At the end of 2013, the Federal Reserve Bank of Philadelphia reported that year-to-date building permits rose by 17 percent in Pennsylvania, 36 percent in New Jersey, and 21 percent in Delaware as compared to the same 11 month period in 2012. Much of that increase was due to multifamily development.
While not yet back to pre-recession levels, multifamily permitting has steadily increased since the third quarter of 2010 in the Philadelphia metro area. As of August, there were a total of 3,485 units approved for the previous 12 months, high enough to rank 25th in the nation for multifamily permit authorizations.
In 2013, there were 1,183 multifamily units delivered in eight new development projects. Currently, there are nearly 4,800 units in 27 separate projects in various stages of construction and some 70 projects in the planning stages for a total of 12,740 additional units in the pipeline.
Then there are proposed new developments that have been announced, but are not yet in the permitting process. These represent an additional 3,280 potential units scattered throughout the tri-state area in 15 projects. It is unlikely that all of these proposed projects will be constructed, but it is indicative of the optimism that many developers have in the economic health of the region, as well as the hope that many of the echo boomers will choose renting over buying in the years to come.
Sales of multifamily properties (greater than $1 million) for 2013 are likely to total near $900 million for approximately 8,850 units. While this is a decrease in volume of approximately 22.4 percent from 2012, it is still a healthy level of activity. Equally important, about 45 percent of the capital inflow came from institutional investors. Institutional acquisitions have risen steadily since 2010, but private investment comprised almost 56 percent of all sales last year.
Class A properties represented approximately 42 percent of the sales volume, while 29.2 percent was Class B and 28.8 percent was Class C. The overall average sale price was $97,900 per unit. However, the average for Class A properties was $247,200 per unit.Perhaps the most noteworthy of 2013 was the Granary Apartments, located at 409 N 20th St in Philadelphia. The change in ownership took place in October 2013 just 30 days after construction had been completed by local developer Pearl Properties. The buyer, Lowe Enterprises Investors, purchased the property on behalf of an investment client. Although only 40 percent leased at the time of the sale, the property fetched a price of $458,500 a unit.
The average cap rate fell for eight straight quarters from a high of 7.2 percent during the third quarter of 2010 and until the third quarter of 2012 where it stood at a low of 6.2 percent. Since then the average has risen slightly to 6.6 percent at the end of 2013. The cap rate for Class A properties was at 5 percent during the second quarter of 2012, but rose to 5.4 percent by the end of 2013.
With respect to market rental fundamentals, occupancy rates have remained flat for the past 10 quarters despite the influx of new product into the market. At the end of the third quarter 2013, occupancy rose 0.5 points and to 95.3 percent.
As of the end of the third quarter of 2013, effective rents for all multifamily types were up 2.4 percent. Class A effective rents were up less than 1 percent for metro Philadelphia, but retracted 1.2 percent for the city of Philadelphia. Asking rent trends mirrored effective rents for the year. Rent concessions remained flat for all property types through the first three quarters of 2013.
The prospects for another great year in 2014 for multifamily in the Philadelphia metro area appear bright. The outlook for the city of Philadelphia is particularly optimistic with the announcement of office projects in University City, the Navy Yard and the new Comcast Tower, all of which cannot help but be beneficial to the multifamily market.
— By Steve Michaelson, Multifamily Investment Services, Colliers International. This article first appeared in the January/February 2014 issue of Northeast Real Estate Business magazine.