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Philadelphia's condo market lags behind city's housing recovery

While single-family homes have experienced incredible growth in Philadelphia, the condo market is a bit more complicated.

A view from the 23rd floor at 500 Walnut Street in Philadelphia in March. The condo tower is highly sought after for its views of Independence Hall.
A view from the 23rd floor at 500 Walnut Street in Philadelphia in March. The condo tower is highly sought after for its views of Independence Hall.Read moreDAVID MAIALETTI

With units in Philadelphia fetching prices as high as $17.85 million in the last few years, it might seem as if the city's condo market is stronger than ever.

After all, between the impending delivery of Tom Scannapieco's 500 Walnut sometime this fall and the opening of Carl Dranoff's One Riverside this past May, the two luxury towers together are expected to bring 103 new units to the Philadelphia market, totaling $330 million in sales if both sell out as planned.

What's driving the sales, both developers have said in the past, is demand among the region's wealthiest residents for an ultra-luxury product that has never existed before. Yet there's also another primary driver behind their successes: Both condo towers are in Center City.

According to a study prepared by Allan Domb Real Estate and Philadelphia economist Kevin Gillen, Center City is the only local market where condo towers are thriving today. Once outside of Center City’s borders, condominiums are generally faltering in Philadelphia, the study found, and have struggled to gain back values lost during the Great Recession.

Such unevenness in the condo market's recovery is surprising for the greater Philadelphia real estate market, which largely has been thriving for years — especially in the single-family house and apartment sector. Recently, neighborhoods across Philadelphia have seen single-family property values skyrocket beyond their 2007 pre-recession peaks, as prospective buyers, seeking more affordable housing, have pushed into lower-priced neighborhoods. Rents citywide, meanwhile, have climbed to new heights as more millennials have flocked to the city.

The condo market has been different, Domb and Gillen's study found, and has largely been divided among demographics. Wealthier baby boomers seeking an urban lifestyle have propped up the Center City condo market, developers and experts say. Younger buyers, however, have increasingly desired flexibility and delayed home ownership. As a result, the popularity of condos in more affordable areas — once a popular option for entry-level housing — has been eroded by both rental demand and a spike in new, tax-abated houses in gentrifying neighborhoods.

All the while, builders have continued to face tight lending standards, making it harder to build new product and jump-start enthusiasm in the condo sector.

Those circumstances have left Philadelphia with a condo market with much room to grow. After falling a cumulative 28 percent citywide from a peak in 2006, condo values on average have recovered just a part of what was lost.

"The market has been in recovery mode," Gillen and Domb wrote in the findings. But "current price appreciation has been rather sluggish."

"Citywide condo prices are only up 1.3 percent from a year ago," the report said, a rate that is "well below the 9 percent rate of annual appreciation that the single-family houses in Philadelphia are currently experiencing."

Some neighborhoods have fared better than others, the report found: The Rittenhouse Square condo market, for example, has fully recovered, and values are now 10 percent higher than where they were in 2006. In the second quarter of 2017, condos there had a median price of $813,565. Old City values are 4 percent higher, with a median price of $310,937. And values in the Washington Square condo market, where the median price was $375,213, are up 2 percent.

But outside of those wealthier, central areas, condos have struggled. In South Philadelphia, for example, where single-family properties recorded a 59 percent increase in values in the second quarter, condo values remain down 5 percent. The median price there was $409,041, according to the data. The same exists in the highly popular Northern Liberties and Fishtown area, where condo values are down 11 percent, Gillen found. The median price there is $339,027.

"This [study] pretty much confirmed what everyone has thought: You don't see baby boomers buying condos outside the core area," Domb said in an interview. " … They want to be in the center of the city, near restaurants and the theater."

"But with new millennials moving into Philly, they are the ones populating the Port Richmonds and the East Kensingtons, Francisville and Queen Village," Domb continued. " … They are making those come alive in the single-family market."

Indeed, local developers say, the strength of the Center City market has been guided by demand from wealthy baby boomers and Generation Xers, many of whom are leaving the suburbs, trading large, expansive homes for amenity-filled high-rise towers.

And they are willing to pay top dollar, Gillen and Domb's data show: From April to June, there were 28 sales at One Riverside for $1 million or more. At other properties across the city, there were an additional 23 sales for $1 million or more during the three-month period.

"Most of our buyers are 40 years old and up," said Marianne Harris, vice president for sales and marketing at Dranoff Properties. They "are people who … don't want to be in outlying areas."

"So much has happened in the last 10 years, and the reputation of Philadelphia has risen dramatically," she said. "People want to sell their property and move into the city. I think what was getting in their way previously was that there wasn't any product available."

While multiple developers rushed to build condos in the years running up to 2007 and 2008, many projects were canceled as the economy soured. Others went bankrupt. Some barely survived, while others were saved when different developers stepped in. Ultimately, between a bad history of success in Philadelphia and tighter lending standards, little condo construction occurred in the last decade.

Which meant that when One Riverside and 500 Walnut were announced, the supply drew immediate interest. Since One Riverside began pre-selling in 2015, Dranoff and his team have 59 units either sold or under agreement, for a total of $135 million in sales so far. Only nine units remain. At Scannapieco's 500 Walnut tower, $120 million of the tower's $180 million goal has been reached, including the $17.85 million penthouse currently under agreement.

Other Center City condo towers built in the late 2000s have benefited from the recent demand. At the Residences at Ritz-Carlton, which was delivered to the market next to City Hall in 2009, sales were more sluggish amid the recession. But recently, as the city has improved and new towers rise, sales have picked up: In May 2016 alone, the tower sold $23 million in units.

Still, three of the tower's four penthouses remain unsold. One, an 8,600-square-foot penthouse on the 48th floor, sold last year for $12 million.

Outside Center City, the situation is very different.

At the 10-year-old Waterfront Square in Northern Liberties, for example, "sales aren't bad," said Debbie Centofanti, director of sales at the property. She did "close to $30 million in sales" just two years ago.

Yet, she said, "we did sell them at a much higher price 10 years ago when the market was much stronger."

"Some of those units, investors are now selling them in the mid- to high-$400,000s," Centofanti said. "Originally, they would have sold for $600,000 or $700,000."

The reason: Many are seeking the townhouses and single-family projects that are now booming in Northern Liberties.

"A lot of my buyers might have come to me when they got matched here while doing their residency and have outgrown the condo lifestyle," she said. "They want more room; they want to start a family."

Elsewhere in the city, developers and officials say, older condo buildings have likely taken a hit in sales after Philadelphia's 10-year tax abatements expired. In the city, new construction in the condo market hit its stride in 2004, when nearly 3,000 building permits were issued for new units.

"The economist in me says that, if an abatement has expired, it takes away from interest," Gillen said. "If you have a huge tax break, you can rationalize paying a certain price."

After that, however, Gillen said, buyers might begin to think about selling.