With 4,000 new Philly apartments in the next 2 years, questions of enough vs. too much
When Brandywine Realty Trust won a high-stakes bidding war in 2011 for one of the last substantial pieces of untouched land in Center City, it seemed as if the Philadelphia housing market could only work in its favor.
At the time, much of the market was still reeling from the recession. Virtually no one was building. While other developers were waiting for better conditions after sidelining projects years before, Brandywine Realty was forging ahead with plans for the $9.3 million property at 1919 Market St., hoping to construct hundreds of apartments — a type of housing that for years had largely been ignored in the central part of the city.
More than six years later, the 28-story project that was in the apartment vanguard after the economic downturn has been fully realized. Since the beginning of last year, 1919 Market has been leasing its 321 ultra-luxury units, along with 24,000 square feet of retail space.
Yet the Center City rental market is far more competitive than it was back when Brandywine set its plan in motion. When the project was announced in 2012, just 844 apartment units had been delivered in the five years prior, according to the Center City District. By the time 1919 Market opened for business, that number had nearly tripled in 2014 and 2015 alone.
Greater Center City — defined as the stretch from Girard Avenue to Tasker Street, from the Delaware River to the Schuylkill — is undergoing an apartment boom that never has been seen before in the city's history. Propelled by transient millennials and baby boomers who increasingly want to rent, nearly 6,000 rental units have been added since 2013. This year and next, the Center City District estimates, the city will add 4,100 apartments on top of that.
The flood of units, many of them in newer luxury buildings, has been a product of — and in turn, has helped drive — Philadelphia's increasing attractiveness as a place to live. But with so much new supply and more to come in the near future, regional observers have begun to ask a big question: Can all these Philadelphia apartments actually be filled?
Cities across the United States have been confronting the same question. Earlier this month, billionaire real estate investor Richard LeFrak said apartment rents in such places as New York and San Francisco will need to drop as much as 15 percent to absorb the glut of high-end developments. Seattle and Washington, D.C., have faced similar criticism.
And in Philadelphia last year, Jersey City-based Mack-Cali Realty Corp. backed out of a deal with Parkway Corp. to build a 300-unit tower at 709 Chestnut St., citing an expected softening in rent growth in the city.
Indeed, rent growth has been decelerating in Center City in recent quarters, according to data from real estate firm REIS Inc. Rents grew 5.2 percent in 2016, a decline of more than three percentage points from the 8.8 percent growth in 2015. At the same time, vacancy rates have accelerated, with the average across Center City in 2016 close to 9 percent.
"I would not say this is dangerously high," Barbara Byrne Denham, senior analyst at REIS, said of the vacancies. "But we do predict rent growth flattening in 2018, and then maybe staying the same or declining in 2019."
"It's going to become a matter of whether apartments can tolerate more vacancy and better rent, or higher occupancy and slightly lower rent," Denham said.
Property managers and developers have begun offering concessions, slashing prices, and boosting offerings to remain competitive.
Brandywine's 1919 Market, for example, where prices run from $1,700 for a studio to more than $6,000 for a three-bedroom penthouse, is offering among the more generous concessions in Center City: two months' free rent on two-bedroom units, one month's free rent on studios and one-bedrooms, and $500 off if a prospective resident applies within 24 hours of seeing the property.
"We've been offering concessions since we opened," said Lauren DeMezza, property manager at 1919 Market. "And I think that absolutely is due to what Philadelphia has had coming on the market and trying to be prepared to compete."
At some of the luxury apartment buildings, the bid to capture a similar demographic of renters has created an arms race of sorts. With many buildings already equipped with entire amenity suites featuring pools, full-sized gyms, and movie theaters, other incentives are being offered to help properties stand out.
At 1919 Market, newcomers have been lured with omelet chefs, paint nights, and free tickets to the Philadelphia Orchestra. And just beyond Center City's borders, at the new AKA University City residences inside the FMC Building, residents are offered an on-site massage-treatment room, a golf simulator, and a private landscaped terrace, among other goodies.
"All the properties have raised their game," said Brad Korman, co-CEO of Korman Properties, which developed AKA University City in partnership with Brandywine Realty. "It's increasing the number of renters."
Paul Levy, CEO of the Center City District, said 2015 figures showed greater Center City offered more than 58,000 rental units. So to deliver about 6,000 new units between 2015 and 2018 — a 10 percent increase — certainly is significant, he said.
"Of course, there will be some cooling off," Levy said. "A lot of supply has come onto the market. … And if you are a lender of a builder coming late to the market, you may have some concerns.
"But," he continued, "supply and demand is never 100 percent balanced … and in the macro picture, this is relatively small."
Multiple market observers and developers in the city have discounted the notion that Philadelphia has reached an oversupply, citing the boom's strong fundamentals. Though millennials make up 20 percent of the region's population, they comprise 40 percent of Center City — accounting for the surge of smaller rental spaces, projects that are easier for banks to finance, said City Councilman Allan Domb, Philadelphia's "condo king."
Meanwhile, Philadelphia has added 45,000 jobs since 2010. With the new Comcast building, which is expected to add thousands of jobs, and the expansion of Children's Hospital of Philadelphia, demand for rentals near the new projects likely will increase, Domb said.
In the end, the increase in supply will likely put the most pressure on the city's older and less renovated apartments. As newer, flashier options become available to renters, market observers say, the options will be renovate or pull out.
"Older buildings have real pressure on them, and some of them could be withdrawn," Levy said, which would reduce supply.
But until then, said Denham, the REIS economist, any talk of oversupply is "a preemptive freak-out."
"Like I said, it's Center City, [developers] are not going to lose money," she said. "So even if the supply curtails rent growth, it's great for affordability, and the city as a whole."