Retail Research

Market Report Second Half 2018

Philadelphia Metro Area

Expanding Retailers Bolster Market

As Vacancy Hits 10-Year Low Retail 2018 Outlook

Strong leasing activity as stores add locations. Restaurants, 1.8 million sq. ft. Construction:
fi tness centers and non-traditional users including healthcare Deliveries remain stable year over
will be completed
facilities are among the many retailers fi lling vacant space in year as 1.8 million square feet is
the last four quarters. Buoyed by the highest growth in retail completed in 2018. The largest
sales over the past six years, Philadelphia’s strong retail sector portion of the new inventory will be
is also attracting new stores to the region. Grocer Sprouts will in suburban Philadelphia.
open its fi rst location in the state during the third quarter at
Lincoln Square in South Philadelphia. The mixed-use 20 basis point Vacancy:
development will offer 100,000 square feet of retail space that Net absorption of more than 2.4
decrease in vacancy
will also include PetSmart and a small format Target. Target million square feet during 2018
also plans to open three other reduced size stores in Northern will offset store closures, result-
Liberties, Haddon Township and Devon later this year. ing in a vacancy decline of 20
basis points to 5.1 percent.
Retail demand especially strong in urban environments.
New households seeking walkable neighborhoods near amenities Rents:
generate robust demand for retail space in communities such as
5.7% increase
in asking rents
Rents will continue an upward
Center City, University City and Market East. Modest construction climb. as the average asking
levels amid an increase in households have tightened vacancy in rent jumps 5.7 percent to $17.74
nearly all submarkets within the city of Philadelphia to below 4 per square foot following a 4.8
percent over the past four quarters. A wave of mixed-use per-cent leap last year.
residential projects with ground-level retail space are scheduled
for delivery throughout the market this year, providing walkable
neighborhoods in the suburbs as well, prompting further demand
for retail inventory marketwide.

Investment Trends
• A price disconnect between buyers and sellers in the
Local Retail Yield Trends Philadelphia market remains. Assets priced appropriately,
Retail Cap Rate 10-Year Treasury Rate however, will trade quickly at cap rates that average in the
low-6 percent area for single-tenant assets with multi-tenant
12% yields nearly 100 basis points higher.
9% • The potential for larger returns is moving more investors to
Average Rate

consider multi-tenant properties. Assets with fewer than fi ve

6% national necessity-based retailers in neighborhoods with
favorable demographic trends are especially desired. Over
3%
the past 12 months, small strip centers in the market traded
0% at an average of $170 per square foot.
00 02 04 06 08 10 12 14 16 18*
• Internet resistant retailers such as restaurants, hair salons
and auto parts stores are garnering buyer attention. During
the past four quarters, auto parts stores exchanged hands at
an average of $270 per square foot with fi rst-year returns in
the upper-5 percent range.
* Cap rates trailing 12 months through 2Q18; 10-Year Treasury up to June
29 Sources: CoStar Group, Inc.; Real Capital Analytics
Philadelphia
2Q18 - 12-MONTH TREND
Employment vs. Retail Sales Trends EMPLOYMENT:
Employment Growth Retail Sales Growth 1.3% increase in total employment Y-O-Y
YearChange

6%
0% • Employers added 38,900 workers to payrolls during the
3% past 12-month period, down from 44,500 positions one
year earlier. The hiring dropped the unemployment rate
by 40 basis points annually to 4.3 percent in June.
Year- over-

-3% • The education and health service sector led employment

gains, adding 17,500 jobs during the period, followed by
-6% professional and business services with 11,700.
08 09 10 11 12 13 14 15 16 17 18*

Retail Completions CONSTRUCTION:

Completions Absorption
1.7 million square feet completed Y-O-Y
(thousands)

8,000
• After the fi nalization of 1.9 million square feet one year
6,000 ago, developers delivered 1.7 million square feet in the
most recent four quarters. Another 1.1 million square
4,000 feet is underway with completions slated into 2020.
Feet

• Developers are most active in Suburban Philadelphia

Square

2,000
submarkets with more than 1 million square feet due
0 in 2018.
08 09 10 11 12 13 14 15
16 17 18*

VACANCY:
Vacancy Rate Trends
Metro United States
30 basis point decrease in vacancy Y-O-Y
12% • Net absorption topping 2.6 million square feet reduced
vacancy by 30 basis points to 4.9 percent year over
9% year in the second quarter. This follows a 50-basis-
Rate

point decline last year.

Vaca
ncy

6%
• The multi-tenant vacancy rate decreased 80 basis
3% points annually to 5.2 in July, while asking rents
registered a 5.6 percent hike.
0%
08 09 10 11 12 13 14 15 16 17 18*

RENTS:
Asking Rent Trends
6.7% increase in the average asking rent Y-O-Y
Change

Metro United States

16% • During the most recent four quarters, the average asking
rent marketwide climbed 6.7 percent to $17.59 per
8% square foot, after a 2.7 percent rise last year.
-Year

0% • The highest rent among submarkets is found in King of

r -over

Prussia/Wayne. Here the average asking rent reached

Yea

-8% $36.33 per square foot at midyear, soaring an annual

34.1 percent, while vacancy sat at a tight 1.4 percent.
-16%
08 09 10 11 12 13 14 15
16 17 18*

* Forecast
 Retail Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 JOB GROWTH* FIVE-YEAR POPULATION GROWTH** FIVE-YEAR HOUSEHOLD GROWTH**

