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PHILADELPHIA-Investment in local retail real estate, which has been strong over the past two years, will continue and bring in an increasing proportion of outside investors, according to Jeffrey R. Algatt, regional manager of the local office of Marcus & Millichap. “Although tenant demand was steady, vacancy increased slightly as new retail stock was delivered,” he says, predicting, “buyer demand will exceed for-sale supply again this year, putting further upward pressure on prices.”

During 2003, the median price of single-tenant, net-lease retail properties in the Philadelphia metro area rose significantly from $109 per sf in 2002 to an estimated $173 per sf by year-end 2003. M&M attributes the jump to an excess of potential buyers bidding on a limited number of listings, plus the generally smaller size of the typical properties sold last year.

Investors from outside this region now hold a 22% share of the area’s single-tenant, net-lease properties. “This trend will continue,” Algatt says, “with non-local purchasers likely to make up an even larger percentage of single-tenant property investors in the future due to the less management-intensive nature of these properties.”

The median price of multi-tenant retail property sales rose far less dramatically from $94 per sf in 2002 to $98 per sf in 2003. Sales volume in this segment of the retail market in the overall MSA tripled that of the previous year and reached $940 million. Well over half of it, however, $550 million, resulted from locally based Pennsylvania Real Estate Trust’s acquisition of six regional malls from Columbia, MD-based Rouse Co. However, despite PREIT’s acquisition, outside investors hold a 20% share of the MSA’s overall multi-tenant retail stock.

Approximately 2.3 million sf of retail space was delivered in the MSA in 2003, and another 2.3 million is expected this year. Furthermore, national chains, including Starbucks, Lowe’s, Home Depot, CVS, Eckerd, Walgreens, Ikea and Wal-Mart, have added or plan to add new locations here over the next few years.

Algatt projects that asking retail rental rates in this market will increase 2% this year from $17.35 per sf to $17.70 per sf, and that average effective rents will reach $16 per sf.

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