RetailResearch

M A R K E T
Philadelphia Metro Area

O V E R V I E W
Third Quarter 2012

Retailers Target City Center with Urban Concepts

White-collar job creation in Philadelphia is fueling consumer demand, prompting retailers to expand in the urban core. Tech firms in particular are leading job creation downtown, relocating to areas where young, talented and tech-savvy workers want to live and work. Exemplifying this trend, software company Bentley Systems recently moved to Center City from Chester County, citing recruitment of top talent as the primary motivation. Mobile device company Fiberlink made a similar move, bringing 100 workers from Blue Bell into Philadelphias urban districts. These moves underscore the emergence of burgeoning tech companies at the core of the work force migration downtown. More than 20 tech companies are clustered in Old City alone. As additional residents and workers flock to the area, consumer demand is accelerating. Retailers that typically employ big-box formats in suburban areas are locating in Center City and introducing scaled-down floor plans. Ulta Beauty, for example, is moving to space on Walnut Street, joining a block already occupied by Apple, Urban Outfitters, and Free People. Marshalls is also moving downtown, opening a store in Market East, while Walgreens is planning a new location on South Broad Street, filling space vacated by Borders. Both Target and Walmart are scouting locations in Center City, likely implementing smaller, urban concepts. The stability in Philadelphias retail market will attract buyers with long-term investment strategies, while potential capital gains tax increases in 2013 will drive transaction activity in the near term. In the single-tenant arena, investors will target properties net-leased to national top-credit tenants, even as cap rates compress. A Walgreens in a densely populated area with favorable demographics, for example, can trade at cap rates in the low-6 percent range. Low interest rate financing for these assets will allow investors to maintain attractive yield spreads. Demand for multi-tenant properties is increasing as well. In a market where quality listings are scarce, grocery-anchored centers listed above $20 million that come to market will attract multiple bids from both private and institutional buyers, prompting some investors to shift focus to assets in outlying areas.

2012 Annual Retail Forecast

1.0% increase in total employment

Employment: Employment will gain steam in the second half, supporting a total of 27,000 new jobs for 2012, marking growth of 1 percent. The gain is a significant improvement from 2011, when the metro lost 2,500 jobs.

730,000 square feet will be completed

Construction: In 2012, roughly 730,000 square feet will be delivered in the metro. During the preceding 12 months, 645,000 square feet came online, less than half of the annual average over the past five years of 1.5 million square feet.

50 basis point decrease in vacancy

Vacancy: As tenants occupy an additional 1.4 million square feet this year, demand will outweigh supply additions. As a result, vacancy will trend down 50 basis points to a four-year low of 8.1 percent. In 2011, store closures and soft demand pushed up vacancy 10 basis points.

0.9% increase in asking rents

Rents: Asking rents will continue to trend upward this year, increasing 0.9 percent to $19.57 per square foot, a three-year high. Effective rents will climb 1.2 percent in the same time to $17.32 per square foot. Last year, asking and effective rents each gained 0.3 percent.

Economy

Employment Trends
Metro United States

After a loss of 5,200 jobs in the second half of 2011, hiring resumed in the first two quarters of this year, with the addition of 12,800 positions. A net gain of 7,600 jobs in the last year represents a 0.3 percent increase in total employment. The growing tech industry in Philadelphia contributed to the 11,700 new positions in the professional and business services sector in the first half, the largest six-month gain in 13 years. Also, hotel occupancy climbed 70 basis points to 66.1 percent in the first half, supporting the addition of 8,200 leisure and hospitality jobs during the period, a 3.6 percent expansion in the sector. Job losses in the government sector, as well as in the construction and manufacturing industries, weighed heavily on the overall employment market in the last year. Combined, these segments lost over 17,000 positions during that time. Outlook: Employment growth will gain steam in the second half, supporting a total of 27,000 new jobs for 2012.

