Smaller Retailers Snap Up Space Amid Construction Decline

Smaller tenants like gyms, restaurants and grocery stores are snapping up remaining suburban leases as construction has slowed and retail rents have slightly increased, according to a new report.

Fusion Gym signed for 200K SF within Bensalem’s Neshaminy Mall in the former box of a Macy’s store, and quick-service chain Raising Cane's signed a new 68K SF lease in Turnersville. Grocers also continued their growth trajectory, with Sprouts Farmers Market signing for two locations totaling nearly 50K SF in the Philadelphia area and cult-favorite grocer Trader Joes announcing a Valley Forge store, the report by CBRE shows.

The Philadelphia metro’s average asking rent was $19.26 per SF in Q2, up 66 cents from the same period last year. And retailers are struggling to find space, Steve Gartner, an executive vice president at CBRE, told Bisnow.

"The trend is a continuing tightening of supply of real estate," Gartner said.

The region's availability rate for retail spaces remained consistent over the last year at 7.5%, CBRE reported.

Overall, standout malls like King of Prussia and PREIT’s Cherry Hill Mall remained almost fully occupied. Major anchor tenants like Camp and Signature Workspace have promised anchor leases next year.

In addition to the rise in rent and static availability, developers are building less retail space than last year. There are 485K SF of shopping center spaces currently under construction, less than the 534K SF under construction in the second quarter of 2023.

Because of the slowing retail construction rate, more landlords are doing adaptive reuse if possible, Gartner said. The cost of construction and interest rates make such projects an expensive proposition though. Even a storefront facade upgrade can run well into the hundreds of thousands of dollars, Gartner said.

"Landlords are faced with a really daunting cost to divide big spaces and refit them. So they will try their best to rent spaces in as-is condition with no modification and not dividing them, because dividing spaces is very expensive," Gartner said. "If you think about a big box that you want to make into two tenants, well there's a huge cost of redoing the front facade's very distinct look."

Some big-box retailers opt to adapt their business to make smaller stores work rather than pay more to convert a large space. This strategy can be complex, but some of the newer chains are getting better at executing these projects. Grocery Outlet, for example, excels at this type of reuse, Gartner said.

"Where we're seeing a lot of that grocery category continue to be voracious is that it is led by Grocery Outlet ... being very suitable for backfilling of Rite Aids, because they're an especially smaller-footprint grocer."

In addition, small experiential retail, like the new Puttshack in the 2 Liberty Place building, can be easily slotted alongside office and retail, he said. More of that type of space is coming to the city, Bisnow recently reported. 

Though the CBRE report shows the largest lease-ups are taking place in suburbs like Burlington and Main Line East, Gartner noted that retail tends to trend back to the city's center even if the pandemic has caused some pain. For example, he said, quick-service chains often left their leases when they were no longer supported by people coming into the office to have lunch each day.

However, vacancies are starting to be filled in the heart of the city, he said.

“These are the retailers that are going to the Back Bay in Boston, they're going to Georgetown, they're going to Chicago and they're going to Philly — and they're going to go downtown.”