The Players May Be Different, But The Song Remains The Same In Philly
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Even as Philadelphia real estate sets value records and draws in bigger names than ever before, the story on the ground stubbornly remains the same.
Although Philly has made incremental gains in jobs and population in the past couple of years, it remains well behind its peer cities in those factors. It is a slow-and-steady market like it has been for decades, and the influx of investment from New York and farther afield is more reflective of outsiders’ cyclical optimism than any fundamental changes at a local level.
“In the 20 years that I’ve been here, I’ve seen the pattern recur [wherein] really smart operators come here, and they don’t lose money, but they don’t make money, and they go home,” Verde Capital President Jake Reiter told Bisnow. “But they’re replaced by new operators and families.”
Reiter cited the recent exit of Chicago-based Equity Commonwealth as the latest iteration of outside investor churn. Equity’s last Philly property was 1735 Market St., which New York-based Silverstein Properties used as its own entry into the market — at the highest price in the city's history, both overall and per SF.
For Silverstein, the $451M price tag pales in comparison to the worth of its holdings in, say, the World Trade Center. With the investment market in New York seemingly on the downswing, Center City might look like an attractive bet in comparison, but it won’t behave the way a prime Manhattan building will in that market’s next growth cycle.
“As long as there are heavy tax issues downtown and the population will remain relatively flat, you’ll continue to have investors over time think, ‘That’s cheap, let’s jump in,’” Reiter said. “Some will make money, but overall it won’t have much [value] accretion.”
Local taxes, whether too high or simply too complicated, have been commercial real estate’s bugaboo for decades. Reiter, City Councilman Allan Domb and PMC Property Group President Ron Caplan all blame the lack of incoming businesses, at least partially, on the city’s business and wage taxes. The only meaningful, positive change has been the 10-year tax abatement on new construction enacted at the beginning of this century, Domb said.
Domb, Caplan and Reiter will be among the panelists discussing the realities facing Philadelphia, both political and economic, at Bisnow’s Philadelphia State of the Market event at Five Below’s new headquarters in the Lits Building May 15.
Public backlash against the abatement has steadily grown in the past few years, centered around how real estate taxes fund city school districts. Critics have characterized the abatement as taking money earmarked for schools and returning it to the wealthiest developers, but Domb and the real estate community contend that such development — and the taxable property that it created — would never have existed without it.
“The real question [about development in the city] is, ‘Will it be built without the abatement?’” Domb said. “And from 1979 to 1999, I never saw any new construction. Zero. Since 1999, we have had new construction, but among the top 20 cities, we’re still near the bottom.”
But as real estate taxes are hotly contested, the job growth that would fuel further development, or theoretically make the abatement unnecessary, has eluded the city. Major gains in the area have almost exclusively come in the suburbs like King of Prussia, Conshohocken or Camden, but even then, rarely from companies migrating in from another metro. A move from Malvern to King of Prussia, Center City to University City or Cherry Hill to Camden is far more common these days. Reiter called the situation “a zero-sum game.”
The lack of socioeconomic growth is “something that cannot be denied,” Philadelphia Deputy Commissioner of Real Estate Dominique Casimir told Bisnow. Casimir, Caplan and Domb said more robust incentives could improve matters, but Domb called it a “Band-Aid, not a cure.” In lieu of a fundamental change to how the city operates financially, stasis is the best-case scenario.
“[Fixing the tax code to grow jobs] is a question that makes us think about what growth means from a development perspective and a micro- and macroeconomic perspective,” Casimir said. “It’s a continued dilemma for Philadelphia as it seeks continued growth, and if it’s not addressed, we could see a setback that people might not be anticipating.”
Some organic growth has been taking place and continues to provide reason for optimism, in the form of Philadelphia’s “Eds and Meds.” The University of Pennsylvania, Children’s Hospital of Philadelphia and Jefferson are all building new facilities, filling in Center City real estate or both.
What’s more, the younger demographic Eds and Meds either employ or educate is living in the city, sustaining its thriving restaurant scene and growing neighborhoods like Fishtown, Kensington, Point Breeze and Brewerytown. To a degree, they are also growing the core of Center City and driving new development, such as PMC’s Franklin Tower and Riverwalk multifamily projects on Race Street and the banks of the Schuylkill River, respectively.
Even though PMC’s Caplan said Philly, like all cities, is overbuilt, his company continues to develop and add to its holdings as the biggest multifamily landlord in the city. A couple of years after the delivery of One Water Street, PMC is beginning vertical construction at the 700-unit Riverwalk.
“It’s almost like if we build it, they will come,” Caplan said. “That’s what’s happening. As we build more and more new development in the city, more people are moving to the city.”
Caplan’s characterization of population trends is emblematic of developer optimism, but as the head of a local company in the business of delivering product, he has a leg up on the outside investors looking for buy-and-flip deals. If members of that set think they can project yield in Philly as they do in boom-or-bust cities, they have another think coming.
“I think people are jazzed about big names coming into this market, [but] I don’t necessarily see that playing out in some huge new story for Philadelphia,” Reiter said. “I don’t think people learn new things in this space; money just cycles and it looks for opportunity.”
Come discuss whether Philly has the capacity for transformative change at Bisnow's Philadelphia State of the Market event at the Lits Building on May 15.