Cranes Are Up Across The City, But New Multifamily Starts Plummeted This Year: How Did Philly Get Here?

Developers started construction on dozens of new multifamily projects across areas like Northern Liberties, Fishtown and Graduate Hospital in recent years when the going was good and the money was easy.

Now, though, demand for housing has snapped back like a rubber band, and new housing starts have cratered despite an abundance of ongoing construction activity, Alterra Property Group Vice President of Development Mark Cartella said at Bisnow's Construction and Development Summit, held at The Bellevue Hotel Tuesday.

The situation has developers reflecting on what happened, tightening their belts on completing projects that are already underway and, in some cases, scrapping them altogether. 

“It's like an elastic, right? There was a whole lot of pent-up demand,” Cartella said. “And because of the 10-year tax [abatement] change two years ago, everyone rushed in to start the project to secure that long-term tax incentive.”

Until January 2022, the city offered an abatement that exempted new residential construction from the first 10 years of property taxes. It replaced the abatement with one that exempts such properties from 100% of property taxes in the first year and goes down 10% annually thereafter.

The result was a mad rush to get projects permitted before the deadline, and by the close of 2021, Philly had issued more housing permits than New York City. That year, the Philadelphia Department of Licenses and Inspections issued building permits for residential projects totaling 26,116 units, including 11,888 permits in the Philadelphia region in December 2021 alone, according to Census Bureau data.

Then the Federal Reserve hiked interest rates, banks shied away from lending, and new starts flatlined. Now the city is wrestling with a disconnect that has seen a slew of new units come on the market or get underway in rapid succession, even as demand dips and costs rise.

“So you're seeing just like a rush of supply. But it’s also kind of deceiving. Maybe it is counterintuitive to walk down those corridors,” Cartella said, referring to areas like Washington Avenue, which has been bustling with new luxury apartment builds.

“You see tower cranes, you see new construction everywhere. But what's not happening, at least not too much, is new starts, and you haven't seen a new start, at least on a significant scale, in the last probably six to 12 months.”

Last year, just 11,400 new apartments were added to the Philly market, primarily luxury units, which ended 2023 with nearly an 11% vacancy rate, Costar data shows. And just 45% of the 7,930 units across 62 high-end apartment buildings that completed in 2023 have been filled, according to CoStar.

An additional 16,000 high-end and luxury apartments are scheduled to be completed over the next 18 to 24 months.

But in January, permits for only 949 housing units were issued in the Philadelphia region, according to census data, mirroring a national trend. Multifamily starts totaled 472,000 units in 2023 across the U.S., down some 14% compared to 2022, according to a February report from the National Association of Home Builders. This year, national multifamily starts are predicted to dip to 379,000, the NAHB reported.

In Philly, some developers have begun backing away from permitted projects. That includes Alterra, which canceled plans to build 352 apartment units in University City late last year.

For other projects, timelines have changed as developers attempt to wait out the market. Some existing projects and those on the way could take about a decade as occupancy stabilizes, instead of five to seven years, Cartella said.

And developers need to wrap up whatever is already underway as cheaply as possible, panelists said. That includes getting guaranteed maximum price contracts at least six months ahead of time and procuring materials early, with materials remaining costly.

“We have a little more hands-on nature about procuring electrical and things like that,” said Sarina Rose, senior vice president of development for Post Brothers, which is securing contracts for new elevators, electrical and more for projects early on.

The mantra for construction contracts now is “earlier, earlier,” she said, given inflation and a slowdown of the market. 

“The lead times have doubled or tripled,” she said. “This is something that is an unseen risk for many lenders, but we've been able to head that off by our purchasing process.” 

Smart developers are also leveraging technology tools wherever possible to cut down on costs and organize timelines, GZA GeoEnvironmental Senior Principal Ernest Hanna said.

Lidar scanning tech, 360-degree cameras set at all times to watch workers and sites, have become part of the development process, he said. The tech can also monitor major storms on the shorelines, including along the two rivers that bound Philadelphia, so crews can secure sites early, avoiding storm damage.

Hanna said developers can also cut costs by incorporating sustainability practices into design, including incorporating geothermal heat into the structure of buildings.

“So if they've already got a hole drilled, maybe we can put the pipes in [then] and use that to control the heat of the building,” he said. “It's kind of amazing with new technology nowadays, it will only cut costs and move things along faster.” 

Meanwhile, on the leasing front, Post Brothers’ Piazza Alta in Philadelphia is partially open, thanks to landing $312M in financing for the first phase in October. But it is already facing steep competition for tenants from Stamm Development's luxury apartment building next door, The Beverly.

And despite permitting slowing to a relative trickle, several new projects are on the horizon, including a $100M, 400-unit apartment project Ori Feibush is planning along Washington Avenue. However, that land sale likely won’t close until 2025, according to the Philadelphia Business Journal.

For Cartella, the slowdown is no cause for panic.

“Based on supply and demand, the fact that we have been underserved from housing, new housing product equivalent for the last probably 50 years — the market will correct itself,” he said.