Philadelphia Trophy Apts. are Up For Sale, but is Anyone Buying?

Within the last six months, two of Philadelphia’s latest-and-greatest multifamily assets have been put up for sale, with reported price tags that are noteworthy (and potentially record-setting in one case.) But with a clear slowdown in multifamily sales activity playing out over the last several quarters, it remains to be seen if these trophy assets will fetch the dollars-per-door their sellers are looking to secure.

Southern Land Co. listed its 3601 Market at the outset of the second quarter and broker HFF is hoping to draw as much as $450,000/unit for the 363-unit, 5 Star asset located in the University City submarket. Asking rents at the time the property was listed ranged between $1,800 and $4,700 per month for apartments averaging between 427 and 1,543 square feet each.

Meanwhile Dalian Development, a family investment and development company based in Washington, D.C., put the 5 Star, 293-unit Dalian on the Park up for sale just months after it delivered in 2016. Reported price estimates of $180 million to $190 million would net an unprecedented $650,000/unit. The Dalian, 35% occupied entering June 2017, has some of the highest rents in the metro. Studios start at about $1,900/month while two-bedroom units of nearly 2,000 square feet ask as much as $7,250/month, although the building is offering one rent-free month in addition to reduced amenity and parking charges.

The Dalian sits atop a 90,000-square-foot Whole Foods Market (one of only two in the city), but the retail portion is owned separately and is not for sale.

Through the first five months of 2017, multifamily sales volume across the Philadelphia metro area has gotten a slow jump out of the gate, particularly after three consecutive years with more than $1 billion in total apartment sales. In 2015, the region set a new record when apartment sales volume topped $2.8 billion, nearly double the previous record high for the Philadelphia market of $1.5 billion set in 2007. 

In a year that may see the peak for new supply in this cycle, apartment sales volume through May 2017 is just over $165 million. Pricing is at cyclical, and likely record, highs through first quarter 2017 with an average price per unit of more than $100,000, well above the high point set in the previous cycle at just above $70,000 per unit. 

Transfer Tax Avoidance Law Weighing on Sales?

Most of the multifamily sales activity in Philadelphia occurs within Philadelphia County, and it is possible that recently passed transfer tax avoidance legislation is weighing on sales. The City Council voted in December 2016 to close certain legal loopholes that, according to analysis and reporting by The Philadelphia Inquirer, have cost the city tens of millions of dollars during this boom cycle. 

According to the Inquirer, few big-ticket property sales have included the full transfer tax of 4%. This includes 1% going to the State of Pennsylvania, and payment is commonly split evenly between buyer and seller. 

Several investors instead paid a levy based on the assessed value (as opposed to the sales price), or no tax at all or by having sellers retain a small ownership slice in what amounts to an entity sale versus a real estate transaction. The so-called 89-11 transaction method does not mandate that a deed be recorded. 

The new legislation changes the mandatory retention for a seller from 11% to 26% and the hold period from three years to six. Potentially even more impactful is the change of tax basis from the computed value to the actual consideration paid for the transferred interest. Despite Philadelphia recently reassessing its commercial properties (and implementing annual reviews), many properties are still likely to trade for well over their assessed values due to intensifying investor interest in core and core-plus investments in the city. Cap rates for the most highly sought after apartment properties are below 5%. 

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