Apartments in Philadelphia’s urban core command premium rent, prompting more renters to consider living in the surrounding suburbs. Rising demand for apartments in submarkets both near and far from Center City have helped lower vacancy and improve rent growth.
Southwest Philadelphia, in particular, has exhibited these trends despite elevated construction activity. The combination of favorable property fundamentals amid supply additions draws strong investor interest, leading to increased transactions and higher sales prices.
Multifamily properties in Southwest Philadelphia are outperforming those in Center City. Over the past four years, apartment inventory in both submarkets rose by almost proportional amounts, 10 percent versus 14 percent, respectively. Yet, over that time, vacancy in the suburban submarket dropped 100 basis points to a rate of 4.2 percent while the downtown rate went up 70 basis points to 5.3 percent.
Sean Beuche, Regional Manager, Marcus & Millichap
Rent growth showed a similar disparity. In the same four-year span, average effective rent appreciated 18 percent in Southwest Philadelphia but only 6 percent in Center City. The steep decline in vacancy and strong rent growth during this construction wave have demonstrated a healthy amount of demand in the submarket as residents seek more affordable housing options.
As of June 2018, the average apartment in Center City leased for $2,152 per month, compared with $1,497 per month in Southwest Philadelphia. This difference incentivizes professionals working in Center City to consider commuting to the adjacent submarket, adding to existing demand from those who cannot afford downtown rent or prefer to live in Southwest Philadelphia for other reasons.
Supply-side pressures on Southwest Philadelphia’s multifamily properties will abate soon, improving the positive impact in the area from heightened demand. Development activity first picked up in the submarket in 2015, when more units were delivered in that 12-month span than over the preceding eight years combined.
Construction was similarly elevated in 2016 and 2017. Many of the recent completions belonged to Presidential City, a massive four-tower complex that underwent substantial renovations beginning in 2014. Even without the 1,000 rentals reintroduced into the area from that project, arrivals would still have been above the historical average. The development pipeline for the rest of 2018 and 2019 is considerably smaller. Only the Luna on Pine, set to arrive later this year in Spruce Hill, has more than 100 units.
The strong property performance in Southwest Philadelphia has attracted greater investor attention. Sales velocity improved by about a third year over year in June, thanks to an uptick in acquisitions from in-state investors. Attention was placed mostly on the neighborhoods surrounding the University of Pennsylvania and the associated Ryan Hospital, including Spruce Hill, Powelton, and University City. Buyers interested in value-add strategies will find numerous older properties in those areas that can be repositioned via renovation.
Such motivations were likely the case in Spruce Hill, which led the submarket in transactions over the past 12 months. Deals in the neighborhood involved buildings with fewer than 60 units that were all constructed prior to 1931. Investors more interested in contemporary stock can also consider Spruce Hill in addition to University City and Powelton, which have also seen post-2000 development.
Newer properties will also see less competition going forward as completions dip. Depending on the size and quality of the asset, average sale prices can range from $60,000 to $370,000 per unit, with initial returns in the low 4 to 6 percent span.