Outside Of Center City, Philly's Multifamily Market Is Already Recovering Nicely
Philadelphia’s multifamily market has managed to make it through this harrowing year relatively unscathed compared to some cities, and industry optimism remains prevalent.
After holding steady at a 10% vacancy rate through the summer, Philly apartments have ticked down to 9.1% in November, according to Apartment List’s monthly report. Landlords have managed to make gains in occupancy by finally offering rent discounts on top of concessions, with average asking rents in November sitting 4.6% below January’s average.
“The fall uptick [in occupancy] has been a rent and concession game, because people have been giving two- to three-month concessions and dropping rent as much as 5%,” Alterra Property Group Managing Partner Leo Addimando told Bisnow. “We’re comfortable riding this out at around 90% occupancy so we can get back to the rents we were at in 2019 once this all ends.”
Demand for apartments has largely recovered in Philly’s neighborhoods, but in the heart of Center City, every difficulty brought on by the coronavirus pandemic has been magnified. Renters in the urban core paid more per SF in exchange for an unparalleled live-work-play experience, supplemented by large buildings’ luxury amenities that emphasize the bells and whistles of the building rather than the apartments themselves. All of the benefits in that trade-off have been upended until it is once again safe to gather indoors.
Center City’s population is also more likely to move around than that of any other area in Philadelphia but University City, where vacancies are entirely attributable to the lack of in-person learning at the University of Pennsylvania and Drexel University, multiple sources told Bisnow. The same issue adds to vacancy in Center City as well due to the number of graduate students who live across the Schuylkill River or who attend Thomas Jefferson University in Market East.
At the priciest apartments, many vacancies have opened up because they were a tenant’s second home that didn't make sense for them to keep while holed up in the suburbs, Post Brothers Vice President of Property Management Yvette Stewart said. But one of the biggest drains on occupancy in Center City has more to do with the pandemic’s effect on businesses rather than individuals.
Multiple short-term rental companies that signed master lease agreements to take large blocks of space in Center City buildings have either gone out of business this year or otherwise left their commitments, directly resulting in at least 2,000 vacancies, Rittenhouse Realty Advisors Managing Partner Ken Wellar said. Sonder has remained strong and Airbnb is riding high, but smaller competitor Stay Alfred went out of business in May and others have retreated significantly.
“Those master leases are worth nothing now,” CBRE Senior Vice President Spencer Yablon said. “If you got to 80-90% occupied but 25% of that was one tenant subletting the space, now you have to do that lease-up all over again.”
Aiding in Center City’s path to recovery is a lack of large multifamily deliveries in the last few months of the year, multiple sources told Bisnow — perhaps because of the brief delay in construction during the city’s spring lockdown, perhaps a coincidence of development timelines. But smaller, boutique buildings have been opening up in Fishtown and Northern Liberties and leasing up quite well, Yablon said.
Among the larger deliveries anywhere in the city is The Poplar (formerly known as the Quaker building) from Post Brothers on Ninth and Poplar streets, a 285-unit factory redevelopment to the west of Northern Liberties and the north of Spring Garden abutting SEPTA’s elevated regional rail line. The Poplar began leasing early this month and has had three move-ins so far, Stewart said.
Farther out, key suburbs like Conshohocken, Bala Cynwyd and King of Prussia have seen growth in demand for Class-A apartments, as young families who were planning to move out of the city anyway accelerated their plans this year, Yablon and Scope Investment Real Estate Services Managing Director Philip Sharrow agreed.
Space has been a key determining factor in where Class-A tenants have decided to live in the back half of this year, whether in the form of larger units or outdoor amenity spaces — both of which are more common in the suburbs but are driving portfolio-leading performance in the city as well.
Rittenhouse Hill, a two-building, 625-unit apartment complex overlooking Wissahickon State Park near the Germantown and East Falls neighborhoods, has the highest occupancy rate among Post Brothers’ portfolio, despite being the company’s oldest development, Stewart said. Lincoln Square, Alterra’s 322-unit mixed-use property at the corner of South Broad Street and Washington Avenue, has similarly outperformed the rest of Alterra’s portfolio, Addimando said.
Both properties have ample outdoor amenity space, and Lincoln Square also has a Sprouts Farmer’s Market grocery store and a Target on the premises to keep residents from having to venture out for necessities. With so many citizens fearful of public transit, convenience now boils down to how easily one can get around in a car and what is within close walking distance.
“I think ‘transit-oriented’ is not the buzzword that it once was, but it will come back around,” Addimando said. “We’re firm believers that people have short memories, and once we all get the vaccine, people will go back to their old habits.”
Even ahead of the vaccine’s arrival and the resumption of in-person classes, Penn will be welcoming students back to campus at the end of January, which will go a long way toward plugging one hole in the market. Opinions differ on how quickly demand will tick back up once the vaccine begins circulating widely in spring of next year.
“I bet when you get to spring, we’ll have great leasing velocity, because I believe a lot of the people who moved out of the city temporarily will move back in warmer weather,” Yablon said.
“We’re delivering 4233 Chestnut in Q2 next year, and we’re just not expecting as robust a lease-up [as previous years],” Addimando said. “But what we don’t pick up in that early spring season, there will be a real rush of demand in the mid-to-late summer.”
Industry consensus in Philadelphia is that 2022 will be the next year when multifamily developments succeed or fail on their own merits, rather than because of the unequal effects of the pandemic. As so many take the long view, development sites have become the hottest type of investment in the market, exceeding stabilized properties in the urban core — previously the crown jewel of multifamily capital markets.
“We’ve had competition on everything development-oriented in the market,” Yablon said, noting that his group at CBRE has put development sites in Spring Garden and in the Allegheny area of North Philadelphia under contract recently.
A major development site in Center City has been under contract since March, but is on track to close early next year without a reduction in price, Yablon said.
“What I’ve seen is a trade-off, so that there’s not been any reduction in pricing, but the timeline has extended,” he said. “So the buyer says, ‘I’ll pay your price, but I need more time to close, because it’s just tougher to raise construction financing today in the city.’”
The optimism about the speed with which Philadelphia will recover from the economic distress caused by the pandemic means that the multifamily industry is betting on the city recovering much faster than it has from the last few recessions.
“Everyone’s saying 2020 is a write-off, 2021 will mostly be a write-off, so they want to set themselves up for 2022 being a return to business as usual,” Addimando said.