Real estate bubble? Prices rising faster than rents

U.S. commercial building prices have been rising faster than rents since the 2008 recession, and now stand at record levels as compared to landlords' income (annual rents/building prices = capitalization rates, which are going down), according to data collected across the U.S. by Integra Realty Resources, a nationwide commercial real estate appraisal and research firm.

"Some guys are getting in over their skis," Joseph Pasquarella, managing director at Integra in Philadelphia, told me. "A lot of people want to build nice Center City apartments. But we've got 4,000 under construction," and there aren't nearly 4,000 new jobs to support those rents coming on line anytime soon, he told me. Not at Comcast? Not at the hospitals? "Not happening," Pasquarella said.

This real estate boom should make some investors "cautious," but Integra expects more will keep buying and financing properties in 2015, according to a report presented by Pasquarella and his colleague Michael Silverman at the Union League on Jan. 15.

There's plenty of money chasing deals, at the moment: With interest rates still low, U.S. government financing is keeping the apartment market afloat; securitized mortgage-backed bonds are financing retail stores and hotels; banks are funding warehouse/industrial deals, and joining insurance companies to fund office construction, according to Integra data.

Locally, office-building sales in Philadelphia more than tripled last year, and the market, especially in Center City, shows room for modest new construction, according to Integra.

The region's highest occupancy rates are in West Philadelphia and the city's Western suburbs: tops is University City, where 7.6 million sq. ft. of office space is more than 97% occupied, and tenants are filing the equivalent of another 318,000 sq ft building a year, and rents average $24.10/sf; followed by West Chester, the Upper Main Line (Great Valley) area, and "outer" Chester County, all above 93% occupied, and the Radnor-Main Line area, 92.3% (of those markets, only the Upper Main Line, at $26.44/sf, boasts higher rents than University City; the others are all below $23/sf.)

The most-vacant office complexes are mostly in more nothern suburbs: Blue Bell/Plymouth Meeting (occupancy under 82%), Fort Washington/Spring House (same), followed by Lower Bucks (84.6%) and King of Prussia (85.1%), all with rents in the $22-25/sf range -- not much different from the high-occupancy neighborhoods. Same goes for South Philadelphia (with the new Navy Yard bulidings), where occupancy hovers around at 86% and rents are just below $23/sf. .

The lowest-vacancy apartment neighborhoods -- all under 1.5% -- are places where monthly rent is often around or below $1,000 a month: Fox Chase and Lawndale in Northeast Philadelphia ($781/month), Lower Bucks ($1,015), Upper Montgomery ($1,102), Western Delaware County ($970) and Upper Bucks ($947.)

Landlords have more vacant apartments on their hands in wealthier markets with more new construction: in Upper and Lower Merion (including all the new Main Line construction), vacancy is over 12% (typical rent: $1,244); Center City's 17,400 apartments show up as 6.4% vacant (with rents at $1,858/month). Burlington County, Norristown/Plymouth Meeting, and Roxborough/Chestnut Hill all  show vacancies around 5%, and of that group only Burlco rents are typically below $1,000/month.

For retail stores, vacancies are below 4% in the West Chester, King of Prussia/Wayne, Indepenedence Hall, South Philadelphia and Plymouth Meeting/Blue Bell markets (with rents varying from under $13/sf in Plymouth Meeting, up to $23.74 in King of Prussia).

The highest retail vacancies: around 10% in Burlington, southern Camden and western Montgomery counties, and above 11% in New Castle County, northern Delaware -- though rents there, at $16.78/sf, remain higher than in the other high-vacancy markets.

The warehouse/industrial zones at the edge of the Philadlephia region continue to absorb new construction -- 24 million sf is currently rising from the former corn and soybean fields, or 1% of the current base of 2.3 billion sf. Rents are highest in suburban Philadelphia ($12.72/sf), and almost as high in Delaware ($11.40); less than half as much ($5.38/sf) in the I-81 corridor, $6.58 in central Pennsylvania, $7.90 in the Lehigh Valley, $8.04 in South Jersey. Vacancies just 6% in central Pa., rising to 9.6% in Delaware.