Strength seen in Phila. property market

Philadelphia grew more attractive to commercial real estate investors last year, bucking the national slowdown in property markets, according to a new report yesterday from Moody's Investor Service.

The region's commercial real estate market improved the most among the nation's 10 largest metro areas during 2007, according to Moody's, as apartment renters and Center City companies leased new properties as fast as they came on the market.

Nationally, demand for investor-owned real estate is "beginning to show signs of softening," said Sally Gordon, senior vice president for Moody's Structured Finance Group, which analyzes bonds backed by real estate loans for pension funds and other big investors.

But in the Philadelphia area, demand for industrial space, stores and downtown offices held steady last year, while apartment demand outstripped supply.

"The big change in Philadelphia's favor came in the apartment sector," Gordon said. "The vacancy rate is quite low."

That's not because Philadelphia's economy is red-hot. Unlike other East Coast cities - and some in the Midwest - Philadelphia did not explode with speculative apartment towers beyond what tenants demanded, according to Moody's.

"It's been very difficult to push through multifamily projects in Philadelphia," said Spencer Yablon, head of the Philadelphia office of California-based Marcus & Millichap Real Estate Investment Services, which finds investors for apartment buildings.

He said the proliferation of local government agencies and neighborhood groups in the region "makes it very difficult to put through a 200- or 300-unit project. So the rental market is strong, and the slowdown in the housing-purchase market is going to help."

Since Philadelphia did not overbuild, it has not suffered a crash. The same holds true for offices, and recent vacancy rates below 10 percent have sparked "rumblings of new office construction" in Center City, the accounting firm PricewaterhouseCoopers L.L.P. reported in its annual Korpacz Real Estate Investor Survey yesterday. The report listed proposed downtown developments totaling more than 1 million square feet, more than 2 percent over the current supply.

But Philadelphia rents are going to have to move beyond recent averages in the mid-$20s-per-square-foot range before those projects are likely to be built, the report said. Vacancies in suburban Philadelphia are rising, and markets nationally are weaker in the suburbs than in central cities, the report said.

"Many commercial real estate investors have effectively moved into cruise control," said Susan M. Smith, editor of the PricewaterhouseCoopers report. Investors are waiting to see how the credit crunch that followed the collapse of the subprime-mortgage market last summer will spread to other sectors of the economy and affect property demand.

In eight of the 10 largest U.S. markets, Moody's index of commercial real estate supply, demand and vacancies was flat or declined during 2007.

Philadelphia and Houston, an energy center that is booming with the high price of oil, were the only cities where the index improved, and Philadelphia's improvement was greater, going from 68 to 72 on Moody's complex scale. That moved the Philadelphia region from below average to above average as Moody's national index dropped from 72 to 70.

The highest-rated markets were unchanged: Los Angeles at 84, New York at 80. Chicago showed the biggest drop among the 10 largest regions: from 60 to 57.

Philadelphia is doing better than the smaller cities to the north and south, Moody's reported. Outside the immediate metro area, the Trenton-Princeton area ranked among the nation's weakest commercial real estate markets, with little demand compared to the supply of properties available for rent.

Wilmington, Del. was also below average, after the city's two largest employers, DuPont Co. and Bank of America Corp., closed or combined some office operations.