Philadelphia Suburbs Attract Apartment Construction, City Draws Investors
Willowyck Apartments in Lansdale, Pa., was recently sold at a sub-5 percent cap rate.
Suburban Philadelphia Update
The suburban Philadelphia apartment market had a very successful 2017, with no slow down anticipated for 2018. Fundamentals remain strong with low interest rates and increased demand from outside buyers, which is compressing cap rates even further than historical lows.
Some highlighted sales include Willowyck Apartments in Montgomery County, which sold at a sub-5 percent cap rate on trailing 12-month numbers, and Declan House in Ardmore, which recently sold at a pro forma cap rate of 5 percent. These are two of numerous transactions that have sold at historically low cap rates over the last 12 months in suburban Philadelphia.
We are also seeing more newly constructed Class A, highly amenitized properties in suburban Philadelphia that are targeting rents at north of $2.75 per square foot. Some successes have included the Maybrook, a 250-unit newly constructed property in Narberth/Wynnewood, Pennsylvania. The complex opened for leasing in late 2017 and they have been achieving rents in the $2.75- to $3-per-square-foot range.
Another new construction success story is the influx of more than 800 apartments located in close proximity to Towne Center in King of Prussia. The properties include Indigo 301 and Hanover Valley Forge, among others. Both properties are asking for rents in the range of $2.65 to $2.92 per square foot, but both are also offering concessions of one month’s free rent.
The question to be answered: how will this market fare, considering it does not have easy access to SEPTA Regional Rail lines (Southeastern Pennsylvania Transportation Authority) and has limited entertainment options outside of Towne Center and the King of Prussia Mall. There are an additional 800 units slated for construction here in the next year, bringing the total to 1,600 Class A units in the immediate area.
This is one area in suburban Philadelphia to watch closely over the next 12 to 24 months to see if these units are absorbed and if rents in that $2.75- to $3-per-square-foot range are achieved with no concessions.
City of Philadelphia Update
In 2018, the multifamily market in the city of Philadelphia will certainly outpace the sales from 2017. Reflecting back on last year, we can name a few factors that slowed the pace of transactions. After the election of President Trump, we saw a big jump in interest rates at the end of the fourth quarter that affected deals going into the first quarter.
A larger issue that slowed sales from their peak of 2015, was the unannounced reassessment of all commercial properties throughout the city. Going into 2018, most investors feel confident about where the economy is going. The new tax reform should boost investors’ confidence that the economy will have a healthy 2018.
It is pretty safe to say that the city won’t be doing another assessment in 2018 and purchasers are indicating that they are underwriting taxes to get reassessed a year or two after a purchase at 75 percent to 80 percent of the purchase price.
We believe that most of the buyers of Philadelphia commercial properties will be from out of state. More institutional and national investors are looking to break into the Philadelphia market in 2018 and beyond. New York buyers will continue to be major investors in the Philadelphia market, as many of them consider Philadelphia a sixth borough — and returns in Philadelphia have historically been much more attractive than in New York City.
The cap rates should remain similar to what they were over the last two years and we don’t expect much change in that unless we see three to four rate hikes by the Fed in 2018. With more than 3,500 units expected to be delivered in 2018, we believe rents will stay flat for Class A apartments in downtown Philadelphia.
The long-term outlook for the Philadelphia market is that it will remain strong, given the number of new jobs coming to Philadelphia.
— By Corey Lonberger and Ken Wellar, managing partners, Rittenhouse Realty Advisors. This article first appeared in the January/February issue of Northeast Real Estate Business magazine.