Is Center City At A Development Tipping Point?

Some leading lights of real estate development came together to discuss the neighborhood in which they were all gathered last week, Center City. From their conversations, one dominant question emerged: How can the area capitalize on what makes it so desirable without changing its nature?

At the heart of that discussion is the $500M, mixed-use East Market project helmed by National Real Estate Development, whose managing partner, Daniel Killinger (center), spoke as part of the first panel. He was joined by Peter Soens (left) of SSH Real Estate and Larry Botel of JOSS Realty Partners, both of whom also have stakes in the project.

Together, they plan to bring to Center City a way forward, past old office buildings dressed up for new purposes, which are the most prevalent form of commercial real estate in the area.

“We’re convinced that with this new product, which [has] a little bit smaller units, with a community-like atmosphere and great amenities—there’s an opportunity there, and what loses out are those converted office buildings,” Daniel said.

Faced with an area that is already very dense with residents but, according to Peter, “underserved and constrained” in terms of retail, developing both in concert could be a delicate balancing act.

Currently, about 1,300 new residential units are being built per year in Center City, with about a 3% to 5% vacancy rate city-wide, but 5,000 units are set to be built in the next two years, with no certainty that the number of occupants will increase. A 7% vacancy rate isn’t the end of the world, Peter says, but if supply continues to outstrip demand, the potential harm is obvious.

However, retail and office space are in the opposite position in Center City, with demand at an all-time high. Peter explained that when it comes to business, “Everybody is downsizing and being more efficient, but they’re willing to pay more for the space that they take. It’ll create a great atmosphere and attract talent.”

Larry agrees that in the coming years, it will be crucial to bring “better, exciting, more amenity-driven office space that will cater to the modern tenants,” otherwise the area’s growth would not be sustainable. And sustainable growth might just be Philadelphia’s biggest asset.

Even with the scale of East Market, no one considers this a real estate boom for Center City, or Philadelphia at large. Peter points to the city’s economic diversity as its steadying factor, with the fate of the region not tied to any industry.

“Unless there’s an industry that develops for Philadelphia to become a real hub,” Peter explained, “I think we’re still in for steady growth for the future.”

With Philadelphia forever in the shadow of Washington, DC, and New York City, the question of what the city can do to emulate its neighbors was a frequent one, but Larry insisted that Philly should embrace what makes it unique.

“To be a thriving city, you have to take what comes," he said. There’s enough here that Philly can build back up to be a decent spot.”

Center City especially is a wildly diverse area, with residential, office and retail spaces all piled on top of each other—a quality that East Market seeks to continue. Steve Gartner, EVP of CBRE, says that the patchwork quality of the area is its biggest draw to its most important demographic—Millennials. Center City, unlike many major downtowns, is a live/work/play area, which is particularly attractive to retailers.

According to Gartner, many retailers have avoided Center City because of its high tax rates and its renovated buildings that don’t play nice with many national chains’ preferred floor plans. But increasingly, they see the area as a “final frontier.”

“Big retailers think, ‘I don’t have a store there, so there are hundreds of thousands of customers we’re not serving,’” Steve posited, further reinforcing the need for new construction built to be more friendly to such interests. Even so, Center City remains an extremely attractive target for commercial clients.

Daniel Moore, managing director for Hines, says Center City is one of the most desirable markets in the country, primarily because of its demographics—it’s growing, in his words, “Not just bigger, but smarter, younger and wealthier.”

Daniel continued, “Every time you peel back a layer demographically in Center City, it kept just reinforcing the positive story.”

That’s why Hines, after years of considering Philadelphia a “gap in its portfolio,” is finally jumping in—primarily with a 322-unit, multifamily project at 1213 Walnut St, to be built for A-level clients from the ground up. In other words, exactly the kind of construction the market is calling for.

Hines’ bet on Center City is predicated on how it looks right now, which is what makes the process of continuing development so tricky. And it's what makes people who have been here for a while a bit protective. In Killinger’s (somewhat tongue-in-cheek) words, “We don’t want anybody to know about this great secret that we have here.”

But in order to sustain this good feeling, says Center City District president Paul Levy, the city’s onerous tax code needs to change to attract more jobs. Until the tax code becomes more business-friendly, the neighborhood’s growth won’t match expectations.

“The diversification and growth of jobs in the downtown is a huge, powerful lure to people,” Paul said. “People do attract jobs, but jobs are the fundamental draw for people.”

Without the addition of more businesses, that residential vacancy issue that so worries Peter will surely come to pass.

According to Paul, there are still fewer jobs in Center City than there were in 1990 and 2000, even as residential growth has remained steady. It’s part of what has given the neighborhood a bit of a reputation as a “bedroom community,” according to Gartner. That’s why projects like East Market are so crucial—while the politicians sort out the tax code, developers are doing their part to build spaces that are more appealing to businesses.

That way, this moment in Center City can be more than just a moment—it can become another marker in the steady, healthy growth of Philadelphia’s downtown.