Why Philadelphia Shouldn't Aspire To Be Like New York

As Philadelphia has seen unprecedented rent growth across all types of real estate, largely driven by new construction at the highest levels of luxury, it is at risk of becoming a city of haves and have-nots, much like New York and San Francisco, only without the booming business community.

Thousands of new apartments have been delivered in the past year, with even more on the way for the next year, and pretty much all of them are in Class-A buildings at rents that pace the city. By and large, it is the only profitable kind of building developers can build in the face of skyrocketing construction (and, to a lesser extent, land) costs, but it also has a radiating impact all over the city.

Rents and land prices are being dragged upward in proportion with the highest class of buildings in nearby areas, even without improvements. Class-B office product has increased in value by 40%, according to JLL research director Lauren Gilchrist, a leap that leaves a sizable population behind.

“You’re starting to see a real affordability pinch,” Alterra Property Group managing partner Leo Addimando said. “A lot of neighborhoods housed teachers, firefighters and blue-collar workers, and they’re getting priced out of their neighborhoods, and that’s a problem.”

It is the same story seen in America’s flagship real estate cities with growing affluent populations, where affordable housing is scarce and getting scarcer. For as much as industry professionals want to approach the property values of the big boys, Philadelphia is not equipped for such a leap, considering it has by some measures the worst poverty of any major city in the country. 

To make matters worse, Philadelphia’s job growth sits at 1.1% year-over-year, one of the worst measures among major cities (and at least one source claims it is the worst among the 25 largest cities in the U.S.). Those are not the demographic trends that correspond to a city jumping a level in real estate value, even with out-of-market investor interest at an all-time high, but some remain optimistic that improvement is around the corner.

“I think we’ll finally have a lot of job creation in the city [soon], where we trail the national numbers,” Scannapieco Development Corp. CEO Tom Scannapieco said. “With the new office buildings coming online and getting occupied, we’ll improve there.”

Only in University City is job growth already above the national average, which is no surprise — its burgeoning technological and research corridor is the crown jewel of the city, supported by the Eds and Meds.

The institutions in the neighborhood provide a steady stream of educated workers, and proximity to that flow has inspired firms like Hershey and Chinese manufacturer DJI to open labs in the University of Pennsylvania’s Pennovation center. Although their footprints are small, the arrival of out-of-market companies is a big win, and a cause for optimism for the city.

“The people who pass on Philly do so because the employment and population growth isn’t there, until you isolate University City, where all the indicators are good," HFF senior managing director Mark Thomson said.

Those indicators have led massive projects like the FMC Tower to success, and the forthcoming Schuylkill Yards will continue to bet on the strong fundamentals of University City to attract tenants to millions of square feet of planned office space.

For now, office continues to perform well across the city, Gilchrist said, but most big moves into new office space in the past year have been within Philadelphia, rather than from outside companies moving in. Once Comcast’s second tower delivers, the hope is that more companies will move to the city to do business with the expanding cable giant, but that once again would likely mean growth for the high end of Center City primarily.

Despite the concern, tenants escaping the increasing price of Philly’s central areas have breathed life into surrounding neighborhoods south and north, spurring development interest. Interested parties are cautiously optimistic that such development can strengthen those neighborhoods, rather than overwhelm them.

“I’m really hoping that, as our market strengthens, our developer class thinks more creatively,” Philadelphia Redevelopment Authority director Greg Heller said. “That means projects with multiple components, mixed-use projects with community impact, setting aside units for affordable housing, and renting space to important, creative businesses, so we can have more compelling community building.”

“You’re starting to see the necessary residential density in many neighborhoods that allow you to make mixed-use buildings,” Addimando said. “That’s where the city’s heading.”

It is an encouraging thought that Philadelphia’s growth could balance out into its neighborhoods, especially considering the flow of Class-A buildings in Center City and University City could be weakening soon.

“A lot of projects that are in the pipeline will not happen,” Radnor Property Group president David Yeager said. “There have been a lot of issues on the construction side, so we’ll see a natural pullback.”

That pullback, combined with a major tax reassessment that has greatly increased the amount some developers are paying into the city (and the first expirations of the 10-year tax abatement), could give the city a chance to address the deepening inequality in the city in the place where everyone agrees it is needed: public schools.

From community organizers to developers of the most expensive buildings in the city, the desire for improved public schools has been unanimous. They are the key to keeping Millennials in the city as they start families and a major component of addressing the deep poverty of the city.

“The kids in the city deserve a chance to have the schools be fully funded, and we’ve already benefited from real estate being under-taxed,” Post Brothers president Matt Pestronk said. “It was a bumpy and sudden landing for these taxes, but this ultimately needed to happen.”

A previous version of this story did not specify what type of Class-B real estate product had increased in value by 40 percent. It has been corrected.