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For Soft Goods Retail, Center City Is Still Losing To King Of Prussia

For years now, what good news has come out of the retail market has been driven by the growth of restaurants and fitness centers, especially in urban areas. In Philadelphia, that is beginning to cause some frustration.

MRP Realty Managing Director Charles McGrath and Center City District Director of Business Attraction and Retention Casandra Dominguez

“If you polled 10 retailers and asked them if they had a store in Philadelphia, I’m willing to bet that seven of those 10 would say, ‘Yes, in the King of Prussia Mall,’” CBRE First Vice President of Retail Services Paige Jaffe said at Bisnow’s Philadelphia Retail Summit. “And of course, that’s not Center City. It’s the most difficult part of drawing in retail tenants.”

As one of the best-performing malls in the country, King of Prussia has a roster of luxury apparel and fashion retailers that Center City cannot match, even on its prime drag, Walnut Street.

“The brands that I see having success on Walnut Street are more approachable; I don’t anticipate Cartier opening a location there,” Post Brothers principal Randy Hope said. “Philadelphia’s got grit; it’s a tough city for outsiders, but there are a lot of other tough cities.”

For Center City District Director of Business Attraction and Retention Casandra Dominguez, convincing a national retailer to locate in Center City, either in addition to or instead of King of Prussia, is a big part of her job. One of her primary talking points in those conversations is Center City’s access to transit and its residents’ dependence on it.

Five Below Real Estate Manager George Ryan and Paramount Realty Services Vice President of Retail Leasing Nicole Johnson

“That urban population doesn’t want to sit in traffic and shop at a mall; they’d rather take a train to New York if they want that high-end shopping,” Dominguez said. “King of Prussia can’t have both the suburban and Center City customer, whereas Center City has the multimodal transit and the suburban-based workers to the point where it’s the only place that can capture meaningful numbers of both urban and suburban demographics.”

Some modern tenants, like "clicks-to-bricks" retailers UNTUCKit and Warby Parker, have opened stores in Center City, but they are a far cry from the Dolce & Gabbanas of the world. As the luxury stores remain in their suburban ivory tower, discounters like TJX Cos. and Philly-based Five Below are among the few soft goods purveyors expanding nationwide.

Those stores largely prefer shopping centers, but do have Center City presences. (Five Below is headquartered at 701 Market St. and a TJ Maxx is opening up in the East Market development.) Five Below Real Estate Manager George Ryan expressed a preference for power centers, with co-tenancies like Walmart and Ulta to drive traffic for Five Below’s “impulse buy” strategy.

“In the next couple of years, we’re going to get more aggressive,” Ryan said. “We anticipate a couple of deals in former Macy’s, Sears, Kohl’s and such. But it’s really about co-tenancy for us.”

CBIZ Tax & Advisory Group Director Chris Jones, PREIT Executive Vice President Joe Aristone and CBRE First Vice President of Retail Services Paige Jaffe

Five Below’s transition from inline spaces to repurposing former anchors is encouraging news for shopping center landlords, but underscores urban retail’s increasing dependence on services and entertainment, rather than goods. Walnut Street in particular has dealt with a rash of store closures, and a large portion of replacement tenants are restaurants. Some panelists expressed hope that other retailers are simply being more patient and picking their spots.

“If you walk up and down Walnut and Chestnut today, there’s more vacancy than we’ve seen in the past few years,” Jaffe said. “But with each one of those vacancies, there’s a story — whether due to a lease that just expired and another will fill in, or there was a retailer that wasn’t performing. Maybe it was due to them being on Walnut Street, but largely it has been that retailers are not performing overall, and they’re rethinking strategy across the country.”

Fast-casual dining is possibly the most aggressive subset of restaurant tenants in terms of expansion, with small footprints and replicable, scalable models. The proliferation of stores like Sweetgreen, honeygrow and their ilk has filled what would be a lot of vacancies, but they might be heading for a market correction of their own.

“I think we’re reaching a bit of a saturation point with fast-casual,” Metro Commercial principal Michael Gorman said. “There are just too many options, and I think there will be some fallout in the next couple of years, unfortunately.”

Feliz Restaurants co-owner Brian Sirhal, Metro Commercial principal Michael Gorman and Five Below Real Estate Manager George Ryan

Gorman told Bisnow after the event that he started getting the sense that fast -casual is peaking in the past six months, as “some of the [brands] are beginning to plateau.”

In the Philly area at least, honeygrow has the benefit of home field advantage, but across the country, too many different operators are behaving like they are the most original concept out there.

“If there are 15 names in the space, it’ll always dilute the sales,” Gorman said.

On the bright side, most fast-casual eateries have small footprints of 3K SF or less, which makes them much easier to replace than a Kmart or Sears. Those albatrosses are turning into multiple stores, distribution hubs or being razed completely in favor of apartments and hotels to make shopping centers into mixed-use communities.

But while landlords wonder about the best way to achieve density in such developments, Center City already is among the most dense downtown areas on the East Coast, especially in the demographics retailers covet most.

CBRE First Vice President of Retail Services Paige Jaffe, Post Brothers principal Randy Hope and MRP Realty Managing Director Charles McGrath

Millennials and empty nesters abound in the area, and they are uncommonly well-educated and make an average of $125K per year. It is a story Dominguez and other advocates for the area have been telling for years to attract retailers, with some success.

Fashion District Philadelphia, PREIT’s redevelopment of the Gallery Mall in Market East, is still months away from opening, but PREIT Executive Vice President Joe Aristone believes the tenant roster it is putting together will prove the appeal of the area.

“I think you’re going to see the final version of our project that will bring a ‘wow’ factor based on what retailers we’ll have in [Fashion District],” Aristone said.

Aristone and MRP Realty Managing Director Charles McGrath both said Center City’s main goal should be to convince businesses to expand from suburban malls into the city, rather than move from one area to the other. PREIT, which owns the second- and third-most-trafficked malls in the region (Cherry Hill Mall and Plymouth Meeting Mall, respectively), believes it can convince some of those suburban tenants to follow it to Fashion District.

HFF Managing Director Chris Munley, Federal Realty Investment Trust Vice President Chris Fleming and Feliz Restaurants co-owner Brian Sirhal

“There is absolutely room for a retailer to have an additional location in Center City,” Aristone said.

A major facet of what entices retailers to expand into an area is growth, and that is where Philadelphia is struggling. Its job growth is sluggish when compared to other urban markets, and with the business tax structure possibly becoming even more complicated, Dominguez cited it as the biggest impediment to retail’s future in the city.

“If I was to spend money on one thing to boost retail, I’d lower business taxes to produce more jobs,” Dominguez said. “We’ve seen a huge amount of residential growth, and that’s why the retail has grown, but for it to keep growing, we need more jobs.”