By: Paul Schwedelson
The 20-story residential tower Jessup House, at 1134 Sansom St. in Philadelphia, is pre-leasing apartments.
A perfect storm is creating a swell of new apartment inventory in Philadelphia, boosting the number of residential vacancies in the city and slowing rent increases.
The conditions are expected to be a boon for renters as landlords' profits cool, at least in the short term. The scenario is playing out in neighborhoods like Northern Liberties, where a glut of new apartments have opened or soon will.
At the start of 2022, Philadelphia cut the full 10-year property tax abatement for new development effectively in half. Projects approved before then were allowed to receive the full benefit, so developers rushed to secure permits in 2021 before the deadline. At the same time, interest rates were still near historic lows, another incentive to push new development.
Supply chain and labor issues brought on by the Covid-19 pandemic also backed up construction of projects already in development. The three phenomena converged to put many multifamily projects on similar timelines, with new supply now hitting the market all at once.
In the first three months of this year, there were 1,583 new apartments delivered in the Philadelphia market, according to a CBRE report, and the average monthly rent per unit in the market was $1,682. There are also 25 projects with at least 100 units under construction in or around Center City which will deliver a combined 8,467 units when completed, per CBRE.
Last year, there were 5,853 new housing units delivered in Philadelphia, according to Center City District. Fifteen percent of those, or 867 units, were in the 19123 ZIP code, which includes the Northern Liberties and Poplar neighborhoods. Another 18% were delivered in the 19125 and 19122 ZIP codes, which encompass much of Fishtown and parts of Northern Liberties, Olde Kensington and Olde Richmond.
In Center City, Riverwalk North at 60 N. 23rd St. added 310 units and the $110 million One Cathedral Square at 1701 Race St. added 273 units.
According to CBRE, the surge in apartment deliveries pushed the multifamily vacancy rate in the Philadelphia market up to 5.6% in the first quarter, up from around 3% to 4% in the first half of 2022 and on par with 2020 levels. The increase in inventory slowed year-over-year rent growth to 2.7%, well off the 11.5% jump the market posted in the first quarter of 2022.
“We are effectively now reverting back to the norm,” CBRE Senior Vice President Spencer Yablon said. “By way of comparison to the last few years, it looks like a giant step back [in rent growth] but in reality we’re reverting back to more normalized fundamental behavior in the apartment space. We didn’t see a ton of supply over last couple years."
A chart shows multifamily vacancy (light green) and year-over-year rent growth (dark green) in the Philadelphia market.
CBRE
The stabilization comes after years of supercharged rent growth. It brings welcome relief for Philadelphia renters as landlords must now compete to attract new tenants. Incentives, like a month or two of free rent, are growing more common, though the upper hand is expected to shift back toward landlords after the influx of new units subsides.
Yablon views the market correction as healthy. Despite the recent slowdown in rent growth, he said the last few years have been overwhelmingly positive for landlords. After rents grew by more than 10% in late 2021 and early 2022, tenants have new options.
“Renters are being pushed to the point of discomfort on what percent of their income is going to rent,” Yablon said. “So as a result, you’re starting to see those owners feel the pushback from tenants. So they’re just dialing back the rent growth.”
The Carson, a new 373-apartment development in Northern Liberties that opened in May, is offering two months of free rent. Jessup House, a 20-story tower at 12th and Sansom streets in Center City, is pre-leasing and offering up to six weeks of free rent.
Yablon cautioned against calling the Philadelphia apartment market oversupplied. Though the number fluctuates even among industry sources, there’s a national housing shortage of roughly 3 million to 5 million homes, he said, and the surge of new supply in Philadelphia isn't expected to last.
The conditions that drove this current flurry of multifamily development no longer exist. Following the expiration of Philadelphia's full tax abatement, which allowed property owners to pay taxes only on the land and not the new building for a period of 10 years, the new version decreases the abatement by 10% each year. Interest rates, meanwhile, have doubled in the last two years.
Mo Rushdy, managing partner, The Riverwards Group.
When the pipeline of projects with the tax abatement goes dry, there won’t be much new development following behind it, said Mo Rushdy, managing partner of Riverwards Group.
The Philadelphia development firm focuses its multifamily projects in the Fishtown, Kensington and Port Richmond neighborhoods.
“There is this fear that Philly is going to have this glut of apartments and people are going to have problems filling them up at the numbers that they projected them to,” Rushdy said.
“That might happen in a very, very, very short term.”
Long-term, Rushdy thinks the market will respond to the eventual drop-off in new development. He views construction starts as the true barometer of what’s coming in the future and predicts new starts on multifamily developments by 2024 will decrease 85% year over year.
Rushdy is most concerned about neighborhoods outside Center City and established areas like Northern Liberties. Neighborhoods like Kensington “are going to suffer so much,” he said, because developers are likely to be more risk-averse with higher interest rates and smaller tax benefits.
Another concern for Rushdy is a lack of housing that median income earners can afford.
Much of the new supply entering the market is on the high end with rents at more than $3.50 per square foot. New units renting at under $2.75 per square foot — or $1,375 for a 500-square-foot apartment — are nearly nonexistent, he said.