The Philadelphia Apartment Submarket will add slightly more than 2,300 units to the market this year and roughly half that number again in 2017. The supply of apartments that are being delivered to the market area are mostly allocated to the higher end apartment segment. Notable projects include East Market and Dalian on the Park. The mixed use East Market project will include a 15 story, 322 unit residential tower. National Real Estate Development, the full service development subsidiary of National Real Estate Advisors, recently moved to add a second tower there. In addition, Dalian on the Park, which features an on-site Whole Foods, has a total of 293 units.
Nationwide, it is anticipated that developers will add more apartment units this year than they have in the last decade. More than 320,000 new apartments are expected to be finished in 2016. That’s a leap of 50% over 2015. Texas leads the way with nearly 70,000 units projected to be completed this year.
Apartment Market Softening
However, because a major out-of-town developer (Mack-Cali, from Jersey City, NJ) bailed on a 300 unit apartment tower project in center city Philadelphia – citing rising construction costs and diminishing rent growth – some feel the market is softening. Philly isn’t the only city that thinks that.
Downtown Los Angeles – as well as the central parts of Houston and Nashville – are also experiencing a cooling apartment market. As a result, real estate research firm CoStar surmises that asking-rent increases nationwide will decline through at least 2020.
Costs to build are rising as construction increases demand for labor. Skilled tradespeople like bricklayers, carpenters and electricians are charging more due to their numbers having decreased during last decade’s downturn. Because organized labor dominates the market in Philadelphia, even unskilled workers’ salaries are higher due to union pay scales.
No Bubble
According to Reis’s Property Report (www.reis.com), the average vacancy rate in Center City Philadelphia increased 6.9% in Q2 2016. This is the highest level since Q2 1997. It is expected that the rate will be roughly 7.8% by the end of the year. The average vacancy rate in Metro Philly was 3.7% at the end of 2Q 2016, and has drifted upward by 10 basis points. It is now at its highest level since Q3 2012 and is expected to finish the year at 4.17%.
These figures may seem like they are headed in the wrong direction for such a vibrant city but Philadelphia is attracting millennials in droves. Strategically situated between New York and Washington, DC, the City of Brotherly Love is much more affordable than its more cosmopolitan neighbors. And its ‘Eds and Meds’ economy will continue its renaissance. There are also signs that the local economy is diversifying to include more technology employment as well.
Bottom Line
The truth is, fundamentals are expected to stay strong in these submarkets through at least 2Q 2017.While there has been some softening in the multifamily market, it is certainly not a bust or bubble situation. One of the core issues in the Philadelphia Apartment market is that new deliveries are allocated to the top end of the market, which is cooling.
Overall, there is a significant shortage of affordable, quality apartment product and demand will remain high for new average priced apartments. The bottom line is that the market may be getting a little overheated and demand has to catch up with supply. That said, expect demand and vacancy to eventually settle at a normal rate.
Carlo L. Batts, MAI is a certified general real estate appraiser. A member of the Appraisal Institute, he is actively engaged with the organization. Carlo is well known for high quality real estate valuations in the Delaware Valley. He is licensed in Pennsylvania, New Jersey and Delaware.