Millennial population growth, corporate tenants on the move, a dynamic multifamily market and baby boomers retiring and downsizing are making Philadelphia a very interesting, active CRE market. These are five prevailing market forces shaping Philadelphia’s CRE landscape.

1. Millennials Exert Their Influence

Between 2005 and 2015, Philadelphia added 135,000 millennials, the most of any major city in the U.S. during that span, according to JLL. Today, individuals between 18 and 34 comprise nearly one-third of Philadelphia’s population.

As this generation’s buying power expands, it reshapes the economy and CRE assets to meet their needs. Catering to this demographic is imperative for CRE property managers, developers and owners across asset classes, KeyBank Eastern Pennsylvania Market Leader Christophe Terlizzi said.

“Millennials gravitate toward Philadelphia because it does not have an affordability problem by federal definitions, which differentiates it from other desirable urban locations like Boston, Washington and San Francisco,” Terlizzi said. “It's a big college hub, and there's an increase in the number of graduates staying in Philadelphia.”

Once students make the choice to study in Philadelphia, the City of Brotherly Love is particularly adept at keeping them there. Over two-thirds of the 27,000 active college students surveyed by CampusPhilly plan to stay in Greater Philadelphia after graduating, likely because 88% of students feel there is strong local employment opportunity.

“Millennials find Philadelphia really livable,” Terlizzi said. “There’s a high concentration of young, educated professionals, a vibrant arts scene, great restaurants ranging from fast casual to high-end, a burgeoning maker community for craft and artisanal products and over 300 outdoor cafés.”

2. Office Layouts Change

Headquartered in Philadelphia, Comcast is the city’s largest office user, absorbing almost 800K SF downtown. The Comcast Technology Center, a vertical research campus delivering this year, will bring the company’s total leased and owned space in Philadelphia to 3.2M SF.

At 1,121 feet, CTC will be Philadelphia’s tallest tower, and it is designed for a young workforce pioneering research on emerging technologies. The mixed-use building includes a hotel and restaurant.

“It is very unconventional, but shows how office is evolving, with spaces where people can gather and collaborate with seamless integration of technology,” KeyBank Senior Vice President John Manginelli said. "The CTC lacks conventional offices."

Whether open layouts help or harm productivity varies by sector, company, employee job function and even individual preference. Regardless, Terlizzi and Manginelli said the days of stark, sterile offices are gone.

3. Companies Move To Suburbs

In 2017, CBRE found that Philadelphia had over 1M SF of suburban office absorption. Corporate tenants are viewing areas outside downtown Philadelphia as increasingly attractive for their greater availability of space at lower rents.

“Many millennials who live in the city actually work outside the urban core,” Manginelli said. “The reverse commute is becoming more prominent as businesses leave the city to escape its tax regime. Employers who leave the city for tax reasons are reluctant to return unless they benefit from financial incentives."

Others, like Vanguard with its Innovation Studio at 2300 Market St., establish a limited presence in order to attract millennial employees, Manginelli said.

4. Multifamily Sees Crowding

A slew of high-end rental deliveries in Philadelphia has saturated the upper echelon of the downtown market.

"The high cost of new construction pushes most ground-up development into the premium rent market," Terlizzi said. "The properties with creative retrofits typically have a lower cost basis and can be offered at more affordable rents where there is broader demand."

The suburban market is markedly different. In 2017, suburban CRE dollar volume was $3.1B, while the city registered only with $1.1B in transactions, according to CBRE. But a 10- to 15-year building entitlement process has severely limited new multifamily supply.

“The existing suburban stock is largely antiquated,” Manginelli said. “Both affordable and market-rate suburban projects suffer from NIMBYism, as communities fought hard against rental apartments out of fear of overburdening schools and other resources.”

Affordable housing, workforce housing and Class-B and Class-C value-add multifamily projects in the central business district and suburbs remain very appealing to lenders, Terlizzi said. But the availability of these projects has dwindled over time as developers have upgraded much of the older supply.

5. Empty Nesters Downsize

Many empty nesters are downsizing and moving to the city for its amenities, transit, entertainment and high-end condo complexes, helping mitigate the flood of new supply.

“They are accustomed to a larger home so they don’t want to live in a rental apartment that's 1K SF,” Manginelli said. “They want a luxury space that's 2K SF or more.”

Manginelli pointed to the 250-unit Maybrook in Wynnewood on Philadelphia’s Main Line as a recent rental success and exception to this trend.

“Most renters there are over 60,” Terlizzi said. “It’s a two-minute walk to the rail station, centrally located, has a Whole Foods nearby and boasts larger apartments.”

Although parking requirements for urban projects have been relaxed in Philadelphia, according to Manginelli, in suburban areas parking is still a need and concern. Maybrook has a structured parking facility and is charging for parking. Not including parking as an amenity effectively reduces rent for carless tenants.

In the city and suburbs alike, forward-looking developers are building garages with level floors instead of ramps, so they can be converted to higher revenue-generating assets in the future.

"For these developers, this parking use is a way of inventorying land until it is ready to be deployed for a higher and better use if parking need diminishes," Manginelli said.

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