Philadelphia Mayor Michael A. Nutter has the City of Brotherly Love finally feeling good about itself. After his landslide election last November, Nutter has rejuvenated the populace with city-wide cleanup days led by the Philadelphia Eagles and is promoting Philly as an affordable, attractive place for new businesses to set up shop. Coupled with historically robust collegiate and medical sectors—the “eds and meds”—the added business growth has multifamily fundamentals in Philadelphia looking extremely favorable.

“Philadelphia has always been a more conservative market, so we don't necessarily see the highs and lows, but portfolio fundamentals are great right now,” attests Elizabeth Jodlbauer, director of sales, marketing, and property management for Dranoff Properties, an owner and manager of Class A apartment properties across the Philadelphia metro. “Average occupancy at Dranoff 's portfolio remains at 96 percent and higher, and we have successfully maintained rent increases each year.”

Jodlbauer's comments echo a refrain heard across the country: Despite a soft national economy, multifamily fundamentals remain solid. Take the Dallas/Fort Worth area or the Denver apartment market, both of which have shown strong economic stability, pumped up rents and occupancy, and lured in multifamily investors, according to press releases issued in May by Encino, Calif.-based commercial real estate brokerage house Marcus & Millichap. From analyst to analyst, report to report, the industry's collective voice is telling a tale of rent gain, vacancy compression, and increased multifamily asset values.

Unlike its market peers, Philadelphia-based Dranoff Properties says it's maintaining strong fundamentals without concessions.
Dranoff Properties Unlike its market peers, Philadelphia-based Dranoff Properties says it's maintaining strong fundamentals without concessions.

SMOKE AND MIRRORS All lies, says Mike Morgan, president of Morgan Florida Real Estate Group, a Jensen Beach, Fla.-based real estate research and consulting firm that also offers brokerage services. Morgan says that concessions being doled out by multifamily firms cloud each industry report and data set that comes across his desk, hiding a reality as bad as the single-family home builder recession. “We don't need anymore homes and we don't need anymore apartments, but there are still cranes coming out of the ground,” Morgan says. “When do you stop? I don't know any market in the country that is not overbuilt.”

As a result of shadow market rentals, condo reversions, and apartment overbuilding, Morgan says multifamily portfolio managers are renting to anyone who can fog a mirror. “They give 'em a free month of rent here, a free month there, a free refrigerator, two dogs, and a parakeet,” Morgan says. “They get so creative with what they give away—and those concessions do not get reported in the numbers—so the numbers never reflect what is happening on the ground.”

In a way, Morgan is right. Rental concessions have always been a way for multifamily owners to sweeten the pot for prospective renters and close leases without fundamentally changing the net operating income that dictates an asset's value. “Across the board, landlords use concessions as opposed to rental reductions because they are trying to maintain cash flow and NOI for selling the property. So instead of reducing rents, they give away stuff,” explains Richard Swerdlow, CEO of, a Coconut Grove, Fla.-based multifamily Internet listing service that, despite the name, also features rental listings. He agrees that concessions are on the up-tick: “With all the condo reversions and the shadow market, you have huge net gains of unit inventory. In practically every market, we are seeing concessions across the board—half a month rent, at a minimum.”

At least in the case of Dranoff, Jodlbauer disagrees, although she does see a softening market, particularly in some of Philly's aging multifamily stock. “We have not seen an impact on our leasing to need rent concessions, but we have seen many other projects in lease-up giving one to two months of free rent, and we are also seeing incentives for parking and discounted rents in some of the older, more tired buildings that we had not seen prior to the last six to nine months.”

GETTING A GAUGE If concessions offer a barometer on the overall health of the rental market, the trick is learning how to read the rise and fall of the pressure. That's difficult, considering that the multifamily industry is loathe to report occupancy levels along with concession-weighted actual rents. “Many of the major owners are very quiet when it comes to current concessions, so it can be a confusing environment,” says Dan Fasulo, managing director for New York City-based Real Capital Analytics. “But it is definitely a market-by-market scenario. Look to supply-constrained markets, and you'll see some nice year-over-year revenue growth.”

One rule of thumb? “The first guys to the concession line are typically the guys who are just riding the wave,” says Jesse Holland, president of Latham, N.Y.-based Sunrise Management & Consulting, who factors in concessions and still says multifamily fundamentals look strong. Morgan suggests a hit-the-streets-running approach, gauging concessions as part of a normal shop of submarket assets. “When you see the lease-ups with the balloons and the barbecues and the cookies and the ‘Win a trip to the Bahamas' sign, it's time to expect the worst.”