Suburban Philly Resi Conversions Rarely Pencil Despite High Demand
Office-to-residential conversions have become a major trend in Center City, but those projects rarely make sense for developers in the bedroom communities surrounding Philadelphia.
Despite high demand for apartments and a low supply of new units in the Philly suburbs — which RentCafe characterized as the nation’s sixth-most-competitive rental market last week — underutilized office parks aren't being turned into apartments at a fast clip.
“We look at a lot of buildings in the suburbs to try to repurpose,” BET Investments President Michael Markman said Tuesday at Bisnow’s Philadelphia Multifamily Summit at Ballers in Fishtown. “For the most part, they don’t make sense.”
The suburban office market had a 25.1% direct vacancy rate last quarter, which was higher than the 23.2% CBRE calculated for Market West, a conversion hotbed.
The brokerage also found that 709 multifamily units delivered across the Pennsylvania collar counties last year, just over a quarter of the 2,623 that came online in Center City over the same period.
New units make up just 0.2% of the apartment stock in suburban Philly, which has a nearly 95% occupancy rate, according to RentCafe. Rents in Chester and Delaware counties grew roughly 4% and 3%, respectively, last year, while in Center City, they rose by just 0.5%, according to CBRE.
But the ability to capitalize on high demand and rising rents in the suburbs is difficult, Markman said, due to extended entitlement timelines and pushback from municipal officials.
“They’re saying we don’t need the tax dollars,” Markman said of lawmakers in locales including Whitpain Township in Montgomery County.
“There’s nothing available in most suburbs as far as economic incentives. You’re basically begging for zoning approval,” he added. “If you get something in the suburbs, God bless.”
Assistance is a bit easier to come by in South Jersey, JLL Senior Managing Director Fran Coyne said, because officials must comply with a 2024 state law requiring every municipality to provide affordable housing.
The suburbs may be a challenging climate for multifamily conversions, but some developers are making it work.
Love Communities, E. Kahn Development Corp. and Triple Crown Corp. managed to convert a 1980s office complex at 435 Devon Park Drive in Wayne into 162 apartments earlier this year.
Keystone Development + Investment secured a $42M loan to convert a 175K SF Plymouth Meeting office building at 500 W. Germantown Pike into 149 apartments last year.
But in most cases, Coyne said multifamily developers are more interested in the land than the buildings themselves.
Many office complexes sit on large parcels with extensive parking lots. They represent a valuable opportunity: a largely blank canvas for developers in a highly supply-constrained region.
“Right now, we are selling four different office buildings in the suburbs. All that is your residential developers who are tearing out the properties,” Coyne said.
While demolitions in tightly packed Center City could easily become an expensive logistical nightmare, they are much easier to carry out in a secluded office park, the broker said.
“We’re not necessarily spending that much to demo a 200K SF office building relative to the overall capital stack of the project,” Coyne said.
