Central Philadelphia’s shopping and restaurant scene has been on an upswing for years. The new coronavirus could change that.
Business closures aimed at containing the pandemic are all but certain to result in a surge of vacancies, just when dealmaking for future leases has come to a virtual halt due to travel bans and economic jitters.
It’s a one-two punch that could hardly be landing at a worse time. After the year’s lean winter months, stores and restaurants look to make up for revenue shortfalls with springtime foot traffic that will now be delayed, if it comes at all.
New businesses also want to be open ahead of springtime activity. And since it generally takes retailers about 12 months to go from negotiating for space to opening their doors, this season is when new retail leases are being finalized most years.
“This is more than a speed bump,” said Catherine Timko, whose consulting firm, the Riddle Co., has advised the Center City District business association and other economic-development bodies on their retail strategies. “This is a multi-car accident.”
Central Philadelphia began its retail resurgence in 1990s on the back of an increasingly affluent residential population and the growing number of visitors staying at its expanding inventory of hotel rooms.
With its tight inventory of retail space in a dense urban core, the city has been able to maintain high occupancy rates relative to other big cities, despite the troubles faced by all brick-and-mortar businesses as more shopping migrates online.
Thanks to that demand, rents along Center City’s main retail corridors soared by more than 130% over 15 years to about $160 per square foot in July 2018, when the commercial real estate firm CBRE published its most recent central Philadelphia retail-property survey.
But there were big dips along that decade-and-a-half run. Between the start of 2010 and late 2011, rents plummeted by more than a third from nearly $150 a square foot to about $99 a foot, as the city weathered fallout from the Great Recession.
Philadelphia’s retail real estate fortunes could now be in for a similar — or worse — reckoning.
Already, the forced closure of restaurant dining rooms and “nonessential” shops has stoked fears of massive business failures.
While successful national chains with lots of ready cash may be able to muddle through a few weeks behind shuttered doors, smaller, independent businesses probably can’t, Timko said. Restaurants, which operate on tiny margins, are especially vulnerable.
“If they don’t have any revenue, they’re not going to pay rent," she said. “Landlords can only be forgiving for so long.”
Making matters worse, vacancies left behind by the city’s retail-business failures will probably take longer than usual to fill, since the virus has caused new leasing to slow considerably, said Larry Steinberg, a senior managing director at the Philadelphia office of the commercial real estate firm Colliers International.
Already, the pandemic has led the International Council of Shopping Centers to delay its major annual May gathering in Las Vegas, which draws tens of thousands of attendees each year — including a large Philadelphia contingent — to negotiate retail leases.
Dealmaking at past years’ conferences yielded new sites in the city for brands such as H&M, Cole Haan, Nordstrom Rack, and Warby Parker, Steinberg said.
Bruce Schanzer, chief executive of Port Washington, N.Y.-based Cedar Realty Trust, said his company had planned to use this year’s conference to pitch space at two big South Philadelphia strip-mall complexes that it plans to transform into walkable urban enclaves.
One is the Riverview Plaza shopping center in the city’s Pennsport section, which is being reimagined as a mixed-use development to be known as Revelry. The other comprises Quartermaster Plaza and South Philadelphia Shopping Center on the west side of South Philadelphia, which are being combined into a one million-square-foot shopping and residential complex called South Quarter Crossing.
Schanzer said Cedar’s leasing staffers have been staying in close touch with potential tenants at those sites throughout the health crisis, which he expects to have a minimal long-term impact on his company’s plans.
“I don’t think it’s putting these projects at risk,” he said. “I think it’s probably just changing people’s schedules around a little bit.”
Others are less sanguine.
Jacob Cooper, a partner with the brokerage MSC Retail in Philadelphia, said multiple clients working on Philadelphia deals have put those talks “on pause” this week
Companies appear to be rethinking expansion plans to reserve their cash and borrowing capacity for critical uses like payroll as they gird themselves for a period of uncertain revenue, Cooper said.
“Deal-making velocity has all but come to a stop,” he said. “This is going to reverberate through the market for the rest of the year.”
Steinberg, meanwhile, said he had been working with what he described as a major online retailer that was in advanced talks to open a physical store in a corner storefront now occupied by a T-Mobile store at 18th and Chestnut Streets, a busy area near Rittenhouse Square.
Those talks are now on indefinite hold, after the retailer had to cancel a planned visit to evaluate the space with an architect, Steinberg said.
“It’s a big setback,” he said. “This is a big time of the year for leasing. Now it’s wiped out.
He cited a familiar business-world adage: “'Time kills all deals.'"
Across town at the former Gallery at Market East shopping mall, which began reopening in September as the Fashion District Philadelphia after a three-year redevelopment hiatus, the pandemic’s consequences will likely be felt long after its current city-ordered closure concludes.
Enclosed malls such as the Fashion District ― and other properties held by its owner, Pennsylvania Real Estate Investment Trust — were already financially stressed, with tenant bankruptcies leaving behind vacancies that landlords have struggled to backfill.
PREIT has for years been trying to shore up its financial position by selling off its lesser-performing assets in hopes of earning cash while driving up its average sales per square foot — a measure of mall-portfolio performance closely tracked by Wall Street.
But investors remain skeptical. PREIT’s stock price had already declined 29% from a year earlier to close at $5.05 on Jan. 17, its last trading day before the first instance of COVID-19 was reported in the United States.
The performance of the FTSE NAREIT Equity Retail Index, which tracks PREIT and 37 other publicly traded retail landlords, was flat over that period. The S&P 500 rose 26% during that time.
Since Jan. 17, PREIT’s stock has plummeted 74% to close on Friday at just $1.31 after trading at under a dollar earlier in the week, far underperforming the FTSE Retail Index, which fell 49%, and the S&P 500, which declined 31%.
PREIT is also among the most indebted of its regional-mall-owning peers, owing almost as much — 91% — as the market value of its portfolio, according to a report earlier this month from the real estate research firm Green Street Advisers.
A PREIT spokesperson did not respond to an email seeking comment about its business trajectory amid the pandemic.
In its most recent quarterly earnings call with analysts in February, chief executive Joseph Coradino warned that the company was in danger of breaching its financial-performance benchmarks with lenders, known as “covenants,” and was in talks to modify the terms of its debt.
That gives PREIT little flexibility to offer breaks at the Fashion District, occupied by such tenants as the already bankrupt Forever 21 chain, as coronavirus impacts slash the disposable incomes of mall visitors, said Scott Crowe, chief investment strategist at CenterSquare Investment Management in Plymouth Meeting.
As a result, Crowe said, the Fashion District, which was 80% leased as of PREIT’s most recent earnings call, is “going to be emptier for longer.”
“Maybe there will be a little bit of altruism: You’ll see PREIT able to turn around and give rent relief to some tenants and PREIT’s lenders treat them with some flexibility," Crowe said. “But there just isn’t enough money to go around.”