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PHILADELPHIA-The retail vacancy rate in the metropolitan area is expected to decline 20 basis points to 8.6%, according to Jeffrey Algatt, regional manager in the local office of Marcus & Millichap. He also expects a 2.5% hike in average asking rental rates to $18.13 per sf and a rise in effective rates of 1.7% to $16.40 per sf by the end of the year.

While the reasons for this come from a strengthening economy and sustained retail sales throughout the region, Center City’s residential boom is bringing special strength to that market, particularly among investors. “Multi-tenant assets in Center City, where the residential market is flourishing, will command multiple bids in the quarters ahead,” he predicts.

Beyond the heart of Center City, he points to South Philadelphia, an area that is undergoing a transformation that is attracting white-collar residents. Inexpensive available land and a 10-year new homebuyers’ tax abatement are sparking new residential construction, “and national retailers should find their way into the area as a new demographic profile evolves,” Algatt says.

The average sale price of single-tenant assets throughout the MSA dropped 33% to $107 per sf in 2004, according to M&M data, due primarily to a limited supply of high-quality, for-sale properties in desirable locations. “With many potential buyers chasing too few assets,” Algatt predicts, “the stage appears to be set for a run-up in prices when superior single-tenant assets hit the market over the remainder of the year.”

Confirmation comes from two early 2005 deals. A freestanding building in Delaware County sold for $676 per sf, which is more than two times greater than any freestanding asset sold for a year ago. An Eckerd drugstore, also in Delaware County, sold for $418 per sf. These compare with a market-wide median price of $239 per sf for drugstores in the area in 2004.

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