The 201,602-unit Philadelphia apartment market continues to strengthen, and rent gains have begun to accelerate. This is a stable market, where booms and busts are limited by conservative developers and a stable tenant base. As such, it tends to be less exciting in booms than in busts, when stability is prized. But the market’s strength has both developers and investors interested.
The Philadelphia area vacancy rate for the second quarter of 2012 is 3.7% according to Reis, down 20 basis points for the quarter and 100 from a year earlier. It is the lowest rate since the early 2000s according to this source, as that decade was a period of relatively high vacancy here. The year-end rate has fallen as low as 1.6% in 2000. The peak rate for this cycle was a modest 6.5% in 2009. The Class A rate fell 10 basis points to 4.3% during the second quarter, while the Class B/C rate decreased 40 basis points to 3.1%. The year-over-year declines are 90 and 120 basis points, respectively.
“Demand for rentals will persist in the second half of the year as stringent mortgage financing delays purchases by prospective first-time buyers,” Marcus & Millichap predicts. “As a result, vacancy will fall 130 basis points in 2012 to 3.0%, after slipping 120 basis points last year.” This source credits a slowdown in apartment construction in the wake of the recession with improved operations. Reis predicts the decrease in the vacancy rate, however, is close to coming to an end. After the rate falls to 3.4% at year-end 2012, according to the forecast, it is expected to edge up to 3.6% at year-end 2014 and remain there. As has been typical, Philadelphia’s vacancy rate will remain well below the U.S. average during this period, though it will be higher than the average for the Northeast.
SUPPLY AND DEMAND
The decrease in vacancy is expected to halt because new supply is forecast to surge. This market averaged nearly 1,500 units of new supply per-year during the decade from 1999 to 2008, though the average annual increase in the inventory was less than 1,000 due to demolitions and conversions to condominiums. But construction stalled during the 2009 to 2011 period, falling as low as 98 in the latter year. The forecast for 2011, meanwhile, is for 1,040 new units, of which all but 163 are already completed. The 230-unit Jefferson at West Goshen in Goshen, in the Central Chester county submarket, completed construction in June.
Extensive new supply will merely catch up with the strong demand that has been in place since 2010, following a decade of weaker demand due to two recessions and a shift to owner occupancy in the 2000s. The net absorption totals for 2010 and 2011 were 2,690 and 2,390, and the Reis forecast for 2011 is similarly strong at plus 2,785. It would be the strongest three-year period for demand since 1992 to 1994, in the wake of the deep early 1990s recession, and the current year-forecast is well on the way to being achieved. Including 612 units in the second quarter, the half-year total is about 1,730, split fairly evenly between the Class A and B/C segments.
Reis tabulates nearly 1,450 apartments under construction with 2013 completion dates, with another 1,120 planned units with at least partial development schedules in place. With groundbreakings announced regularly, the firm predicts nearly 2,500 units will complete construction in 2013, and more than 2,000 in 2014. Although more new units were added during the 2004 to 2007 period that, was also the time when many existing units were converted to condominiums. Net absorption, however, is forecast to be equal to this large level of new supply, keeping the vacancy rate low during the next two years. A slowdown to a more moderate pace—for supply and demand alike—is expected for the out years of the forecast period.
Philadelphia’s apartment rent increases accelerated in the second quarter, after more than two years at a more moderate pace. The average asking rent rose 1.0% to $1,075 per month, with the average effective rent increasing 1.3% to $1,046 per month. The year-over-year gains are 2.3% and 3.1%, respectively, already stronger than the full-year gains recorded in 2010 and 2011. In this steady market Reis has recorded only one year of rent gains over 5.0% and one year of rent decline since 1990. The Class A asking average is up 1.2% for the quarter and 2.7% year-over-year at $1,286 per month. The Class B/C increase was 0.7% over three months and 1.6% over twelve to $873 per month.
Rentjungle reports an average rent within 10 miles of Philadelphia at $1,314 per month as of March 2012, up from $1,200 per month one year earlier, an 11.0% increase. During that period, however, the average rent for a one-bedroom apartment in the area increased just 0.5% according to this source, to $1,060 per month. “In 2012, asking rents will accelerate 2.5% to $1,070 per month, and effective rents will reach $1,028 per month, marking growth of 3.0%,” Marcus & Millichap predicted. This source reports slowing rent gains in the first half of 2021, relative to the second half of 2011.
With its larger recorded gains for the first half of 2012, Reis predicts larger gains for the year as a whole. The average asking rent is forecast to increase 3.2%, with the average effective rent up 4.0%. Subsequent asking rent increases are forecast to be slightly larger, with subsequent effective rent increases slightly smaller, through 2015, as annual gains stay close to 3.5% per-year. As is common during upturns Philadelphia is forecast to underperform, with asking rent gains trailing the U.S. and Northeast Region averages.