IF YOU STILL HAVE the stomach to watch the nightly news, you might think that every U.S. city is in complete economic pandemonium. However, that's simply not the case in Philly.

While all cities are hurting, some are worse off than others, especially housingbust metros in the Southwest, Southern California, and Florida. But then there are cities such as Philadelphia, where the impact of this recession will be far lighter.

The country's hardest-hit sectors—construction and manufacturing—will shrink by 20 percent nationally from their peak numbers by the time the dust clears. But fortunately, Philly happens to be 25 percent less concentrated in these two job sectors than the average U.S. metro.

The city's economy is driven by the education and health care sectors, which make up 21 percent of all jobs in the metro. In fact, Philly has the second-highest concentration of employment in this sector in the country, trailing only Pittsburgh. Hospitals and universities, which account for much of the jobs in this sector, are hesitant to reduce payrolls, and as a result, this sector hasn't had a significant contraction since the early 1970s, if not longer.

This stability is reflected in the city's apartment market, which had a vacancy rate of 7.1 percent, as of mid-July. Vacancies here have only moved up 100 basis points (bps) from their 2007 lows, roughly half the increase for the average metro. The vacancy rate will move up an additional 50 bps over the next two years, reaching 7.6 percent, which again is a softer increase than the average metro's climb of 170 bps.

Absorption has been weakening in Philadelphia since 2006 but remained positive on a yearly basis, in 2007 and 2008. However, this year is going to be much worse. Absorption is down 900 units through the second quarter of 2009 (off a base of roughly 270,000 units), and before the recession ends, absorption is expected to give back 1,500 units (a 0.5 percent decline).

SOFTER RENTS

Year
2006
2007
2008
2009
2010*
2011*
2012*
2013*


Rent Growth
2.2%
4.0%
2.2%
-3.5%
-4.1%
-2.1%
0.5%
1.6%

VACANCY SWELLS

Year
2006
2007
2008
2009
2010*
2011*
2012*
2013*


Vacancy Rate
6.0%
6.3%
6.7%
7.4%
7.4%
6.8%
6.3%
6.1%

* Projected
Source: Property and Portfolio Research

Still, those losses are actually less than in most markets. Cumulative absorption declines of 1.7 percent in the average metro are far steeper, and the drop in other metros— such as Fort Lauderdale, Fla, where absorption will plunge by 14 percent during the recession—will be a lot worse.

Constrained Pipeline

In the metro's favor is the lack of supply growth. As in many densely populated cities, supply growth is weak in Philadelphia, averaging 0.8 percent since the early '80s. In fact, development looks nonexistent when compared to Phoenix and Austin, Texas, which had historical growth of 4.4 percent and 4.1 percent, respectively.

In terms of supply growth, almost half of Philly's construction will be concentrated in Chester and Montgomery counties, even though these two only account for about a quarter of metro inventory.

Some of the larger projects underway include two projects delivering in 2010: the 376-unit Uptown Worthington in Chester County and the 225-unit Chester waterfront development in Delaware County. Plus, the 400-unit Village at Valley Forge in Montgomery County delivers in 2011.

While the short-term outlook is stable, the long-term picture is less clear. Many of these positive factors will begin to work against Philadelphia. For instance, hospitals and universities are not going to swell their ranks, and therefore, Philadelphia will not have a sudden influx of new residents. The housing-bust metros will lead much of the charge in terms of job growth during the recovery, which will fuel outsized returns. It's not that Philadelphia will have horrible returns; it's just that it won't be able to keep pace with the coastal juggernauts.

In short, Philly is a good market to be in if you want stability, but it has not been—nor will it ever be—a speculator's market.

Transactions Wane, Prices Fall

Clearly, the metro is not a hot spot for investor interest in the same way as its neighbor an hour-and-a-half north. When the Big Apple was red-hot in 2007, 900 apartment buildings changed hands; in contrast, Philly had 86 trades that year.

Still, metro volume in 2009 has been surprisingly light through the middle of the summer, with only two transactions, totaling just under $8 million. Assuming that volume stays consistent, the final 2009 tally will be well below last year's 41 trades.

This slowdown of activity has made it difficult to judge pricing, but the likely scenario is that prices are down 30 percent, with another 10 percent left to go. Although Philadelphia has better than average fundamentals, it does not attract the investors willing to pay the prices that can keep pace with trendier coastal cities.

Prices should bottom by the summer of 2010, but before looking to Philly, watch the vital signs instead. It's probably a good idea to wait for the EKG monitor to register a couple of beeps before hopping in.