Wednesday, May 24, 2023

Philadelphia's Multifamily Market Returning To More-Normalized Rent Growth


By Brenda Nguyen Costar Research

Multifamily rent growth across the Philadelphia metropolitan area has returned to a more normal pattern following a period of unprecedented escalations in recent years. Performance has normalized to its pre-pandemic, five-year average of 2.7%, with annual rent growth at 2.8% midway through the second quarter. In the past three years alone, apartment rents in the region have escalated cumulatively by 17.5% and continue to build on that gain. As renters digest the record rent hikes and tighten their budgets, apartment owners have felt the reduced demand from less-confident renters in recent quarters.

While all multifamily segments have experienced some fluctuation over the past few years, the higher-rated, and pricier four- and five-star apartments have shown the most significant rent swings. These high-end apartments were the only segment to experience negative rent growth in 2020, followed by a 10% year-over-year growth surge at the end of 2021. Since then, annual rent growth across four- and five-star apartments has slowed to 2.1% by mid-2023 – below average rent growth for the one- and two-star and three-star apartments.

Interestingly, the trend of slower rent growth for four- and five-star apartments was present even before the pandemic. In the five years leading up to the pandemic, this segment experienced an annual average growth of only 1.9%, while three-star apartments averaged 3.2%, and one- and two-star apartments averaged 2.9%.

This pattern is expected to hold in the near term. Nearly 23,000 high-end units are in the pipeline and expected to be added across the Philadelphia region through mid-2024, expanding existing inventory by 6.6% and intensifying lease-up competition. The effects of this construction surge are expected to be particularly pronounced for Center City, Northern Liberties and Kensington-area apartments over the next six to 18 months. CoStar forecasts that regional rent growth will continue to flatten through mid-2024, and high-end units are expected to bear the brunt of this surge in supply.

As the market adjusts to the influx of new inventory, developers and property managers of high-end apartments likely will carefully consider their pricing strategies, concessions and amenities as they try to attract and retain renters in a highly competitive environment.

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