Is University City Strong Enough To Resist A Development Slowdown?
University City is the most active part of Philadelphia for commercial construction, and the city's real estate leaders believe it can sustain that momentum through next year, even as the rest of the city may struggle to do so.
Developers are hesitant to start construction in much of Philadelphia due to the state of the U.S. capital markets, specifically the difficulty in obtaining construction loans, panelists said at Bisnow's Philadelphia 2023 Forecast event at the Wanamaker Building in Center City on Dec. 1.
"On the development side, I think that we're in more of a pause mode," The Badger Group CEO Paul Badger said. "We're gonna wait the markets out, we're gonna see what happens with interest rates and construction costs. And hopefully, things will come into better alignment by the end of the year."
But in University City, where over 1M SF of life sciences development is in late stages of construction, the real estate fundamentals are too strong to ignore — and the developers with holdings too well-capitalized and experienced — to falter, Badger and University Place Associates CEO Scott Mazo said.
UPA's 3.0 University Place, at University City's western edge of 41st and Market streets, is nearing completion on its envelope and green roof. The company is ready to move forward on 4.0 University Place, another life sciences development slated to total at least 450K SF on a neighboring lot, Mazo said at the event.
"We're completely bullish on where we are, and I don't see any hiccups in that area," Mazo said.
Slightly north of Market Street and to the east of University Place, Wexford Science & Technology's One uCity Square and the first ground-up component of Brandywine Realty Trust's Schuylkill Yards are both scheduled to deliver in 2023. While 3.0 University Place and One uCity Square have both announced multiple pre-lease deals, Brandywine has yet to announce any tenants at its building.
Much as construction loans have dried up for developers, venture capital investment has dropped off steeply this year for startups, including in life sciences.
With only one homegrown startup in Philly's pet sectors of cell and gene therapy in the revenue-producing stage — Spark Therapeutics — University City's developments will depend on either more investment flowing in or out-of-market companies coming to town to lease up.
The next wave of development, which includes Gattuso Development Partners' project at 3200 Arch St. and Chicago-based Sterling Bay's proposal at 3801 Chestnut St., has yet to begin. For a city notoriously dependent on pre-leasing to start major projects, the search for tenants may be as much (or more) of a factor in setting a timeline than obtaining financing.
"As the industry matures, it's going to become more important to make sure there's a reason for having a life sciences building filled with these tenants," Rubenstein Partners Managing Principal Fred Harmeyer said. "Because at some point in time, if those tenants move out, you can't backfill [their space] and you have debt on that building, it'll be like any other type of real estate."
Regardless of how much life sciences development gets built and when, University City's growth has become self-sustaining on the multifamily side, Mazo and U3 Advisors CEO Omar Blaik said.
Just to the south of Market Street and west of the University of Pennsylvania's main campus, an incredible number of multifamily units are either under construction, in the planning phase or have recently delivered, with Chestnut Street west of 36th Street at the epicenter.
"In University City, I don't think you'll be able to find a single piece of ground or a single building available within the next two years," Mazo said.