Philadelphia’s Multifamily Market Can Withstand A Broader Economic Downturn
As we look toward the end of 2019, multifamily investment sales and mortgage banking transactions in the greater Philadelphia market are at an all-time high. For lifelong Philadelphians, it’s exciting to witness the area’s longstanding foundation successfully take shape through numerous real estate projects in the city and its suburbs.
The Philadelphia multifamily market continues to capture interest from a variety of capital sources. Berkadia’s Philadelphia team alone has $4.3 billion in firm or funded transactions from January through August of this year.
Specifically, institutional investors have demonstrated an increased interest in this market, as both national and international players continue to recognize the area’s relative value and sound fundamentals. We expect these trends to continue throughout the remainder of 2019 and into next year, regardless of any major headwinds at the macro-economic level.
The driving forces behind Philadelphia’s success include a robust volume of new Class A developments, a more tactful approach to value-add deals, marketplace efficiencies and most of all, a continued demand for multifamily product.
The market’s new Class A properties have been well-received in terms of leasing velocity. More construction capital is available than in years past; top-of-the-market rent discovery has generally proven out.
In addition, the market is seeing very little delinquency on construction loans. Lastly, we’ve seen several high-profile projects trade hands while still in lease-up. Both of these trends are a reflection of a multifamily market backed by strong demand — from both renters and investors — across all product sub-types.
In terms of the market’s older workforce products, our clients are exhibiting a more tactful approach to value-add plays. Investors are getting smarter with capital deployment by focusing on specific amenity or in-unit improvements to drive rents more efficiently. As new Class A projects stretch the multifamily market, now more than ever, there is demand for Class B and C properties, as well as opportunity to grow rents within these product types.
Efficiencies within the metro’s multifamily marketplace have allowed us to compile a database of real-time, actionable insights to easily understand what will work for the local area — and what will not.
The transparency and fluidity of market data allows for high-confidence underwriting and heightened awareness from a lending perspective. Both of these market features have drawn investor interest and continue to distinguish Philadelphia from other potential investment regions.
Investor and lender appetite in Philadelphia multifamily, at its core, is driven by renter demand. At the end of the second quarter this year, Berkadia research showed that overall multifamily occupancy had hit 96.2 percent in the Philadelphia metro-area — 50 basis points higher than that period last year.
At the same time, asset pricing in Philadelphia has remained surprisingly consistent. The local market has also exhibited a trend of positive absorption each year since 2017.
This year, fewer units will be delivered than in each of the previous three years. However, year-to-date absorption is still outpacing new deliveries by an impressive 60 percent. These stats serve as key indicators of the stability and demand for multifamily product in the Philadelphia market.
A phenomenon not unique to Philadelphia involves renters continuing to be priced out of homeownership. As such, the demand for multifamily product in the Philadelphia area, and across the U.S., has continued to grow.
Taking all of this into consideration, investors’ bullishness on Philadelphia’s multifamily market presence should come as no surprise. Despite nationwide noise of a potential recession, Philadelphia’s local market will likely prove more durable than other metros, as the city has demonstrated a solid foundation and the wherewithal to withstand a potential downturn.
— By Michael McKee, associate director, Berkadia. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.