'Absurd': Philly Permitted More Housing Units Than New York City In 2021

Residential permitting in Philadelphia reached rarefied air last year, and though it was inflated by anticipated changes in the tax code, it could mean an unprecedented construction boom in the years ahead.

In 2021, the Philadelphia Department of Licenses and Inspections issued building permits for residential projects totaling 26,116 units, according to data from the U.S. Department of Housing and Urban Development. The city of New York, which had issued several times more units' worth of permits than Philly in previous years, only permitted 19,923 units last year — lower than average over the past five years, but in line with the number of units permitted in 2020.

"That's absurd," Post Brothers President Matt Pestronk told Bisnow when presented with the figures. "I'd be surprised if half of those [units] got built."

The obvious culprit for the astounding spike in permits is the expiration of the full 10-year tax abatement for most residential properties at the end of last year, replaced by one that decreases in value over the first 10 years after completion. From 2015 to 2018, L&I permitted an average of about 3,400 residential units, according to HUD data, before rising to about 4,500 in 2019 and 5,600 in 2020.

Though a certain number of permits are pulled every year for projects that will never see completion, developers expect that from a much larger portion of last year's permits.

“In Philadelphia, there’s been no shortage of announced proposals for projects that don’t get built," Pestronk said. "Developers are optimists, after all; there’s nothing stopping them from putting money into early plans and permits, which costs a couple hundred thousand dollars [to do]."

There are any number of reasons a permanent project never gets completed, even without accounting for pandemic disruptions, muddling any attempt to establish a statistical relationship between permits and deliveries. Over 1,300 units delivered within Philly city limits in the first half of last year, with another 1,000 or so under active construction, according to CBRE's most recent market report. Even if all of the latter group had delivered before the end of last year, the total of 2,400 deliveries would be between 800 and 2,000 fewer units than what was permitted in any of the previous three years. 

Though L&I keeps records of Temporary Certificates of Occupancy it issues to freshly completed residential buildings, its database of all the permits, zoning variances and certificates it issues is notoriously hard to parse even for city government employees, as several of them told Bisnow. Multiple L&I representatives did not respond to requests for information or comments.

From 2013 to 2020, an average of 4,000 apartments per year have been completed across the Philadelphia market, with deliveries peaking at 5,406 units in 2018, Yardi Matrix reports. Research reports from brokerage houses and analytics firms like Yardi include Philly's suburbs, use their own datasets and formulas, and often only track projects large enough to be deemed significant. In its Q3 report for the region, Marcus & Millichap projected that 7,100 units would be delivered marketwide in 2021 — a 20-year high.

Taken together and accounting for the interval between receiving permits and completing construction, the data roughly suggests that Philadelphia delivers between 1,000 and 2,000 units fewer than the average number of units permitted by L&I over the previous couple of years. Even if more than half the units that were permitted in 2021 never get built, the number of completed residences would shatter records for the next two or three years.

If the projects wind up spaced out over more than a couple of years, the inventory of rental units in Philadelphia still stands to grow at a rate never seen before in Philly. Leaving aside the question of financial viability under the new tax abatement, the pace of permitting will likely take a massive step back as developers wait for the market to absorb the new inventory, Rushdy said.

“You have enough projects permitted now, and with the absorption you have in this market, you’ll have a decrease of projects permitted starting in 2023,” Rushdy said.

Though the largest projects are indeed exponentially pricier to build than to design and permit, those first steps still amount to "putting your money where your mouth is" for many smaller development companies, Philadelphia Director of Planning and Development Anne Fadullon said.

“During the pandemic, some people discovered how strong the value of Philadelphia is and how good the quality of life is here," Fadullon said, citing increased demand as a reason for continued development even with a higher tax bill. "We’re now into 2022 and continue to see large-scale multifamily projects being presented to [the Planning Department] that are just now working their way through the system. So it doesn’t mean that nothing is going to move forward.”

With little doubt that this year and next will see the number of permits come back to earth, some question remains as to where exactly it will settle. Critics of the abatement change, of whom Riverwards Group principal and Building Industry Association treasurer Mo Rushdy is one of the loudest, predict it will crash to a number lower than the 3,000 to 5,000 range the city experienced in the last five years.

“Once you reach the end of Q3 and Q4 this year, you’ll see a scary decrease [in permits issued],” Rushdy said, allowing for the possibility that some leftover activity could bleed into the early part of this year.

Already, several landowners who applied for building permits last year have been looking to turn around and sell their properties with entitlements in hand, Rushdy and Pestronk said. Both predicted that trend to grow in prevalence in the near future.

Even for developers with every intention of completing the projects for which they have received permits, the resultant demand for construction in Philadelphia — among other factors, such as activity spurred by the new infrastructure law — is set to far outstrip the local industry's capacity. Programs to expand opportunities in that arena have begun, but are years away from fulfilling their missions.

"If Philly's construction industry delivers 2,000 or 3,000 units a year and you get this sudden spike [in demand] to 10,000 units, you don’t have the capacity to build all these units at the same pace they were permitted, because resources are a result of supply and demand," Rushdy said. "It’s not like we can’t reach that capacity; it just takes time to catch up."