Brenton Baskin, Marcus & Millichap
Philadelphia’s apartment market remains bright as increasing employment fosters stable economic growth, which in turn is bolstering apartment operations. Employers in the metro, which is known as the center of economic activity in Pennsylvania, will increase hiring 1.2 percent this year, adding 35,000 jobs. In 2014, new jobs increased 1.6 percent and the unemployment rate decreased 130 basis points. Total employment is on the upswing, recovering nearly all of the jobs lost during the recession. The favorable employment conditions are supporting demand for apartments and swiftly improving performance throughout the metro, prompting developers to start new multifamily projects.
Builders in Philadelphia are focusing their attention in Center City, which includes the central business district and central neighborhoods of Philadelphia, where nearly 25 percent of this year’s deliveries will be placed into service. Developers are on track to complete 3,600 units in 2015, increasing total apartment inventory 1.4 percent. Last year 2,400 rentals were delivered. Part of the reason that demand is especially strong in Philadelphia can be attributed to the increasing popularity of living in the urban core among young professionals and baby boomers. The lack of developable in-fill locations in the area is prompting developers to convert office buildings into apartments. One example is the Avenue of the Arts building, constructed in 1898 as an office building. Avenue of the Arts is being transformed to include a 217-unit apartment complex. The new owners are targeting millennials and empty nesters who can afford luxury apartments. Situated near the Ritz-Carlton, Union League, and City Hall, the location is commensurate to building a luxury multifamily complex.
Despite rising inventory marketwide, absorption in Philadelphia continues to surpass supply. In the second quarter, vacancy in every submarket fell within a narrow range of 3 and 7 percent, and average rents are posting modest gains. The expanded construction pipeline will slow the vacancy decline this year as the rate recedes 20 basis points to 4.5 percent, on net absorption of 5,300 units. In 2014, average vacancy fell 80 basis points. Vacancy is tightest in Delaware County [Pennsylvania] at 3.1 percent, after falling 90 basis points in the past four quarters. The largest vacancy improvement was recorded in the Lower Camden County [New Jersey] submarket.
The demand for apartment assets in the Philadelphia metro is far outpacing the supply of for-sale inventory, as strong property operations are encouraging owners to hold onto their assets. Limited availability of listings is creating competition among buyers. Therefore, adequately priced properties receive multiple offers over a short time period. The robust demand is pushing property values higher. At the top of the market, some institutional-grade apartment buildings in Center City are beginning to sell at record-high prices and cap rates in the low-5 percent range. Opportunistic sellers are taking advantage of these conditions, resulting in accelerated transaction velocity. Cap rates remain compressed in the metro, though they are often higher than other metros in the Northeast, attracting yield-d riven buyers. Overall, first-year returns average in the mid-5 to high-6 percent range. Strong rental demand will foster a 3.5 percent gain in average effective rents to $1,195 per month, up nearly 11 percent above the pre-recession high.
— By Brenton Baskin, Regional Manager, Marcus & Millichap. This article originally appeared in the August/September 2015 issue of Northeast Real Estate Business magazine.