Steady employment growth over the last several quarters has created a large pool of renters and helped boost the fortunes of the Philadelphia region's apartment market, real estate investment services firm Marcus & Millichap says.
The increase in jobs - 60,000 new ones are anticipated by the end of 2016 - has resulted in the formation of 23,700 new households in the region over the last four quarters, the firm's research shows. As a result of this increasing demand for rental apartments, Marcus & Millichap says, developers are accelerating construction and permit activity for multifamily projects.
Delivery of 5,600 completed units in 2016 - 2,000 of them in Center City - will be the highest in more than 15 years, the firm's says.
That number, on top of 3,300 units completed in 2015, will cause "some fluctuation" in the region's vacancy rate in coming months, but Marcus & Millichap predicts a "hiring boom" in first-quarter 2017 that will keep the rate below 5 percent and result in steady rent gains through the year.
Average rent will rise at a steady pace, reaching $1,221 a month by this year's end, an annual increase of 3.1 percent, Marcus & Millichap says. That follows a 2.6 percent annual bump in average rent during 2015.
Developers of multifamily housing say their experience mirrors the research findings.
"My sense of the market is that there is demand in Philadelphia like we have never seen before," said David Waxman, a principal in MMPartners, which is turning older buildings into apartments in Fairmount and Brewerytown.
That demand is "coming from people moving to the area," including millennials, empty-nesters, and young professionals, Waxman said.
"For a long time, apartment product in Philadelphia was, frankly, tired," he said. "We are finally seeing design-driven, amenitized rental housing that people expect and demand today."
And they are consuming apartment units as soon as there is a whiff of availability, especially in the edge neighborhoods where Waxman's partnership and others build.
For example, at Fairmount@Brewerytown, a 161-unit building being carved out of part of the old Acme distribution center in Brewerytown, Michele DiVeterano, vice president of operations for developer McSpain Properties, said that eight to 10 studios and one- and two-bedroom units rent every week.
Millennials "are our target market," said DiVeterano. "They are pioneers."
Millennials keep the Manayunk rental market sizzling, said builder C.J. Koch of Green Lane Realty Associates, which is turning the closed St. Lucy's Church and school into apartments.
"Not so much older folks, however, as I've noticed that they have been more inclined to buy higher-end/new construction homes closer to the city," Koch noted.
The rental market here also has a "seasonality" that cannot be ignored, said Marianne Harris, vice president of sales and marketing for Dranoff Properties in Philadelphia.
"The market is very robust this time of year because so many people are starting law school, medical school, and new jobs at this time of the year. We are also seeing and renting to many professional athletes now, from the Eagles and Flyers," Harris said.
The trend favoring multifamily housing is not a Philadelphia phenomenon, but one shared by the rest of the country in the aftermath of the housing bubble's burst in 2007.
The nation's homeownership rate dropped again in 2016's second quarter to its lowest level since 1965, though the decline was not significant.
Trulia chief economist Ralph McLaughlin said the drop was more likely due to a large increase in the number of renter households than any real decline in the number of homeowner households.
However, homeownership rates among millennials fell 0.7 percentage points, a trend that is statistically significant, McLaughlin said, just as likely due to "new renter household formation as it is their ability to buy homes."
As rental demand increases, capital markets are responding in kind.
The Mortgage Bankers Association reported an 18 percent increase in loan originations for multifamily properties nationwide in second-quarter 2016 from the first quarter.
Stable economic growth and healthy property operations are attracting investors to the area apartment market this year, Marcus & Millichap said.
Sales of assets priced in excess of $20 million continue to rise as institutions and real estate investment trusts become more active in the market.
First-year returns for these properties have compressed to nearly 5 percent in recent quarters, but private capital investors are shaking the trees for multifamily properties "with some sort of inefficiency to correct" - the "tired" product to which Waxman referred - and create additional value, Marcus & Millichap said.
Well-located, stabilized complexes in suburban submarkets are also appealing and typically change hands in the low- to mid-7 percent range, Marcus & Millichap said.