The Spigot Is Turning On Again For Philadelphia Investment

Philadelphia is back on the map of big commercial real estate investment cities. And despite a glut of multifamily development that could bog down that sector for a year or so, other asset classes have begun to shine and are primed for investment, panelists said at a Bisnow event last week.

Retail, hospitality, industrial and even the city's beleaguered office sector are primed for growth, those investors and developers told an audience during the Bisnow State Of The Market event held Wednesday at One Penn Center.

The event came just hours before the announcement the Federal Reserve would lower the target range for the federal funds rate by half a percentage point to 5%. 

A lot of ink has been spilled on developers and investors hitting pause on the city's multifamily market, with some 13,000 units set to arrive by the end of 2024. Many of those new units are a result of the expiration of a 10-year tax abatement program which caused developers to rush to apply to qualify for new projects more than two years ago.

But that has cleared the way for other asset classes to benefit from investment, industry experts said.

“The economy is going to continue to grow. That'll benefit hotels. It'll benefit all asset types. Retail is performing very well, you know, high occupancy [and] rent growth,” said Argosy Capital’s Sara Doelger, a principal for the investment group, which believes that the local market has hit bottom and is on the rise again — even multifamily.

“The [multifamily] pipeline is off. So by 2025, 2026 there's going to be a big need again,” she said. “And then I think, the industrial sector, with the continued expansion of onshoring and ecommerce, there's going to continue to be a lot of demand for that space.”

A bit of multifamily oversupply is better for CRE than a total recession, noted Matthew Pestronk, co-founder of Post Brothers, a firm that has specialized in luxury developments, including One Thousand One Residences, a new apartment building on Broad Street and Washington Avenue. 

“So, if you have to rent an apartment for 10% less, well, that's OK,” he said. “Would you rather have interest rates be 9% and rents be 8% higher, or have a 5% interest rate and have rents 8% lower? It's pretty easy math.

“Now I think we're moving away from that market.”

The market could be turning for office as well, despite continued distress, noted Lauren Gilchrist, head of the local market for Newmark.

Gilchrist said a deal to buy 1760 Market St. in June is one signal that some in the market are starting to see long-term investment opportunities and price discovery reflecting a new reality is underway. That 127K SF office sold for $11.5M, one-third of the $31.5M it last sold for in 2018.

“We saw the same thing with OCF Realty, kind of buying over on the eastern side of town, resetting the basis, resetting the rents,” Gilchrist said of OCF's purchase of a 30% occupied five-story Old City building for a near 40% discount, also in June.

“You know, it's been very interesting to also begin to track the loan sales environment. We have not seen a whole lot of very big loan sales in Philadelphia just yet,” Gilchrist noted ahead of the Federal Reserve’s cut of 50 basis points.

Real estate insiders believe the cut could spur further activity.

But the city could make itself more attractive for dealmaking, Doelger noted. Philly does not rank in the firm’s top 30 cities in terms of investment targets.

“I lived in Philadelphia all my life. I went to school here. I love Philadelphia, and I'm a huge booster for it,” Doelger said. “Our company does not really invest here. I mean, we've made one investment here in the past 10 years.” 

Part of the issue is competition with Sun Belt markets, where job growth has been plentiful, she said.

The city has an opportunity to revamp its image by getting state and city governments to work together and encouraging outside investors to put money into the pot, too, cofounder of minority-led firm Mosaic Development Leslie Smallwood-Lewis said.

From Mosaic's Navy Yard’s overhaul to supporting emerging and low-income communities, the city could benefit from a stronger private-public partnership, she said. 

Initiatives like Mayor Cherelle Parker's promise to add or revamp 30,000 units of housing and following through on the Philadephia 76ers' plans to bring the 76 Place basketball arena to Center City are examples of what should be happening, she said. That, along with more affordable housing assistance, would make Philadelphia a stronger market overall.

“A lot of the capital stacks that I work on in emerging markets involve subsidies that are coming from both the city and the state. They come from opportunity zones. They come from… low income housing tax credits,” Smallwood-Lewis said. ”So I do say that the city could [offer] a really helpful advocacy to making sure that those programs also work well in the sandbox together.”