Philly's High Street Retail Corridor May Get Slammed With Vacancies In 2020
This year is shaping up to be one of turmoil for Philadelphia’s prime retail corridor.
The stretch of Walnut Street west of Broad will likely experience a rash of closures due to flagging performance and/or expiring leases, multiple retail brokers told Bisnow. While some landlords are looking forward to the opportunity to revamp long-occupied spaces and fill them with tenants more relevant to current trends, the turnover will be disruptive near term, and potentially damaging long term.
“It will absolutely affect traffic on the street and sales,” Colliers International Senior Managing Director Larry Steinberg said. “This is why in a shopping center, a lot of retailers have clauses in their leases that if anchors or certain other stores go dark, their rent changes or they have the option to leave.”
The 1700 block of Walnut Street in particular will have several stores vacating their properties in 2020 — adding to the closures of second-floor nightclub Coda and fast-fashion brand Zara in the past year. MSC Retail is currently marketing for lease the entire building that once housed Coda and has Wells Fargo on the ground floor.
Chestnut Street has been gaining in popularity in recent years, especially for food and beverages this year, to the point where many consider it a part of Philly's "high street." A Center City District report that included both Chestnut and Walnut streets between Broad and 20th streets pegged the high street vacancy rate at 5.9% as of Q2 last year.
To Steinberg and MSC Retail Managing Director Jacob Cooper, that low number doesn't match the reality on the street. Since Q2, Zara and Forever 21 closed their doors on Chestnut Street, as did Barneys New York at the corner of 18th and Walnut. The space given back just from those three closures exceeds 30K SF.
“I hate that data point [vacancy], because what it does not take into account are tenants considering leaving in the short term, or landlords that would like to recapture that space in the short term,” Cooper said.
The block is populated by several retailers in categories that have fallen out of favor, such as non-discount apparel stores like H&M, Talbot’s and Ann Taylor (whose off-price brand LOFT also occupies space on the block). Jackie Balin, CBRE's senior broker for the area, referred to such spaces as "shadow vacancies," where landlords are looking for tenants for when the current occupant goes dark.
Some of the block's landlords are eager to revamp some stale storefronts to be suitable for more contemporary brands and uses, Cooper said. MSC represents the landlords of several buildings on the 1700 block of Walnut Street, including Zara's former store at 1715-1717 Walnut.
"There will be a lot of repositioning; some very strategic architectural changes as spaces on that block transition," Cooper said.
Much of that redevelopment will likely be out of necessity, Steinberg said, as several departing retailers occupied multistory spaces and the market for those in soft goods retail is virtually nonexistent in 2020.
1715-1717 Walnut is the first of this round of vacancies to lock down a backfill tenant, with Tiffany & Co. moving over from the Bellevue building on Broad Street. But the jeweler is only taking 4K SF on the ground level, where Zara leased 18K SF across two floors.
"We consider Tiffany as kind of the first piece of the puzzle," Cooper said.
Splitting a storefront so that the second floor can be a viable retail space on its own is an expensive job for what would likely be lower rent, provided a landlord can find takers for much less appealing real estate.
“If you get a tenant that only wants the ground floor, then you’re really in bad shape,” Steinberg said, noting that other likely vacancies, like Zara, have much more square footage on the second floor than the ground floor.
No matter the situation, real estate is always full of optimists, and the glass-half-full set believes the next wave of tenants will be swift to arrive and better suited to today's urban residents and workers. Cooper and Balin also believe Walnut Street's elite status in the city will help rents remain largely stable.
“A lot of digitally native brands expanding into physical stores will want to be on Walnut, because they’re looking for the greatest level of recognition," Balin said. “A brand that really wants to make an impression, or feels like it belongs in the most visible area will want to be on Walnut.”
Steinberg believes that leases signed this year won't be able to match rates set back in 2010, and that if landlords wait around to find a tenant willing to pay them, the vacancies could last years.
The ground floor of the Drexel Building at the northeast corner of 15th and Walnut streets, owned by City Councilmember Allan Domb, has been vacant since at least mid-2015, despite a sign on the door declaring it the "best retail corner in the city." Steinberg estimates that the vacant space totals about 23K SF.
Arden Group Chairman and CEO Craig Spencer, whose firm owns the Gap store on the 1500 block of Walnut, said at Bisnow's 2020 Philly Forecast event that he can't wait for the clothing seller to leave, but not because he expects to push the rent.
“I was looking at perhaps $100/SF to $150/SF, and I don’t think we’ll get that,” Spencer said.
Spencer is excited to replace Gap with a more exciting user; among the newest notable entrants to Center City streets are more experiential concepts like the Rumble Boxing gym at 1520 Walnut St. or a Rescue Spa that will be replacing the Barneys New York store. But Steinberg worries that swapping luxury goods for services or experiences won't be an even trade.
“Service retail that takes advantage of traffic already there doesn’t add to the corridor at all," Steinberg said. "You’re not driving in from Exton to spend the day at a gym.”
Cooper called Steinberg's description an oversimplification, and both he and Balin believe that foot traffic in the heart of Center City isn't beholden to destination shoppers.
“I think it will all improve, and create more lively pedestrian traffic," Cooper said. "I don’t know if it will change the character of the streets, but I think you’ll at least see fewer shopping bags ... I think it will extend the day, and you’ll see more morning traffic and late evening traffic.”
With all the changes coming to Walnut Street, it isn't hard to see why there can be such difference of opinion on the drag's future. It might be well into 2021 before the dust begins to settle and show who was right.