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Walnut Street Wasn't Center City Retail's Biggest Pandemic Loser

Going into 2020, the stretches of Walnut and Chestnut streets that make up Philadelphia’s retail high streets were expected to struggle with vacancies.

More than two years after the pandemic turned retail real estate upside down, that reality has come to pass, but it may not even be the most concerning development for Center City retail.

Alterra Property Group's Leo Addimando, Colliers' Larry Steinberg and CLA Principal's George Kotridis at Bisnow's Philadelphia State of the Market event at 1600 Market St. on Sept. 29, 2022.

Storefront vacancy sat at 17% across Center City after the first half of this year, according to data from Center City District — much higher than the 6.4% vacancy rate at shopping centers across Philadelphia reported by Colliers for the same time period.

But while digitally native brands and some local entrepreneurs have taken smaller chunks of space on Walnut and Chestnut, no market seems to be developing for vacated space on the ground floors of office buildings in the city’s business core, Colliers Senior Managing Director Larry Steinberg said at Bisnow’s Philadelphia State of the Market event at 1600 Market St. on Sept. 29.

“We’re having a lot of trouble leasing up retail space under office buildings, especially on Market Street and John F. Kennedy Boulevard,” Steinberg said, adding that he doesn’t believe conditions will improve until significantly more workers come back to those offices.

Kastle Systems data from the last full week of September indicated Philadelphia offices were occupied at 39.4% of pre-pandemic norms, the lowest percentage of all 10 markets tracked by the building security firm.

The most recent CCD data found that at the end of August, foot traffic by nonresident workers in Center City was at 56% of 2019 levels — a number that CCD Vice President Prema Gupta expects to increase now that Comcast called employees back to the office for three days a week in September and was likely joined in doing so by many smaller firms, she said.

Center City District's Prema Gupta, Northwestern Mutual's Nylz Reyes and American Real Estate Partners' John Chesley

“It’s about getting people downtown, re-establishing patterns and making people feel comfortable about it,” Gupta said. “Some people are coming back to work, and we’re seeing the value of that.”

If the average office worker only returns three days a week, that puts a meaningfully lower ceiling on the revenue that office-adjacent businesses can expect, Gupta said. But Center City’s daily population of residents averaged 17% higher than in 2019 at the end of August, while visitors and shoppers were at 78% of 2019 levels. Meanwhile, leasing has increased from 2020 and 2021 levels according to data from both Colliers and CCD.

“There are a lot of challenges, but what has really saved us is our residential population,” Gupta said.

That residential population, owing to its age and relative affluence, is attractive to digitally native brands like Allbirds, Glossier and Brooklinen, all of which have either signed leases or opened on the 1700 block of Walnut Street since the pandemic began, Steinberg said.

JPMorgan Chase's John Bazzano and Josh Seiff

The replacement of older, potentially less relevant brands like Ann Taylor, Gap and Brooks Brothers with online-first brands improves high street vibrancy. But the latter group requires very little square footage for its stores, which function as much as branding and interaction vehicles as repositories for physical merchandise. Like with office building-based retail, spaces that are ill-suited for small tenants will require a reversal of current trends to have a positive outlook.

“The nature of retail is that it’s going to be really difficult to fill larger spaces,” Steinberg said. “The larger spaces [are] still empty. You can walk up and down Walnut Street and see them; they’re not hard to find.”