Philadelphia's Vibrant Multifamily Market Is Inspiring Its Suburbs
As Philadelphia’s urban multifamily housing market sees an influx of high-level product the likes of which have rarely been seen, its suburbs are taking notes. Come discuss how all the parts of the Philadelphia market fit together at Bisnow’s sixth annual State of the Market event at 1735 Market St on Sept. 27.
The United States’ demographic shift to city centers has been a blessing to Philadelphia, with high retention rates of students from its universities, a booming restaurant and tourism scene, and an increasingly enticing place to headquarter large companies. But what it didn’t have was an abundance of high-quality apartments to choose from.
As of September of last year, only 15% of residences in Philadelphia were apartments, lowest among the US’s 25 biggest cities. What’s more, very few multifamily buildings had been built in the past several years, with most of the new product arriving on the market being renovations of older office buildings. Demand, naturally, was incredibly high.
That’s finally changing, with a series of high-profile, Class-A apartment buildings that have either just hit the market or will in the coming months. Though some have expressed concern that it’s too much all at once, others like Korman Communities co-CEO Brad Korman, disagree.
“I don’t think it’s too many apartments,” Brad says. “I think we’ve needed it for a long time.”
While the increased supply has taken the edge off demand, slowing rent growth from 2014 to today, Brad says other fundamentals remain strong enough for developers to remain optimistic about the viability of their upcoming projects.
“I think you’ll see strong occupancies [through the next wave of construction], even though we may not have the rent growth we had a couple of years ago,” Brad says.
Still, the anxiety over the prospect of overbuilding is real, and perception is powerful enough to make a tangible impact on the market. Concern over diminishing returns were sufficient to cause Mack-Cali Realty to pull out of a 300-unit multifamily project at 709 Chestnut St this week.
“It’s a great part of town,” Brad says. “I don’t know what their reason was for [pulling out], but there’s certainly enough new supply that it might not have hit their return thresholds.”
Some of that trepidation could be chalked up to out-of-market capital sources being more reluctant to invest in markets based on their own specific criteria, whereas Philly-based companies are more acutely aware that the city is not a boom-and-bust market.
“Philadelphia’s never been a great market for outside capital anyway,” Brad says, adding that reticence from those sources could dissipate “until the new construction has had time to prove out.”
Regardless of whether Philadelphia’s urban building boom is sustainable, its mere existence has provided inspiration for the city’s suburbs, where the multifamily market has remained strong despite the office and commercial sectors continuing to fall short of pre-recession highs.
The biggest competitive advantage that cities have over suburbs, and indeed a large component of the population flight to urban centers, is the walkable nature of a city neighborhood. To respond, developers are beginning to approximate that feel by focusing on mixed-use buildings and nearby amenities in building and selling their properties.
For example, BET Investments’ dual developments in Media have been designed to all but eliminate the presumed necessity of driving in the suburbs, with a new multifamily project called West End Flats and a redesigned Granite Run Mall with a shuttle service between them.
The Flats will have 162 apartments walking distance from downtown Media’s commercial corridor, and the mall will have 400 more (it currently has 162), plus 230k SF of retail. The retail space includes a grocery store that will be connected to the apartment complex via an overpass, cutting out the need for either a very short drive or a walk across a busy suburban artery.
The shuttle between those two developments will also make a stop at the Media train station, meaning residents of either complex can shop, eat at restaurants and commute without needing a car—just like in a city. It’s a unique setup, but one that could be emulated in years to come.
“To be able to connect downtown shopping areas [in Media] with the largest regional shopping center in the area is highly unusual, but it made a lot of sense because we own both properties,” BET president Michael Markman (above, with his wife), another panelist at State of the Market, says.
Other communities, like Korman’s Village at Valley Forge in King of Prussia (at top), are also attempting to place enough varied retail and restaurant options in the same complex as multifamily buildings to simulate a city neighborhood. That’s important, because many across the commercial real estate industry agree Millennials won’t stay in cities forever.
“At some point, Millennials will move to the suburbs,” Michael says. "Before they buy their houses, we want to build a segue to homeownership."
Even leaving aside the coveted Millennial demographic, there’s increased demand for apartments in the suburbs relative to homeownership. That same drive to cities has affected how home property values appreciate, and the calculus of weighing appreciation against property taxes has shifted.
“The demographic that’s occupying apartments now has changed,” Michael says. “People who can afford to live in houses are living in apartments.”
Hear more about it later this month at our State of the Market event at 1735 Market St.