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Economic trends in Philly area mean solid apartment market, reports say

Positive economic trends and faster-paced household creation in the first quarter kept the Philadelphia area's rental-apartment sector producing "solid results" for property owners, real estate investment services firm Marcus & Millichap reported Tuesday.

Positive economic trends and faster-paced household creation in the first quarter kept the Philadelphia area's rental-apartment sector producing "solid results" for property owners, real estate investment services firm Marcus & Millichap reported Tuesday.

Rents in the region were increasing "modestly and consistently," the firm said, while vacancy rates will fluctuate in a tight range this year.

Marcus & Millichap cited persistent and exceptional "demand-side dynamics" in the market, with several years of employment growth creating a "large pipeline" of current and potential renters.

Employers in the Philadelphia metro area will create 44,000 jobs in 2016, the report said, noting that more than 48,000 positions were added last year behind strong growth in health care and construction.

The positive report on the rental-apartment market came on the same day the U.S. Census Bureau reported an 8.8 percent decline in housing starts nationwide in March, to a 1,089,000-unit annual rate.

Industry observers consider a healthy new-home market to be 1.5 million construction starts annually, a level that has not been seen since the real estate bubble burst in 2006-07.

The single-family-home category fell 9.2 percent to a 764,000-unit annual rate, while multifamily starts lost 7.9 percent to a 325,000-unit annual rate, the Census Bureau said.

Although the decline in housing starts came in the same month that traditionally launches the spring home-selling season, IHS Global Insight economist Kristin Reynolds said that "one month does not make a trend."

"The fundamentals remain supportive, and we expect starts to reach a 1.2 million-unit annualized rate in 2016," she said.

Marcus & Millichap's report said that against the backdrop of rising demand, developers are preparing to introduce a substantial number of new projects this year.

"Recently delivered complexes have leased up well, barely disturbing marketwide trends," although the focus on higher-end rentals may be overlooking unfulfilled demand from specific demographic groups or income levels, the report said.

With Center City leading the way, developers will complete 5,400 mostly market-rate rentals this year. About 3,200 units were completed in 2015.

Completions will exceed an increase in occupied units in 2016, generating a 30-basis-point rise in vacancy to 4.6 percent and erasing last year's decline, the report said.

Despite reports to the contrary, consistent rent growth remains a hallmark of the Philadelphia-area market, Marcus & Millichap said.

This year, the average rent in the region will increase 3.1 percent, to $1,221 a month, outpacing last year's gain of 2.6 percent, it said.

The Marcus & Millichap report was seconded by a first-quarter analysis of the local apartment market by commercial real estate research firm Delta Associates.

Though completion of new projects will restrain growth and negatively affect vacancy rates in the short term, Delta said, over the long term, "demand generation from sustained job growth, demographic shifts, and owner/renter preference will bode well for the Philadelphia metro area."

Total return on apartment investment in Philadelphia - cash flow plus appreciation, as reported by the National Club of Real Estate Investors - was 7.93 percent in 2015, the highest among major metro areas in the Mid-Atlantic region but below the national average, Delta said.

aheavens@phillynews.com

215-854-2472 @alheavens