Downtown Philadelphia has experienced a significant population and demographic shift during recent years and is currently undergoing a major multifamily construction boom. Philadelphia’s multifamily market has all the characteristics to drive significant growth in the near future and attract institutional and private investors.
The Center City neighborhood has evolved into one of the most vibrant residential downtowns in the United States with a diversified residential and commercial base and increasingly affluent residents. According to Center City District, the population of Philadelphia’s greater Center City increased 10.2 percent from 2000 to 2010, making it the third largest downtown population among American cities behind New York and Chicago. An influx of new residents will drive further demand for residential units, with an emerging tenant profile of a rapidly growing population of 18- to 34-year-olds. Recent demographic surveys indicate this age group accounted for 28.5 percent of Philadelphia’s population in 2013, up from 24 percent in 2007.
Graduates from nearby colleges, including Villanova and the University of Pennsylvania have been a big population driver in Philadelphia. The Philadelphia Economic Development Office indicates a significant increase of college students staying in Philadelphia after graduation. Forty-seven percent of students who located to Philadelphia for college stayed after graduation; this is up from 26 percent in 2007. Recent graduates and young professionals fill Center City apartments as they are looking for a work-live-play environment upon graduation.
In addition to attracting college students and graduates, Center City is now retaining tenants into their late 30s and early 40s, professionals who stay to raise their children as school districts improve. The Philadelphia School District indicates Center City had a 15.7 percent increase in the number of 5- to 14-year-olds from 2000 to 2010. This lifestyle trend will drive further demand.
Strong Market Indicators
Recent absorption numbers for Philadelphia indicate historically high demand, particularly in the Center City submarket. Since year-end 2009, Philadelphia has a net absorption of more than 8,333 apartment homes and delivered only 2,401 units, thereby decreasing the vacancy rate from 6.6 percent to 3.4 percent. Despite the massive uptick in development, New York–based market research firm Reis projects robust demand, with absorption pacing slightly behind supply by an average of 104 units annually from 2013 through 2017. Even with this projected forecast, we expect Philadelphia to remain a healthy and stable market.
From 2010 through 2012, cumulative rent growth of 7 percent and limited supply has gradually brought Philadelphia’s apartment market above pre-recession levels. Landlords are continually testing the ceiling without encountering extreme resistance given high occupancy rates. However, due to an active development pipeline, effective rental rates may not grow as quickly going forward but Reis predicts solid consistent growth over the next five years, with average annual rent growth of 3 percent through 2017.
Renters are not the only group interested in Philadelphia--institutional capital is taking note of the city as well. The apartment market, which was traditionally dominated by local real estate investors and families, is now attracting institutional money due to its stability and pent-up demand as well as its attractive pricing. Groups such as AEW, Clarion, Invesco, Prudential, and TIAA have begun deploying capital in the newly constructed multifamily assets, as well as the development space. Even historically known office owners like Brandywine Realty Trust and Pennsylvania REIT are now building apartments in the area.
The economy is emerging from the 2009 recession and the apartment market finds itself experiencing very strong occupancy and historically high rental rates. In addition, financial markets have aligned to provide historically low interest construction loans allowing for financially feasible apartment development. As a result, the market is ripe for major apartment developers and institutional equity investors. New apartment construction and renovation are under way in Center City include The Granary (228 units), The Sansom (104 units), 2116 Chestnut Street (321 units) and Southstar Lofts (85 units). The 163-unit Goldtex Building, 1400 Spring Garden (204 units) and 2040 Market Street (275 units) were recently completed in May. In addition, major office renovation projects are also under way including 1616 Walnut Street (206 units) and 260 S. Broad Street (275 units).
Philadelphia has seen a recent uptick in new construction with more than 900 units during the past two years and an upcoming surge of planned projects resulting in more than 3,000 multifamily units over the next three years in Center City alone. While the number of units under construction is significant, the continued inflow of young professionals and retired Baby Boomers looking for a vibrant urban feel on top of retaining tenants into their 30s and 40s will drive further demand for apartment living.
Jose Cruz is senior managing director of HFF’s New York/New Jersey/Pennsylvania investment sales team based in the firm’s New Jersey office. Jeffrey Julien is managing director of HFF’s New York/New Jersey/Pennsylvania investment sales team based in the firm’s New York office.