's trying to forecast those ‘next problems,’” he said. “I see that being a challenge, trying to incorporate the solutions into our next coming developments.”