The City of Brotherly Love, whose name comes from the Greek origin of the words phila (love) and delphia (brother), is a consistent heartbeat of the United States in terms of historical significance and modern-day economy and performance. Since witnessing the signing of the Declaration of Independence and the creation of the American flag, Philadelphia has prospered and grown into one of the most notable marketplaces in the country.
Today, Philadelphia is the nation’s fifth-largest city, boasting the third-largest downtown population. Perfectly situated halfway between New York City and Washington, D.C., Philly is in prime position to maintain a strong, steady economy.
The uniqueness of the city lies in the fact that it didn’t grow and prosper around one central industry or product. Rather, the metro has been built on an extremely diverse foundation of manufacturing, production, transportation, and industrial development, attracting millions of people with talents of all varieties. In fact, its vast diversification in trade has proven to be Philly’s secret to steady success, as evidenced by its relatively high employment level, even during the nation’s economic ups and downs. Over the past decade, the region’s unemployment rate has consistently beaten the national average, especially in 2008 and 2009, when Philly’s unemployment rate (5.8 percent and 8.4 percent in those years, respectively) was 150 basis points lower than the U.S. figures of 7.3 percent and 9.9 percent. In December 2011, the preliminary unemployment rate for the Philly region had dropped to 7.9 percent, while the U.S. rate was 8.5 percent. This is not to say that Philadelphia hasn’t felt some of the effects of the Great Recession—just that the effects it did experience have done nothing but bolster Philly’s apartment market.
Constant and Consistent
The 200,951-unit apartment market in the Philadelphia metro region is similar to a surgeon’s hand—steady. Due to restricted financing and economic uncertainty in late 2008 and 2009, new construction was literally nonexistent in 2011, with no new market-rate rental units coming to market. Coupled with the very real fact that homeownership is declining in popularity, possibility, and affordability, the multifamily housing industry in Philadelphia has continued to steadily improve, even in the face of the economic downturn.
Occupancy directly illustrates the Philly apartment market’s constant performance. Although its three-year high occurred in the third quarter of 2011, at 95.4 percent, the lowest that occupancy ever hit during the downturn was a healthy 93.5 percent, in the fourth quarter of 2009. The horizon only promises more upward trends, as occupancy is expected to climb to as high as 96 percent by the end of 2012.
Effective rent is another indicator of Philadelphia’s consistent performance. In the past two decades, the only minor blip on the radar was a loss of 0.7 percent in effective rent in 2009, which was immediately recaptured in 2010 with 2.8 percent growth. Due to a lack of new units and the healthy absorption of 2,338 units in 2011, effective rents grew another 2.9 percent in 2011.
The rent increases weren’t concentrated in just a few submarkets, either. All 28 submarkets in the Philadelphia metro region experienced rent growth last year, according to the Reis Observer report. For 2012 through 2014, the forecast for the Philadelphia metro region is that effective rent will grow 2.8 percent a year, with a 3.0 percent increase in 2015.
A significant new trend is adding to the demand for housing in Philadelphia and the Keystone State overall. A mass migration out of New Jersey to Pennsylvania was captured by the 2010 census. According to The Philadelphia Inquirer, the widespread movement from New Jersey to Pennsylvania “accounted for 80 percent of the Keystone State’s net gain [in 2010] of 25,770 residents from other states.”
Pennsylvania was one of only three states in the Northeast (the other two being Vermont and New Hampshire) that saw more people move in than move out of the state in 2010. Significantly lower property and income taxes are cited as top contributing factors behind moving to Pennsylvania. New commuting patterns from Pennsylvania to New York, New Jersey, and Maryland have also made the state more attractive as a fresh and affordable place to call home.
The end of 2011 saw a tremendous boom in the number of housing starts in the Philly region, with a focus on multifamily, not single-family. As a strong indicator of the shift away from homeownership, single-family permits grew only 1.6 percent in November, while permits for multifamily housing grew 13.9 percent and are the highest they’ve been since October 2008. Furthermore, multifamily starts rose 23.5 percent in November, the largest increase in 19 months. As demand for rental units continues to strengthen, the region’s pipeline has slowly but surely risen.
Currently, the Philly metro region has 1,220 market-rate apartment units under construction. Of those units, 673 are expected to deliver in 2012. Despite the completions expected in the next few years, absorption is expected to stay high. Net absorption for the Philadelphia metro is forecasted to be 1,050 units for both 2012 and 2013. In 2014 and 2015, however, net absorption is expected to drop to 859 units and 612 units, respectively, as the burst of post-recession building permits levels off. The more-distant horizon shows that 34 multifamily properties are planned for construction. According to Reis, only two of the properties—representing 166 units, all seniors housing—have reported start dates in 2012. Proposed properties in the Philly region total 13, nine of which are market-rate apartments and four, seniors housing. Kahn Development Corp. is expected to break ground on a mixed-use project in the heart of Malvern and a 180-unit apartment complex in West Chester. The Bozzuto Group and Cornerstone Properties are planning to construct 250 units in Newtown Square, and O’Neill Properties Group is planning a 753-unit apartment complex in Malvern.
A notable development in the Philadelphia pipeline is the first net-zero apartment complex in the United States. In order to qualify as passive-energy, the building must create almost as much energy as it absorbs from the power grid, which is accomplished through technology such as solar panels, heat exchangers, and extreme levels of insulation. The project is being built under the auspices of the Philadelphia Redevelopment Authority, whose aim is “energizing the city’s plodding land bank,” according to The Philadelphia Inquirer. After competing against local powerhouse developers Pennrose Properties and Westrum Development Co., the developer that won the project is Onion Flats. The Ridge Flats, as the property will be called, is scheduled to break ground in the first quarter of 2013.
Philadelphia offers a multifamily housing market that remains very steady. The highs are not really high, and the lows are not really low, but one thing remains true regardless of the state of the market—strong, consistent performance. Compared with several other major Mid-Atlantic metro regions, Philadelphia has the second-highest number of transactions and is ranked third in terms of total transaction volume value—holding true to its history as a consistent market without major swings in either direction.
As most reports will agree, Philadelphia will underperform its more volatile competition when times are good, and it will outperform the competition in a housing downturn. Steady consistency has allowed a city that saw the birth of our nation to remain a strong player nearly two and a half centuries later.
Ryan Ogden is a principal in ARA's Washington, D.C.-Mid-Atlantic location.