4%
Year-Over-Year Change

2% 0% -2%

-4%

08

09

10

11

12*

Construction

Retail Completions
4
Square Feet Completed (millions)

In the last 12 months, developers completed 860,000 square feet of retail space in the metro, increasing stock 0.6 percent. The 156,000-square foot Court at Grant community center came online last year near Northeast Philadelphia Airport in Philadelphia County. The development pipeline contains roughly 500,000 square feet under construction in Philadelphia, with completion dates reaching into 2013. Completion of the XFinity Live entertainment complex in the second quarter brought 90,000 square feet of retail space to the stadium district in South Philadelphia. With financing options still limited for developers, over 10 million square feet remains on the drawing board. A substantial amount of inventory, totalling nearly 3 million square feet, is slated for Gloucester County, while Montgomery County has 1.8 million square feet proposed, though no start dates have been set. Outlook: By year end, approximately 730,000 square feet will come to market, which will expand inventory 0.5 percent.

08

09

10

11

12*

Vacancy

Vacancy Rate Trends

Metro United States

Demand for retail space picked up in the first half. Net absorption of 760,000 square feet helped push down vacancy 30 basis points to 8.3 percent, the lowest level since late 2008. In the last half of 2011, vacancy ebbed 10 basis points. Vacancy at community centers increased 20 basis points in the first two quarters to 9.3 percent, as tenants gave up 38,000 square feet. Conversely, a slight uptick in demand reduced vacancy at neighborhood centers 10 basis points in the same time frame to 10.2 percent. At power centers, limited development activity in the last year, along with net absorption of 575,000 square feet, supported a 130-basis point reduction in vacancy to 4 percent. In the prior year, vacancy contracted 100 basis points. Outlook: As tenants occupy an additional 1.4 million square feet this year, demand will outweigh completions. As a result, vacancy will trend down 50 basis points to a four-year low of 8.1 percent.
Marcus & Millichap

11%

10%
Vacancy Rate

9% 8%

7%

08

09

10

11

12*

* Forecast page 2 Retail Research Report

Rents

Year-Over-Year Change

With demand gaining traction, owners were able to raise rents modestly in the past year. Asking rents rose 0.4 percent to $19.44 per square foot during the period, while effective rents ticked up 0.3 percent to $17.14 per square foot. A similar trend took place in the prior 12 months, with asking and effective rents each creeping up 0.3 percent. Boasting the tightest community center vacancy rate in the metro, operators of these properties in Delaware County boosted asking rents 1.7 percent in the last year to $23.92 per square foot. At the same time, effective rents grew 1.3 percent to $20.74 per square foot. Improving operations helped raise revenues by 0.7 percent since the second quarter of 2011, though leasing incentives remained near peak levels of 11.8 percent of asking rents. Outlook: Asking rents will trend upward this year, increasing 0.9 percent to a three-year high of $19.57 per square foot. Effective rents will climb 1.2 percent in the same time to $17.32 per square foot.

Rent Trends
Asking Rent Effective Rent

6% 3% 0% -3% -6%

08

09

10

11

12*

Single-Tenant Sales Trends**

Median Price Per Square Foot

Single-tenant transaction activity increased 7 percent on a year-over-year basis. Drugstores and restaurants backed by creditworthy tenants captured the most investment dollars. As demand intensified for single-tenant product, the median price jumped 12 percent in the past 12 months to $236 per square foot. Drugstores generally traded between $220 and $350 per square foot. Cap rates remained unchanged over the last four quarters, averaging in the high-7 percent range. Assets occupied by McDonalds yielded just over 5 percent, while Family Dollar stores traded in the mid- to high-8 percent range. Outlook: Strong competition for high-quality assets will lead some investors to expand their investment criteria to include properties with lower-quality tenants.

