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The Philly Region Is Resisting Retail's Closure Wave

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The first quarter has seen a cascade of bad news for national retail chains like Toys R Us and Bon-Ton, but the Philadelphia region has not been seriously hurt.

Toys R Us

There are only three Bon-Ton locations in the suburban counties of Philadelphia — two in Bucks County and one in South Jersey, according to CBRE Retail Researcher Peter Kondelis. Toys R Us makes up less than 1% of the region’s retail space, and embattled Sears has already closed a hefty chunk of its stores in the area; if it is the next domino to fall, the impact will not be as severe, CBRE Research Director Ian Anderson said.

Big-box store closures can have outsized effects on a region’s vacancy numbers due to their large footprints, but in this year’s first quarter, South Jersey actually saw retail vacancy decline, CBRE research shows. Southeastern Pennsylvania saw a modest increase in vacancy, but that doesn’t mean it is trending in an opposite direction from the suburbs across the Delaware River.

“South Jersey had a much more difficult time emerging from the Great Recession,” Anderson said. “For the past two years, it’s started to come into the fore with the rest of the region, but otherwise it’s been lagging. Because of that, there’s been less interest in development and redevelopment in South Jersey, and that has contributed to some of the declining vacancy as opposed to Suburban PA.”

Developments like Suburban Square in Ardmore, the Promenade at Granite Run and elsewhere have contributed to rising vacancies as new space comes online, which is an encouraging opportunity rather than cause for concern. In South Jersey, very little development has happened in years, but it is similarly encouraging that space is getting backfilled with more contemporary uses.

“Some people took advantage of the downturn to improve the quality of real estate [in South Jersey],” Metro Commercial principal Dan Brickner said. “There are projects like the old Kmart in Marlton that got repurposed into residential and a facility for Virtua Health.”

Just as healthcare is a massive part of the South Jersey office market, Virtua Health and its competitors are exerting a new level of influence in retail spaces, with urgent care centers and specialty facilities occupying former vacancies in the lifestyle shopping centers that dot the landscape. Virtua is also repurposing a former Acme grocery store across from the Centerton Square shopping center in Mount Laurel into a cancer center, Brickner said.

The decline of department stores has hurt secondary and tertiary shopping centers far more severely than top-tier centers and dense locations — a trend that favors the Philly region, which boasts three malls that have performed incredibly well in the past few years. The King of Prussia Mall, Christiana Mall and Cherry Hill Mall all draw from a wide population base and have virtually no vacancy.

The Philly Region Is Resisting Retail's Closure Wave
King of Prussia Mall

For other centers, the region is still densely populated enough that closing department stores can be considered a positive, due to the nature of anchor leases that traded lower rents for the presumed benefit of drawing business in for the smaller surrounding stores.

“That sounds like a positive spin from an owner or broker, but I’d say it’s actually true,” Anderson said. “You never want to see a space go vacant and have to deal with leasing risk and re-occupancy, but generally speaking, the overall trend is that they’re able to vacate these old, struggling retailers that were paying below-market rents and not bringing customers and replace them with higher rents, more tenants and ones that drive more customers.”

One of the most popular second lives for department stores in the area is for experiential retail, which in the suburbs is more geared toward family entertainment and activities. Like the iFly skydiving simulator in the King of Prussia Mall, they can have footprints that make up a large portion of big-box stores, but not always with as much return as the new calculus would predict.

“Those deals, from a landlord’s perspective, are not as lucrative due to a higher tenant improvement package and lower rent, but I do think they’re a new anchor, because not only does it drive traffic, it keeps people there,” MSC Retail Managing Principal Doug Green said. “Because if you’re going to a VR location or iFly, you’re committing to a day there. Say, at Legoland [in the Plymouth Meeting Mall], you get a ticket, you wait and you go shop.”

A Dave & Buster’s is coming to a former big-box store in South Jersey, and a new go-kart track on Route 130 in Cinnaminson “went into an old department store and draws from a tremendous distance,” Brickner said.

Though much of the Main Line suburbs of Philadelphia can create walkable environments around train stations, New Jersey is much more dependent on car traffic. That exacerbates the need for retail that can get people out of their house, which is increasingly the domain of food, beverage and experiences. Christiana Mall’s neighbor, Christiana Fashion Center, has done something similar with arcades, bowling and a movie theater.

Grocery stores, healthcare and fitness uses have also become increasingly important to shopping centers for the same reason. These sectors of retail that neighboring tenants would fight against due to parking requirements are now invited in because they reliably bring shoppers to a center. But there remains some uncertainty about whether these replacements for traditional anchors can behave the same way.

“The question is that if someone is there to pick up milk and eggs, will they stop off to buy apparel?” Green said. “And I don’t think there’s a real answer to that question.”