Wednesday, January 11, 2023

Apartment Owners Face Increased Lease-Up Competition As Apartment Development Ramps Up in and Around Center City Philadelphia


By Brenda Nguyen Costar

Five sections in or around Center City Philadelphia lead the entire region in total number of apartment units under construction. The Northern Liberties, North Philadelphia, Center City, South Philadelphia and University City sections, collectively, account for 64% of all new apartment inventory underway across the Philadelphia region. Each section has more than 1,300 units scheduled to reach completion over the next year and a half.

As the regional economic engine, the greater Center City Philadelphia region has grown into the third-largest downtown residential population in the country in the past decade – behind only New York City and Chicago. However, with fewer improvable parcels remaining in this geographically constrained hot spot, developers have migrated outward, to where land is comparatively more plentiful. This has resulted in today’s hyper-charged apartment expansion in adjacent neighborhoods. The City of Philadelphia’s 10-year tax abatement deadline and historically low interest rates in 2020 and 2021 further accelerated these emerging development patterns.

The Northern Liberties area, which includes the Callowhill and Poplar neighborhoods in this analysis, leads the area with nearly 4,700 apartment units under construction. This section is on pace to grow by an astonishing 42%, with development localized along the Delaware Riverfront. North Philadelphia is projected to expand by 35%, with construction concentrated in the Kensington and Norris Square neighborhoods. South Philadelphia is similarly growing by 31%, led by Tower Investments and Toll Brothers’ 1,111-unit megadevelopment at the corner of Broad and Washington. University City’s 16% expansion is focused along Schuylkill Yards West and in the Spruce Hill neighborhood. While Center City is already a mature market, it is still scheduled to expand by an impressive 9% as developers undertake in-fill projects.

The record-breaking supply surge will temporarily outpace renter demand during this cycle. Subsequently, marketing efforts aimed at a more constrained renter pool have already ramped up in these neighborhoods, and lease-up competition will likely continue through mid-2024. If overall macro environment confidence improves near-term, the springtime may unlock pent-up renter demand. However, this supply wave will still moderately exceed even the highest demand levels seen throughout the golden period between late 2020 and early 2022. As vacancy trends upward alongside the wave of new additions, daily asking rent growth is expected to moderate, while concessions will become more widespread throughout 2023.

A review of listings indicates that concessions have returned in early 2023. Nearly half of the top properties in each area offer some form of concession, from a $500 move-in credit to a generous two months of free rent plus a $1,000 move-in credit for city, education and health professionals. Several stabilized properties with occupancy above 90% are even offering concessions.

As renters digest recent rent surges, landlords will need to re-evaluate what 2023 rental rates are competitive to lease up individual developments in a sea of high-end options for renters. Across three-star properties in these five areas, vacancy is 6.5%. Meanwhile, across four- and five-star properties, vacancy is already at 10% and is expected to increase in the near term with the large number of new deliveries. While rent differentials may fluctuate drastically across individual properties, the average market rent differential between three-star and four- and five-star properties is $445 per month for studio units, $540 per month for one-bedroom, and $860 per month for two-bedroom units in these five areas.

In 2023, four- and five-star multifamily owners will need to prepare for the heavy competition ahead, but there should be a reprieve by late 2024 from a significant slowdown in new large-scale supply entering the market. Until then, property owners should focus on renter retention as much as renter attraction to maintain a well-occupied, competitive development.

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