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Can Southern Land's Rittenhouse Square Tower Beat A Softening Multifamily Market?

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In the ritziest area of Philadelphia, Southern Land Co. is planning the city’s tallest residential tower, but the building’s unique circumstances go beyond its height.

Can Southern Land's Rittenhouse Square Tower Beat A Softening Multifamily Market?
A partial rendering of The Laurel, Southern Land Co.'s planned multifamily tower at 1911 Walnut St. in Philadelphia

Southern plans to turn 1911 Walnut St., the last undeveloped parcel on Rittenhouse Square, into a 48-story skyscraper called The Laurel, with groundbreaking scheduled for early 2019.

Its units will be a mix of 54 condominiums and both short- and long-term rentals, with the sales office at 1845 Walnut scheduled to start taking offers in the spring. On the ground floor will be 24K SF of retail space on Walnut, Sansom and 20th streets, with the Walnut frontage across the street from Rittenhouse Square.

As one might expect from its location and size, Southern expects The Laurel to be among the most expensive places to live in all of Philadelphia, with its cheapest condo set to ask $2.5M.

Echoing common sentiment that Rittenhouse Square is “the best location in Philadelphia,” Southern CEO Tim Downey said, “The Laurel will set the market for luxury living in Center City.”

As a deluge of new apartments hits Philadelphia, the multifamily market has seen signs of softening — and the most expensive units have been hit the hardest. At the end of last year, apartments costing more than $3.50/SF were only 60% occupied, compared to 80% for apartments between $3 and $3.50/SF, and 90% for units between $2 and $3/SF.

“I think [the multifamily market] is definitely slowing down,” Korman Communities CEO Brad Korman said. “We’re seeing a combination of some projects that were on the books two, three years ago coming off the books, and people looking to renovate existing properties and upgrade what they have versus building new.”

But multifamily developers are confident that the right offering would still be positioned for success. Korman claims the softening is unwarranted due to Philly still having substantially fewer apartments per capita than comparable cities like Washington, D.C.

“The problem about any noise with oversupply is that people are building generic buildings at high price points that aren’t differentiated,” Post Brothers President Matt Pestronk said. “People are relying on what third-property property managers are saying and hearing that some are offering concessions, so they offer concessions and it becomes a self-fulfilling prophecy.”

Pestronk and Korman claim developers can give themselves an advantage if they manage their own properties, for reasons such as making sure that amenities are being utilized and engaging with residents. Being more hands-on also allows developers to make sure their buildings have a unique feel, which is increasingly important to residents that can afford luxury.

“At this point, the rental customer is very sophisticated, and they’ve been offered some very similar properties, and they’re looking for something either very different or less expensive,” Pestronk said.

Can Southern Land's Rittenhouse Square Tower Beat A Softening Multifamily Market?
A side-by-side of 1911 Walnut St. as of September 2017 and Southern Land's rendering of its The Laurel project on the site

Southern seems to appreciate that, with Downey calling The Laurel’s amenities “the most sophisticated offerings of any residential project in Philadelphia.” Those offerings include valet parking, an indoor lap pool and hot tub, a fitness center with a locker room, steam room and sauna, yoga and Peloton room, a clubroom and a terrace overlooking Rittenhouse Square with a bar and catering kitchen, a conference room, a dog spa, a rentable suite for resident guests and black car service.

The list is long, but checks many of the boxes one comes to expect from a trophy-class residential building. What promises to set The Laurel apart more, in reality, is its location.

“If you build a unique product — and building right on Rittenhouse Square will give you a unique product — then you’re fine,” Pestronk said. “I think it would be very hard to mess with Rittenhouse Square’s success.”

Though new residential development in Philadelphia is moving west and north, Rittenhouse remains the unchallenged king as a location in the city. Its centrality is matched only by the top-of-the-line dining options that line the square, as well as the city’s most desirable retail corridor just a couple of blocks to the east on Walnut Street.

Southern’s mix of for-sale and rental units is somewhat unique in Philadelphia, where Carl Dranoff and Tom Scannapieco drive the luxury condo market and Korman Communities and Post Brothers both avoid putting condos in their rental buildings.

“We haven’t felt there’s a benefit to having condos in our properties, because there is some conflict between owners and renters in a building,” Korman said. “Sometimes, renters can resent if they’re being treated as anything less than owners.”

The Laurel is hoping to mitigate that by providing separate entrances to minimize interactions, betting that its rates and Rittenhouse Square’s luxury factor keeps everyone happy. If Southern can pull that off, it could be well-positioned to hedge against market trends.

“In a bad market, no one buys condos, but people will always rent in a bad market for a certain price. So if you have no revenue coming in from sales, you’re insulated in that regard,” Pestronk said. “It seems perfectly sensible, and in that location you can get very high rents and high prices for condos.”

A key difference between building condos and rentals is in size, as owners tend to accumulate more belongings and make more space for themselves than renters who may prefer to keep things light for their next move. The Laurel is also planning to cater to those keeping it even lighter with its short-term, furnished apartments, joining a market that is increasing in popularity, as Korman’s AKA University City at the FMC Tower, which has outperformed its pro forma, helped to prove.

“Renters don’t just want to fit into one box of a yearlong lease,” Korman said. “And if you know what you’re doing from a management perspective, you can maximize occupancy.”

Occupancy is the chief concern for furnished apartments, as the fluid nature of those rentals does not allow for long-term planning. According to Korman, standard rentals average 90% occupancy, compared to a hotel-like 70% for furnished apartments. But occupancy hovers between 85% and 90% in Korman’s AKA locations, and Korman claims it is due to the combination of its skilled management and its position at the top of the market.

“Clearly, developers are looking at the softness in the unfurnished market, they want to create another sector to occupy units coming online,” Korman said. “And also, other people are looking at operators like us and our success and think, if we’re doing it and getting higher rents, they feel like they can do it as well … How they perform has yet to be seen, but the numbers are compelling.”

Despite the challenges present in Philadelphia’s market — including construction costs, which Pestronk estimates to have risen by 20% in the past two years — it seems that The Laurel is set up well for success. How well it does with renting and selling is likely up to how Southern Land Co. handles it.