Philly's Suburban Developers Are Looking Past The Immediate Future
As Philadelphia’s suburbs are finally beginning to catch up with multifamily demand and other sectors remain challenging, the real estate community is looking further into the future — past the next downturn and into the cycle after that — for the next opportunity.
Even though some suburban communities have become more amenable to density and development, taking a project from an idea to a finished product is a process that stretches years, which forces developers to take the long view.
“Before you even get a shovel in the ground, it’s four years," BET Investments President Michael Markman said. "In the last four years, my construction costs went up 20%, and my pro forma from then is crap. My retailers who used to expand like crazy are not expanding anymore; I have to look at different retailers, restaurants.”
The King of Prussia Town Center has been hailed as a game-changing success, a true urban node in the suburbs around which a mixed-use community is coalescing, and yet its genesis was anything but smooth. Panelists at Bisnow's Future of the Philadelphia Suburbs event at the Bellevue Hotel last week reflected on such experiences to draw conclusions about what is over the horizon.
“You have everything [at the Town Center]; you have a great program that has been a home run and resonates with people," Korman Communities CEO Brad Korman said. "It’s a home run, and it still took us 17 years to get one town center done really well.”
Dranoff Properties experienced a similar process with its One Ardmore Place development, winning the township of Lower Merion's request for proposals (over Markman and BET's bid) back in 2007 before litigation delayed the project for 10 years and ballooned costs.
“Because it took so long to settle the litigation, our cost spiked from what could have been around $40M to what will end up as around $58M," Dranoff CEO Carl Dranoff said. “The delays in getting your approval means you need a cushion for your rent levels and pricing so you can absorb those cost increases.”
There is a silver lining to the extended timeline, however. Had One Ardmore proceeded immediately, Dranoff believes the multifamily component would have been primarily composed of studio and one-bedroom apartments. As it approaches a spring completion, the development is now populated by larger two- and three-bedroom units, thanks to the time spent watching demand trends shift.
"As time went on and we saw empty nesters become a large part of the suburban rental marketplace, we changed our unit mix around to larger units," Dranoff said. "We saw a delay and we took advantage of that to fine-tune our product; you just have to plan for delays and uncertainty with a Plan B, Plan C and Plan D.”
Korman has seen the same scenario play out at its Ave. multifamily project neighboring the King of Prussia Town Center. The company initially planned to attract millennials during the design phase five years ago, only to find empty nesters easily outnumbering younger tenants now that the project is online.
As so many long-term plans are coming to fruition at this mature point in the cycle, developers are fully aware that a project in the planning phase now will deliver in a completely different environment than the current one.
“The key is not just having time and good backers; it’s also flexibility," Markman said. "Keep to your core competencies, but you need to able to change to adapt to the market. If you’re lucky, in seven years you have tenancy. If you’re unlucky, you’re bankrupt.”
When looking years into the future, many in the suburbs anticipate the planned regional rail extension to King of Prussia as a driving force behind yet another wave of growth for the town. The goals of the extension have already changed from when the idea first germinated a few years ago.
“I don’t think it's just a rail to the mall, I think it’s a rail to the town of King of Prussia, where all the new housing is,” JL Architects founding principal John Lister said.
Though plans are beginning to come together for the rail extension, it will be years until anything delivers. As King of Prussia is already enjoying impressive growth, some apparently question whether it is necessary at all.
Philadelphia Suburban Development Corp. President and CEO Mark Nicoletti believes that it is competing directly for limited funding with a possible extension of the Broad Street Line to the Philadelphia Navy Yard, and the ultimate result will be a "coin flip." But such a long-term project does not get built in response to current trends.
"If you look at the Washington, D.C., market, every Metro stop has a town center surrounding it," Korman said. "It may not feel necessary now, but once the rail is built that’s where everyone is going to want to be.”
While a rail extension may change the fabric of an already-transitioning area, it would also supercharge what is already a competitive land market. King of Prussia's growth has been lauded in part because such density is exceedingly rare in Greater Philadelphia.
Though all panelists agreed that mixed-use buildings are the most desirable form of development, some like Carlino Development President Peter Miller believe that density in other areas needs to precede such development, rather than follow it.
“It’s the critical mass of King of Prussia that’s so important," Miller said. "And Ardmore has inherent opportunity and critical mass as well ... So to make a mixed-use project really viable in an area, somehow you need to get to that critical mass.”
Miller wondered if further sites that could reach that critical mass are among suburban Philly's abundance of colleges, some of which have long-term viability questions.
“I think the consolidation of the small, private college world is going to happen, and there will be real estate that comes from that," Miller said. "It’s a macro problem with really high expenses, poor outcomes and not such a need for multiple CFOs and boards.”
While no schools in the area are in clear, imminent danger of closing, Nicoletti agreed that it is a matter of when, not if.
“How long can [schools like] Chestnut Hill [College], Gwynedd [Mercy University] and Arcadia [University] compete in a marketplace where there are so many alternatives?" Nicoletti said. "We’ve seen massive consolidation in healthcare, but we haven’t seen so much consolidation among small, local colleges. And that could possibly create interesting real estate opportunities.”
Planning for events like college closures or a King of Prussia rail extension may seem premature when there is no guarantee of when, or even if, they will happen. But the region's experienced players know that it is perhaps the only prudent course.