Retail vs Office Space: Which Investment Makes More Sense in 2025?

Retail spaces are outperforming office spaces in Philadelphia's 2025 real estate market. Here's why:

• Retail spaces: Steady demand due to mixed-use developments combining residential and retail, ensuring foot traffic and stable income.

• Office spaces: Struggling with 20% vacancy rates, declining property values (down $635M in 2024-2025), and companies reducing office footprints by 40%.
  

Quick Comparison

For safer returns, retail investments in mixed-use developments are ideal. Risk-tolerant investors might explore value-add opportunities in Class A office spaces with modern amenities and flexible layouts.

Trends in Retail and Office Spaces

Retail Space Trends

By 2025, Philadelphia's retail scene is transforming, with mixed-use developments along South Street and Frankford Avenue thriving. These spaces combine retail and residential areas, creating built-in customer bases and ensuring steady foot traffic [2]. To keep up with the rise of e-commerce, retail spaces are focusing on experiential shopping and community-centered locations, particularly in mixed-use projects within growing neighborhoods [2].

While retail spaces are responding to these challenges, the office market is facing a tougher road ahead.

Office Space Trends

Unlike retail, the office sector is dealing with falling demand and changing tenant needs. Several trends are reshaping this market:

The legal sector is a prime example of these shifts, with major law firms leading the push to downsize. Glenn Blumenfeld captures the uncertainty in the market:

"Activity doesn't mean the market is frothy. It simply means more leases are expiring" [1]

Emily Friedman underscores the importance of 2025 for office investments:

"This is the 'put your money where your mouth is' year" [1]

The rise of hybrid work continues to reshape office space needs. When renewing or signing new leases, companies are typically cutting their space requirements by over 20% [4]. This change is reflected in property valuations, with assessments for office buildings dropping by nearly $635 million between 2024 and 2025 [3], signaling a major shift in the market's outlook.

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Comparing Investment Performance

The financial outlook for retail and office spaces in Philadelphia highlights notable differences in 2025.

Profitability Metrics

An analysis of key indicators paints a clear picture of how these two investment types are performing:

Office investments face challenges as companies shrink their space needs by over 20% during lease renewals, making rental income less predictable. James Vandermark, a partner at White and Williams, emphasizes:

"The valuation [of a commercial property] is based on the income that it's producing" [3].

On the other hand, mixed-use retail spaces are performing better. Their integration with residential components creates a steady stream of customers, helping offset the impact of e-commerce growth [2].

The expiration of 2.7 million square feet of office leases in 2025 presents a critical moment for investors [1]. To remain competitive, property owners are being pushed to make upgrades. Tax assessments highlight this pressure, showing that 47 out of Philadelphia's 100 most valuable commercial properties have reduced valuations for 2025 [3].

These metrics give a clear view of the landscape, helping investors weigh potential returns against the challenges. While profitability is a key factor, understanding the associated risks is just as important.

Risks and Challenges

While profitability metrics can highlight potential gains, it's just as important to fully grasp the risks and challenges involved to make informed decisions.

Tenant Stability and Market Volatility

The office market is facing serious hurdles. High vacancy rates and widespread downsizing are putting tenant stability at risk [1]. This volatility is also evident in property valuations. For instance, nearly half of Philadelphia's top 100 commercial properties received lower tax assessments for 2025, signaling a market adjustment [3]. In total, property values dropped by around 6% (a $635 million decline) between 2024 and 2025 [3].

The reduction in downtown workforces adds another layer of instability, further impacting the performance of both office and retail sectors [4].

Costs and Flexibility

Managing costs and meeting flexibility demands are ongoing challenges for both retail and office spaces. Here's how the two sectors compare:

The office sector, in particular, is under pressure to modernize. With 2.7 million square feet of office space leases set to expire in 2025 - the largest volume until at least 2030 [1] - property owners face mounting pressure to invest in upgrades to stay competitive.

Failing to meet market expectations can lead to heavy financial losses, as evidenced by recent high-profile cases. These challenges mean investors must carefully assess their risk tolerance and their willingness to commit to ongoing property improvements. The ability to respond quickly to changing market demands while managing rising operational costs is becoming a critical factor in the success of both retail and office investments.

While the challenges are significant, both retail and office spaces still offer growth opportunities for those who can navigate the complexities of the evolving market.

Future Growth and Opportunities

Even with current hurdles, Philadelphia's retail and office sectors are shifting to align with new market demands.

Future of Retail Spaces

Retail in Philadelphia is undergoing a transformation, blending unique experiences with advanced technology. Areas like South Street and Frankford Avenue highlight this shift through their revitalized offerings [2].

Here’s what’s driving change in retail:

The future of retail seems to lie in mixed-use projects, especially in less developed neighborhoods. Tapping into local residential density could provide a steady flow of customers.

While retail spaces use technology and mixed-use concepts to grow, the office sector is focused on adapting to new workplace trends and tenant priorities.

Evolution of Office Spaces

Office spaces in Philadelphia are undergoing a shift, driven by the need for flexibility and efficiency. With 2025 on the horizon, property owners are at a critical juncture to rethink their strategies.

Key trends shaping office spaces include:

1. Flexible Workspace Solutions

With downtown foot traffic at 73% of pre-pandemic levels [4], companies are redesigning their offices to fit hybrid work models, focusing on maximizing space usage.

2. Amenity-Rich Environments

Class A buildings are staying competitive by offering premium amenities that attract tenants, such as:

• Modern collaboration areas

• Advanced technology

• Wellness-focused facilities

• High-end shared services

• Strategic Downsizing
  

Many companies, including major law firms, are reducing their office space by up to 40% [1][4]. This trend opens doors for landlords to reconfigure large spaces into smaller units, catering to multiple tenants.

Conclusion

Key Points

The office market is grappling with tough challenges, while retail spaces show promise by integrating mixed-use developments. These trends highlight a clear split in their performance and outlook.

This underscores the importance of crafting investment strategies that align with specific risk profiles and market dynamics.

Recommendations

For those seeking lower risk, retail properties in established areas with growing residential populations are a safer bet. Key considerations include:

• Retail spaces near vibrant mixed-use areas like South Street and Frankford Avenue, or ground-floor units in multifamily properties [2].

• Locations with high potential for foot traffic.
  

For investors willing to take on more risk, the office market offers opportunities for value-add investments.

Class A office buildings, in particular, could be worth exploring, especially those that:

• Offer competitive pricing to attract tenants from high-end properties.

• Adapt to modern workplace needs with flexible layouts.

• Include amenities that enhance tenant satisfaction and boost occupancy.

With downtown foot traffic still at 73% of pre-pandemic levels [4], success in this market will depend on smart positioning and the ability to adapt to shifting demands.