The recent performance of the Philadelphia apartment market offers evidence that a sustainable recovery is taking hold. Vacancy returned to a normal level, while property owners continue to realize greater success in raising rents. Newly employed residents and recent graduates of local colleges and universities will further stoke tenant demand in the quarters ahead.
As would be expected following several quarters of solid performance, the recovery is initiating a new construction cycle, as heralded by the start of construction in the first quarter on a 319-unit rental in Center City. The pipeline of planned projects has also increased, but the potential impact on property operations will likely be modest as these projects represent 3 percent of existing stock. In addition, developers appear to be focused on adding rentals in areas where tenant demand is the greatest, placing a large concentration of their projects in Center City and Main Line submarkets, including Bala Cynwyd.
Minimal additions to market-rate stock have moderated vacancies. During the 12 months ending in the first quarter, only the 97-unit 600 on Broad in Center City came online. Developers are becoming more confident, as 6,500 market-rate units are planned, an increase from 4,100 rentals 6 months ago. Only a few projects are advancing, as roughly 1,700 units of for-sale and rental multifamily housing were permitted in the past 12 months, a decrease of 8 percent from the preceding year. Additions to the pipeline of planned projects include the 612-unit Renaissance Walk in Pennsauken and 159 units in the Bordentown Transit Village project in Burlington County.
At 4.3 percent, metrowide vacancy was unchanged in the first quarter, but the rate is 70 basis points less than that recorded in the first 3 months of 2011. Since vacancy peaked at the end of 2009, resurgent demand and limited additions to stock have driven the vacancy rate down 220 basis points. The Class B/C rate has declined 80 basis points over the past 12 months to 3.8 percent, including a 10-basis-point drop in the first 3 months this year. Strong demand for in-city residences pushed down the vacancy rate 40 basis points over the past year in Center City to 4.1 percent, the lowest rate in 7 years. Among the South Jersey submarkets, vacancy in Cherry Hill/Evesham/Medford ticked down 20 basis points in the first quarter and 90 basis points in the past year, to 8.5 percent.
Average asking rents rose 0.7 percent in first quarter to $1,051 per month, while effective rents surged 0.8 percent to $1,006 per month. Since the first quarter of last year, asking and effective rents have climbed 2.3 percent and 2.6 percent, respectively. With a vacancy rate of less than 4 percent, Class B/C asking rents also continue to rise, posting a 0.5 percent increase in the first quarter to $855 per month. Year over year, asking rents in the lower tier have advanced 1.6 percent.
Encouraged by the steady improvement in property operations and the availability of low-cost debt, investors remain intensely active across the metro, with many current owners seeking to expand portfolios. Overall, a modest shortage of assets listed for sale persists, but property owners are increasingly acting to take advantage of strong investor demand and compressing cap rates, triggering a gradual rise in listings. Areas of interest include high-density locations in the Pennsylvania counties and prime locations in Camden County, New Jersey, that offer relatively easy access to Center City. Generally, Class A properties trade at less than 6 percent, but cap rates on stabilized Class B product have compressed slightly to the mid-6 to 7 percent range, depending on property size, and usually draw numerous bids.
Distressed properties also remain a target for many investors, though to a lesser degree than 1 year ago. Investors that once focused intently on troubled assets are instead increasingly diverting their attention to stabilized properties for more immediate cash flows and appreciation potential.
— Spencer Yablon is vice president and regional manager of the Philadelphia office of Marcus & Millichap Real Estate Investment Services.