The Next Recession Is Coming, And Philadelphia Needs To Be Ready

After a prolonged period of growth following the Great Recession, the next downturn is finally on the horizon, and Philadelphia’s commercial real estate community is bracing for it with guarded optimism.

Two thousand apartments came online in 2016, and three thousand more will likely deliver by the end of 2017. Demand has remained strong, thanks to Philly’s ability to retain its graduates and its solid job growth. But the sheer number of available units has many thinking about oversupply, and concessions are already becoming the norm at the top of the multifamily market.

While new apartments are getting more and more expensive in terms of what landlords are asking in rent, consumers are looking for deals, rather than simply the best apartment.

“The concessions did hurt, but I would say right now that there’s a lot of new people to the market who are neighborhood-agnostic,” Brickstone Realty president John Connors said. “The first filter is all about price and all about concessions: If you can’t get them to the location, you can’t sell them on quality and uniqueness.”

The combination of increased concessions and possible decreases in asking rents, with so many new apartments on the way, means the writing is largely on the wall in terms of which direction the market is heading. Multiple executives at Bisnow’s Philly State of the Market event denied any worries about vacancy, but Lubert-Adler CEO Dean Adler called them out.

“Stop trying to sell your books,” Adler said. “Of course there’s excess supply. Philly will live through it, but it’s got excess supply, and it’ll drop rates.”

According to Adler, the city is entering the end of its cycle, with a recession pegged for 2019, although he and others stressed that there’s no reason to expect it will be as severe as the crisis in 2008 and 2009. Still, the time for making big plans might have passed.

“The environment’s different, and you don’t want to get caught in early or mid-stage investment strategies when you’re actually in the later stage,” Adler said. “The focus should not be on [internal rate of return], but on safety and security. It’s not worth the risk to expand your yield when you really don’t know where we’ll be in 24, 30 months.”

One area that might be recession-proof is the area surrounding the Schuylkill River. In that area, the FMC Tower is performing well, Children’s Hospital of Philadelphia continues to expand on both sides of the river, the redevelopment of 2400 Market Street continues and the under-construction Comcast Innovation Center promises a few thousand jobs and a 240-room Four Seasons Hotel on top.

Adler called the skyline-changing tower “one of the most transformational things to happen in Philadelphia in forever,” and it headlines an area that promises to remain active even through a downturn.

“Comcast owns NBC. Why didn’t they open the innovation center in New York?” Adler asked. “The fact that they chose Philadelphia cannot be overstated.”

Even though Comcast seems to have become Philadelphia’s “signature company” along the lines of Seattle’s Amazon and San Francisco’s Google, according to Adler, job growth is still expected to slow in the coming years unless the city can lure another major company from outside of the market.

To that end, Philly has been making moves to recruit companies, such as its Gateway Philly initiative to give companies $1K per worker to establish smaller, satellite offices within city limits. Beyond that, the city has worked to bring in national events such as the Papal visit and the NFL Draft to increase its profile.

“Executives who were here for VIP events around the NFL Draft had no idea how much was happening here, and we got a chance to educate them and sell them on the city,” Philadelphia Department of Commerce senior director Dawn Summerville said.

Summerville also said Philadelphia is on the shortlist for four potential projects that would total 1.8M SF of buildings and bring in 3,200 new jobs. Those jobs would be years off, but even if the city is only awarded some of those projects, it would go a long way toward aiding in recovery from the coming recession.

Upswings canot last forever, but no one is excited to see a cycle end. Still, if the coming recession is indeed mild, Philadelphia is well-positioned to come out of it stronger than before.

“If you just muscle through those first couple of soft years, at year four and five, you’ll own great assets,” Adler said.