Philly Construction Was Building Steam, But Frozen Capital Could Put That On Ice
The freezing of the capital markets in the latter half of this year has caused a lull for new development in Philadelphia, leaving the city to hope that its positive trends of the past couple of years can sustain momentum.
Very few new construction projects have started in Philadelphia over the past three or four months, and very few look to begin in the first half of next year, multiple industry experts told Bisnow.
Experienced, deep-pocketed developers with longstanding lender relationships can initiate projects. But for the vast majority, projects that have the entitlements and planning done are on hold.
“Money costs double today from what it did a year ago,” Tower Investments CEO Bart Blatstein said at Bisnow’s Innovation in Construction and Development event at Piazza Alta in Northern Liberties on Dec. 7. “The lender pool has shrunk. Will it pass? Of course. Will it pass in a year? I don’t know.”
With housing prices dropping and potentially bringing inflation down soon, optimists are targeting the third quarter as the moment activity can ramp back up in Philadelphia. Even those who think the pause will last into 2024 have faith the demand for new developments will still be there when lenders press resume.
“In sectors like industrial and life sciences, there will be a delay, but [projects] will happen because the demand is absolutely there,” CBRE Philadelphia Associate Director of Research Joseph Gibson told Bisnow in an interview.
In the meantime, there will be an acceleration of a trend panelists at the event said has been growing for a few years now: More work is being done in the pre-construction phase between developers, architects, engineers and construction firms to minimize the amount that needs to be done and redone on-site.
“Granular things are getting worked out before you get to the field,” Post Brothers Senior Vice President of Development Sarina Rose said at the event. “Rather than adjust things like components that don’t fit out in the field, we do it at the table, every week, religiously.”
For the companies developers bring on to get a project done, landing such deals and participating in pre-construction often represent upfront investments that pay off when the work is done. With actual construction delayed, some projects have paused on pre-construction work until a clearer financial picture emerges.
“There are a couple of projects we’re involved with where the phrase ‘pencils down’ has come into play,” Pride Enterprises CEO Craig Williams said. “Because moving around budgets to make pro formas work has proven to be very challenging.”
Some developers are trying to face that challenge with intense effort to either meet financing standards or be prepared for when those standards shift.
“Right now, construction activity is being feverishly priced, estimated and value-engineered, but projects have been on hold,” Perryman Construction President and CEO Angelo Perryman said. “So, in many ways, the pipeline is an uncertainty.”
Several smaller construction firms in Philadelphia, especially ones led by marginalized groups, worked hard to scale up and meet increased demand for their services in 2021 and the first half of 2022. Part of that came from the city’s robust pipeline of life sciences, industrial and multifamily development, and the other came from an increased emphasis on inclusion for the industry.
“The diversity push is genuine, and one of the challenging aspects of it is the readiness of the diverse business community to realize the benefits of that effort,” Williams said. “Because capacity is the challenge — what can diverse businesses handle?”
Projects that have already started, like the life sciences developments in University City and apartment buildings in Northern Liberties and Fishtown, are still progressing, and at breakneck speed. Post Brothers’ timeline on its Broad and Washington project is much shorter than at Piazza Alta, which started over a year before the former and is delivering a similar number of overall units, Rose said.
Post Brothers can speed up so much at Broad and Washington by applying lessons it learned at Piazza Alta, including the use of a rigorous pre-construction process. As for the why, Post Brothers CEO Matt Pestronk echoed in an interview what Rose said at the event: interest rates.
“All construction loans are floating-rate,” Pestronk said. “We’re paying interest every month without cash flow, so the quicker we can finish the project and get it rented, the quicker we can have cash flow.”
With labor still hard to come by at every level of the construction industry and relationships with developers so precious, local companies that have been working to take more and larger projects have to do their best to stay staffed up for when they get the go-ahead, Perryman and Williams said.
“If our infrastructure is not in the right place, a developer could say that they’re starting a project now, and we might be struggling to have the capacity to do that,” Perryman said.
Ongoing projects are keeping construction companies busy right now, but if new starts don’t recover by the end of next year, the subsequent loss in cash flow would force construction companies to make cuts for survival. If that happens, developers would be hard-pressed to pick up where they left off.
“We’re ready to build, but the pauses affect our ability to say that we have increased our capacity as businesses to be able to respond to needs that are greater than they were in 2020,” Perryman said.