In recent years there has been a paradigm shift for institutional real estate investors to flock to growth markets in the South East and South West in states like Florida, Texas, and Arizona because the North East cities come with too much baggage, i.e. – high taxes, aging population, high costs of land and construction, slow growth combined with difficult business environments, the list goes on and on…
Many investors that run in the institutional circles don’t understand the metrics of a market like Philadelphia, the majority of real estate funds want to be in garden style multi-family investments in high growth states like Florida where population growth is 3-4% average per year. If they are in a North East investment then it has to be either New York, Washington DC, or perhaps Boston.
Although Philadelphia is considered a “major” city in the United States – one rich in history where the founding fathers kick started our great nation (we all remember history class from grade school, right?). It is one of only ten cities with a population over a million and falls just outside the top five in terms of size but still has a stigma or neglect when it comes to being considered a true international or gateway city. As Phoenix and Houston have continued their robust growth over the years they have passed Philadelphia’s population, but that does not mean it is not a growing urban market that is ripe for investment and development opportunity. That’s assuming you know the lay of the land and can identify the niche opportunities (zip codes) within the city.
1 – It is a Growth Market (Gentrification Nation)
Gentrification takes place when rundown urban areas attract residents of higher income. It’s a controversial phenomenon. Conversations about it can lead in both highly negative and positive directions. As long as Philadelphia remains a convenient and culturally interesting place to live with transit oriented communities and quick trips to work, you can be sure gentrification will continue to flourish.
Philadelphia has plenty of room and the housing infrastructure to boot. Many people forget it had a population of TWO MILLION in the 1950s before the suburban sprawl and urban decay combined to batter the city’s population down to a low of 1.5 million in the 1990s. At this time, it started taking small steps toward resurgence with Society Hill and Queens Village being the first desirable neighborhoods attracting higher income residents again. That’s why buying property in a distressed area of Philadelphia that has the potential to become trendy can be a promising investment. Just look at the growth in average sale prices in zip codes like 19125, 19146, 19130 over the past ten years with 19125, in particular, averaging 10%+ growth year over year since 2000.
As I mentioned, most North East markets have an aging population compared to the growth markets in the South East/West. However, if you find the right pocket, the growth can be astronomical. The city is ripe with MILLENIALS–a buzzword that you hear at almost every real estate conference but one that has been driving many markets resurgences since the 2008 financial collapse.
Based on US Census Bureau estimates, no major city has experienced a larger increase in 20-to-34 year old population than Philadelphia, as measured by the change in their percentage of each city’s overall population This interesting study done by Pew Charitable Trust shows many interesting millennial facts as it pertains to Philly’s population and in turn its real estate market.
2 – It is AFFORDABLE!!
Believe it or not, Philadelphia is one the most affordable real estate markets in the country. If you pay attention to facts and NOT certain local Philadelphia politicians (not going to name names) who are pandering to their lower income voting bases, which make up some of largest voting blocks of the city, it is remarkably affordable in overall terms.
Real estate home ownership, in terms of median house prices, averages around $150,000 per quarter, which is affordable for most two income family households in America who can qualify for a 30 year mortgage. In late 2017, real estate analytics firm Zumper published its Annual Renter Survey, which covers topics such as consumer expectations and feelings about the housing economy. When it comes to future plans of purchasing a home, the Philadelphia region is the fifth most optimistic in the region.This can be taken as a sign of overall optimism towards the real estate market, but there is more to consider.
Philadelphia renters are among the most financially balanced in the U.S. with regard to their housing-to-income ratio. Most economists recommend tenants to keep their monthly rent payments under 30 percent of their total household income; in Philadelphia, the average rent burden is only 24 percent.
Some prospective landlords may think that the Zumper survey makes Philadelphia a renters’ market that does not allow too much room for profit; this is a flawed perspective. While it is true that Philly is a renters’ market, this does not mean that monthly payments are scraping the bottom; it just means that tenants are making enough money to feel comfortable and play the market. This also means that Philadelphia landlords are less likely to experience issues such as late payments since tenants have more financial solvency.
Institutional investors are paying close attention to the rental market. Real estate investment firm Equus Capital recently went to the closing table on 22 apartment properties totaling $467 million; most units were located in Philadelphia.
The recent cry for affordable housing and new construction taxes is more of a political move for certain candidates in low income districts to get re-elected. Yes, the market has seen dramatic price increases in certain zip codes but the long time residents have also enjoyed the increase in home valuations and if they chose to sell or have sold, they capitalized on larger than expected proceeds then what was the status-quo for many years.
In relative terms, it is certainly affordable in comparison to many other cities such as San Francisco, Seattle, Washington DC, and its big brother (sorry Philly natives) 90 minutes up north on the turnpike – New York City. Which brings me to my next point…
3 – It is a Derivative Market (of New York)
At one point Philadelphia was called New York’s sixth borough in the early 2000s. Philadelphia is a derivative of NYC’s activity on a smaller scale. Comparatively there are 72,000 units under construction in NYC, DC has 29,000 and Philadelphia has 9,000. For being smack dab in the middle of these two markets we are not going too crazy on overbuilding and are prime for any affordability overflows from these cities going overboard with Class A product in every direction.
The school of thought here is that NYC leads all real estate markets by six months or is ahead of any cycle by six months. Simply put, this means if there is a crash or a hiccup in a real estate cycle, NYC will be the first to show these signs of distress and foreshadow it. This is largely because it is the most desirable real estate market in the world and has the highest liquidity for all asset classes.
SL Green, one of the largest REITs in the world and Manhattan’s top office landlord, seems very bullish about the growth of NYC and surrounding markets such as Philly copycat what is happening in the big apple. There are 12M square feet in commercial projects over the next five years in NYC and HALF is already pre-leased! That is around 2.6M sq. ft. of commercial property and 10,000 full-time jobs added per year. While NYC has struggled with its ultra-luxury condo sales and retail because of the Amazon effect leaving some projects in a standstill, practically every other asset class is still robust.
Almost the same story remains for Philadelphia. Right now there are 28+ large scale commercial real estate projects under construction or planned over the next couple years. The largest of those is 1911 Walnut St aka The Laurel, a 48 story mixed use tower in the most desirable area of Philadelphia – Rittenhouse Square – recently broke ground. This is a major indication of the direction of the city to remain a strong real estate market as completion is not expected until 2021. This is a great sign that product is being pipelined in the city almost 3-5 years down the road.
The cat may be out of the bag for Philadelphia. No longer a secondary real estate market with questionable metrics. Philly is now making its presence felt with institutional and foreign capital flooding into it as Chicago, Los Angeles, San Francisco, and Boston have experienced.
The good news is there is still plenty of opportunity and chances to partake in the resurgence the city and market is experiencing. Center City has re-emerged but also have their secondary and tertiary neighborhoods such as Northern Liberties, Fishtown, Graduate Hospital, and Brewerytown. Even during the last recession, Philadelphia was a stable market that didn’t get crushed as its economy’s backbone is made up of “eds & meds” which are some of the more recession proof jobs.
While Philadelphia didn’t escape the recession without hiccups or bruises it still managed to sustain itself without too much damage, especially compared to some other high-growth, boom and bust markets. This makes Philly appealing for the future as many are predicting another downturn sooner rather than later.
Philadelphia is not only sought after for institutional players now, but the smaller and middle market operators as well. Real estate players of all makeups, backgrounds, and risk profiles can thrive here and find value making Philadelphia one of the more unique cities in the United States for real estate investment.
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