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Multifamily Concessions On The Rise As Downtown Philly's Class-A Market Shows Signs Of Fraying

The coronavirus pandemic hasn’t hit Philadelphia real estate as hard as it has in wealthier cities like New York and San Francisco, but its crowded multifamily pipeline is putting pressure on developers nonetheless.

A rendering of Delwyn Bala Cynwyd, an 88-unit apartment building developed in 2020 by Federal Realty Investment Trust just outside of Philadelphia's city limits

Though rents overall have remained relatively flat from the start of the year through August in Greater Philadelphia, new construction and Class-A apartment buildings in Philly’s urban core are losing renters to the suburbs, data from Yardi Matrix and Apartment List suggest. Anecdotal evidence suggests landlords have been offering more concessions across the market, especially those who need to fill new buildings.

In some cases, it would be fair to assume some of the impetus for the concessions is for owners who took out construction loans to meet their pro forma obligations for occupancy and secure the ability to refinance, Yardi Matrix senior research analyst Tara Jeffcoat told Bisnow.

This is especially true of Center City and its inner surrounding neighborhoods, which have had the lion’s share of new buildings coming online in the area and also have the tenant base most likely to rent by choice — those with the means to move to larger suburban apartments or single-family homes.

“When you’re looking at rent numbers and concessions, the data is not filtering out new deliveries,” Jeffcoat said. “So it might increase the rent averages in the market because of what they’re asking, while offering concessions to still get tenants.”

Concessions have also become more common in suburban multifamily, again to compete for the demographic that could own a house or could afford new-construction apartments. Federal Realty Investment Trust is offering free rent for the rest of the year for its 88-unit building in Bala Cynwyd, called Delwyn Bala Cynwyd, which opened for leasing in January and will start move-ins this month.

Construction on Delwyn was forced to halt on March 19 due to Pennsylvania’s statewide shutdown order, and restarted on May 1 when it was lifted, delaying its opening by over a month. Federal Senior Vice President Mike Ennes told Bisnow that Delwyn has no debt obligations and that offering up to four months of free rent has nothing to do with any financial pressures.

335 Bala, a multifamily development in the Philly suburb of Bala Cynwyd, shown under construction in July 2019

“For us, it was an opportunity to draw an unfair amount of attention to the property in terms of consumer awareness, and to give an advantage to our on-site marketing team,” Ennes said. “And for us, wanting to get motion before the winter was a strategic move.”

As a public REIT, Federal takes a longer-term, more risk-averse strategy than some developers that look to flip their properties as soon as they stabilize. Considering the Delwyn property a hold play, Federal figures that getting the building filled sooner means the concessions will start paying for themselves once tenants get through their first lease and sign extensions.

Even within the Bala Cynwyd submarket, Delwyn is not alone in offering concessions. The building at 335 Righters Ferry Road that opened this year — owned by local developer Nolen Properties, managed by Greystar and dubbed 335 Bala — had 179 units listed as available on its website and was offering one free month on 13-month leases as of Wednesday.

Both Delwyn and 335 Bala are asking for rents over $2K per month in units with more than one bedroom, and buildings like them have been luring some affluent tenants away from the city. Overall occupancy and rents started to decline in Philadelphia in June, while the suburbs have held steady, Yardi Matrix data provided to Bisnow shows. For Class-A apartments, occupancy rose from 95.2% in May to 95.6% in July in the suburbs, while declining from 91.7% to 91.2% in the city over the same period.

Changes that small in a two-month sample aren’t enough to prove a trend, Jeffcoat said, but the divergence is the first to happen this year and bears monitoring.

Center City, Philadelphia

“Rental rates are often tied to job growth, so [landlords] are not going to be able to raise rents if the economy remains depressed,” Jeffcoat said. “If you can’t [raise rents], you need to continue to compete on price and get tenants in your building.”

In the suburbs, average overall asking rents have crept steadily upward each month this year, while Class-A asking rents have started rising again in the past two months, hitting $1,965 per month in August, according to data from Yardi Matrix. Class-A rents in the city have been steadily declining from a peak of $2,433 per month in February to $2,392 in August.

Such trends aren’t as dramatic in Philadelphia as the out-migration happening to New York, Boston and San Francisco, at least partially due to the other cities having larger white-collar industries like finance, with jobs that can more easily be done remotely, Jeffcoat said. By comparison, Philly remains a budget option for New Yorkers, but for new-construction projects delivering in such uncertain times, defensive measures may seem like the prudent course.

“[Concessions are] a part of the business,” Ennes said. “So when we look at the short-term potential pains — and ours is a lease-up, so it’s not atypical to see concessions — it all balances out. There are some times that you offer concessions and others where you can get a lot of rent growth.”