Single-Tenant Sales Trends

$240

$205

$170

$135

$100

08

09

10

11

12**

Multi-Tenant Sales Trends**

Investment activity in the multi-tenant universe rose 16 percent over the past year as yield-hungry investors expanded their portfolios. Over one quarter of the transactions took place in Delaware and Camden counties, with buyers targeting smaller strip centers in these areas. The median price for multi-tenant assets surged 40 percent in the past year, to $133 per square foot, as a few high-end shopping centers traded above $250 per square foot. In the prior 12-month period, several REO assets changed hands, contributing to a 25 percent decline in the median price to $91 per square foot. Institutional-quality shopping centers in affluent areas traded at cap rates in the mid-6 to mid-7 percent range, while strip centers in secondary submarkets produced yields north of 9 percent. Outlook: As top-tier properties generate keen investor interest, the number of listings brought to market will be the only factor limiting transaction activity.
Median Price Per Square Foot

Multi-Tenant Sales Trends

$200

$150

$100

$50

$0

08

09

10

11

12**

* Forecast ** Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Retail Research Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalRetailGroup.com or call: Bill Rose National Director National Retail Group Tel: (858) 373-3100 bill.rose@marcusmillichap.com

Limited retailer expansions are supporting a sluggish recovery in the national retail sector. Nationwide vacancy was unchanged in the first half at 9.7 percent, while asking and effective rents rose nominally. Additional store openings related to holiday shopping will modestly accelerate demand by year end, resulting in a 30-basis point vacancy reduction to 9.4 percent. In general, decent leverage is available to financing purchases of multi-tenant and single-tenant net-leased properties. For each property segment, LTVs typically start at 65 percent for nonrecourse loans and can range up to 75 percent depending on deal merits and recourse provisions. CMBS lenders offer terms of seven and 10 years on multi-tenant assets, and rates from 300 to 350 basis points above U.S. Treasurys. Many conduits have shown greater willingness to finance unanchored properties and assets with lower-rated anchors. For shopping center loans under $5 million, banks remain a primary lender and offer rates in the high-3s to low-4s for terms of three to five years, lowto mid-4s for sevens and high-4s to mid-5s for 10 years. Lenders focusing on STNL assets are underwriting specific merits of each property. Terms vary from five to 10 years, with spreads ranging from 240 basis points to 300 basis points over U.S. Treasurys. Walgreens recent strategic partnership with Alliance Boots, a European pharmacy chain, has resulted in a lower credit rating and elevated caution among lenders.

Submarket Overview

Construction of a 220,000-square foot neighborhood center is underway in Philadelphia County. The site, called Bakers Centre, is expected to come online fully preleased in 2013. Tenants include Browns ShopRite, Ross Dress For Less, Subway, and two dollar stores. In one of the largest leases signed in the last year, Speed Raceway recently moved into 78,000 square feet at the Cinnaminson Shopping Center in Burlington County. In addition, discount retailer Impact Thrift occupied 66,000 square feet at the Bucks Crossing shopping center in June. With over 1,000 multifamily units under construction in Center City, foot traffic at shops, bars and restaurants in downtown will pick up as the apartments are completed through 2013.

Prepared and edited by

Peter Tindall
Research Associate Research Services For information on national retail trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Philadelphia Office:

Spencer I. Yablon
Vice President, Regional Manager syablon@marcusmillichap.com 101 West Elm Street Suite 600 Conshohocken, Pennsylvania 19428 Tel: (215) 531-7000 Fax: (215) 531-7010 Price: $150

Submarket Vacancy Ranking

Rank
1 2 3 4 5 6 7 8

Submarket
Delaware County Bucks County Burlington County Philadelphia County Chester County Montgomery County Gloucester County Camden County

Vacancy Rate
4.0% 6.2% 6.5% 7.5% 9.9% 9.9% 10.4% 11.8%

Y-O-Y Basis Point Change

-40 0 -70 -10 -90 -130 130 -40

Effective Rents
$18.83 $17.22 $19.33 $18.38 $15.37 $18.57 $12.73 $13.20

Y-O-Y % Change
0.6% 0.5% -0.5% 0.9% 0.5% 0.8% -1.1% -1.5%

Marcus & Millichap 2012 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 using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.