Metro 1.3% 37,200 or 0.1% Annual Growth 78,000 or 0.7% Annual Growth
U.S. Average 1.6% U.S. 0.7% Annual Growth U.S. 1.1% Annual Growth

2Q18 RETAIL SALES PER MONTH

$4,006 Per Household

U.S. $3,925
2Q18 MEDIAN HOUSEHOLD INCOME RETAIL SALES FORECAST**

Metro $71,524 $1,547 Per Person Metro 20.3%

U.S. Median $60,686 U.S. $1,507 U.S. 20.0%

* FORECAST **2017-2022

Lowest Vacancy Rates 2Q18* Potential For Higher Returns Will Keep
Investors Searching in Philadelphia Market
Y-O-Y
Submarket Vacancy Basis Point Asking Y-O-Y % • Multi-Tenant: The average price inched up 4 percent
Rate Change Rent Change
to $235 per square foot annually in June. Buyers were
most active in the Northeast Philadelphia submarket.
King of Prussia/Wayne 1.4% -60 $36.33 34.1% • Single-Tenant: Fewer quality properties available
SUBMARKET TRENDS

kept the average price per square foot at $303, up 1

South Philadelphia 2.3% -90 $19.57 12.7% per-cent over the past 12 months. Assets in Lower
SALES TRENDS

Bucks County received heightened investor attention.

Horsham-Willow Grove 3.1% -130 $18.93 1.9%
• Outlook: Multi-tenant cap rates nearly 200 basis points
Northwest Philadelphia 3.5% -60 $17.10 -4.6% above those in nearby New York City will draw addi-tional
investors to shopping centers in Philadelphia.
Northeast Philadelphia 3.6% -110 $17.27 5.5%

Delaware County 3.8% -50 $14.28 -2.0%

Price Per Square Foot Trends
Ft. Wash./Spring House 3.8% -200 $16.68 -5.7% Single-Tenant Multi-Tenant
eciati
Appr

on

20%
North Camden County 4.7% -20 $15.11 8.5%

10%
North New Castle County 4.8% -550 $21.60 11.8%
Year- over- Year

0%
Upper Bucks County 4.8% 160 $15.98 -5.4%

-10%
Norristown/Valley Forge 4.9% -50 $13.35 -11.4%

-20%
Overall Metro 4.9% -30 $17.59 6.7%
08 09 10 11 12 13 14 15 16 17 18*
* Submarkets with more than 5 million square feet.
* Trailing 12 months through 2Q18 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Retail Research | Market Report

By DAVID SHILLINGTON, President,

10-Year Treasury vs. 2-Year Treasury
Yield Spread Tightens Marcus & Millichap Capital Corporation
10-Year Treasury 2-Year Treasury Fed raises benchmark rate, plans for additional increases.
8% The Federal Reserve recently increased the federal funds rate by
0 bps
Rate

25 basis points, lifting the overnight lending rate to 2 percent at the

20bps
260bp
23

6% 280
bps
conclusion of its September meeting. The Fed noted infl ation has

s
4%
broadly reached its target, while household spending and corporate
investment remain robust. The Fed indicated an additional rate hike
2% this year and projects as many as three increases in 2019.

CAPITAL MARKETS
0% Lending costs rise alongside Fed rate increase. As the Fed lifts
04 06 08 10 12 14 16 18*
rates, lenders have been tightening margins to compete for loans.
Despite these efforts, borrowing costs remain on an upward
trajectory, which is tightening returns and pushing some investors to
Retail Mortgage Originations by Lender
seek greater yields in secondary markets. However, though buyers
100% may try to push back on pricing due to increased loan costs, some
sellers remain convinced that the strong economy and sturdy NOI
75% performance substantiate aggressive pricing and a widening
Total

National Bank
International Bank expectation gap is the result. If interest rates rapidly surge upward,
50% Regional/Local Bank this gap could quickly widen, slowing transaction activity.
of

CMBS
Perce

Insurance
nt

25% Financial
The capital markets environment remains competitive. As the
Private/Other Fed tightens policy, global investors have been acquiring Treasurys
in order to capture a considerable yield premium, keeping the 10-
0%
13 14 15 16 17 year Treasury near 3 percent. Portfolio lenders are providing debt
for retail assets, with leverage typically capped at 60 to 65 percent.
The sector has become increasingly nuanced, with deals more
* Through Sept. 26
scrutinized due to e-commerce competition. Ten-year loan
Sources: CoStar Group, Inc.; Real Capital Analytics
structures will range between 4.95 and 5.25 percent, depending on
tenancy, location and sponsorship. Continued consumer spending
National Retail Group underpins U.S. growth, supporting retail demand and driving a 10-
basis-point decline in vacancy to 4.9 percent this year.
Visit www.NationalRetailGroup.com

Scott M. Holmes
Senior Vice President, National Director | National Retail Group
Tel: (602) 687-6700 | scott.holmes@marcusmillichap.com

Prepared and edited by

Nancy Olmsted Philadelphia Office:
Senior Market Analyst | Research Services
Sean Beuche Regional Manager
2005 Market Street, Suite 1510
For information on national retail trends, contact:
Philadelphia, PA 19103
John Chang (215) 531-7000 | sean.beuche@marcusmillichap.com
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information;
however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-
level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise
noted. This is not intend-ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specifi c investment
advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge
Pipeline; U.S. Census Bureau