Philly Developers Don't See End To Long Multifamily Cycle, Despite Unprecedented Supply

It has been nearly a decade since the world’s economy was mired in the depths of the Great Recession, and commercial real estate has yet to see a real downturn since. But some of Philadelphia’s biggest names in the industry are not simply waiting for the other shoe to drop.

“The state of the market in the [Philadelphia] suburbs is very healthy, and from the Delaware River to 45th Street is healthy as well,” Toll Brothers co-founder and BET Investments principal Bruce Toll said. “Between certain areas, let’s say Spring Garden to South Street, the market is still very healthy.”

Philadelphia has long been characterized as a slow and steady market, resistant to large swings in either direction, but as multifamily buildings open at unprecedented rates, it is natural to wonder if something like a boom means that a form of bust could follow.

“Nonsense,” Tower Investments CEO Bart Blatstein said to that line of thinking. “People bring people. There’s such a drive to be in the city, and in an urban setting, today.”

And yet, the number of apartments delivered between last year and today is far beyond what has come before. According to a JLL report, buildings that delivered last year are only 47% occupied so far, meaning that around 1,300 apartments are still vacant from that set. Two thousand seven hundred more units are expected to deliver this year, and absorption is only averaging 1,100 units per year in Philadelphia.

Using those numbers, Philly projects to have 2,900 new apartments still available at the end of the year, or roughly two and a half years of supply. Concessions are very likely to increase as landlords fight for the available tenants, especially for apartments asking for over $3.50/SF in rent. But developers are eager to point out that cities like Washington, D.C., have thousands more apartments in the pipeline.

“There just aren’t enough buildings to create too much of an inventory, and everybody’s doing well,” Blatstein said.

It is also commonly said that even among all these new deliveries, Philadelphia still has fewer apartments per capita than nearly all cities of comparable size. A lot of that can be chalked up to Philly’s sprawling, rowhouse neighborhoods that are ignored by market-rate developers and account for the city’s deep poverty numbers, but people like Toll continue to sing a happy tune.

“We’ve been under-housed for 20 years, with more people coming into the housing stock than we’ve been building, and there’s less labor to construct housing,” Toll said. “What used to take Toll Brothers six months now takes a year to build.”

BET Investments largely focuses on suburban development, such as its redevelopment of the Granite Run Mall into the Promenade at Granite Run and its more dense Promenade at Upper Dublin, which Toll predicted will set the top of the market for multifamily rents in Montgomery County.

Other developers are building at serious scale in Philly’s suburbs, such as Hankin Group in the Exton area and the boom happening in King of Prussia. And yet, the story from developers remains the same.

“I don’t think anybody will be overbuilt in suburban Philadelphia,” Toll said.

Toll disputed any characterization of Philadelphia as an area moving in from the suburbs to the city, choosing instead to emphasize that both areas are seeing strong growth. The suburbs’ advantages remain the same as they have for years: better school districts and a more forgiving tax code. For all the optimism, the one gripe that all developers are eager to share about Philly is that tax structure.

“Of course there’s room for improvement [in the tax code],” Shorenstein Managing Director Mark Portner said. “No one’s been able to solve it either, for the last 30 years.”

Even the one element of the tax code popular in this circle, the 10-year tax abatement on newly constructed or renovated properties, is under fire as some circles claim it disproportionately benefits large developers at the cost of the school districts that take funding from real estate taxes. Blatstein called the abatement “the greatest tool the city has in encouraging development.”

“[The abatement is] not taking anything away; you’re adding to the base,” Blatstein said. “It’s not like your taxes are reduced or eliminated; they’re just frozen. And as these abatements burn off, a huge amount of money is flowing into schools. And it encourages all other kinds of revenue from all the construction work and suppliers.”

The tax structure has seen one recent, significant change: the new federal tax reform bill driven by President Donald Trump that passed at the beginning of this year.

While many in the community, such as Portner, have said that it is too early to tell just what effects the bill may have, Toll said it “will extend the economic recovery for some time.”

Toll is a member at Trump's Mar-a-Lago country club and said he is "very friendly with the president."

Not every developer sees the multifamily market as full steam ahead, considering that only about 450 multifamily units are scheduled for delivery in 2019, according to JLL.

One way to explain the discrepancy between the slowing pace of construction and developers' optimism is that builders are simply setting up projects for farther in the future, when absorption has caught up with the current pace of delivery.

While different people interpret the pipeline numbers differently, every developer with whom Bisnow has spoken in the past two years is in lockstep when discussing Center City's appeal as one of the most vibrant downtowns in any major American city.

“It’s cool to be in Center City," Blatstein said. "The definition of success when I was young was moving to the suburbs, and now the definition of success is living back in the city, which is why you’ve got such amazing appreciation of residential value in Center City."

If anything is going to keep Center City from a multifamily downturn, it will likely be the area's cultural draw that will keep demand high enough to stabilize all those new deliveries in a reasonable time frame.

“I feel like it has accelerated, since you’ve seen more residential and hotels being built downtown," Portner said. "There are lots of restaurants and life on the streets. Just from being there, it’s gotten better each year.”

Toll, Blatstein and Portner will all be speakers at Bisnow's Philadelphia State of the Market event April 25 at 1818 Market St.