Experts: New Capital Sources Eye Philly MF

PHILADELPHIA—Could multifamily landlords here start averaging rents of $3 per square foot? Although a handful of projects have crossed that barrier, especially in Center City, Philadelphia as a whole isn't there yet, multifamily experts said at the RealShare Philadelphia conference Thursday, which drew 450 industry professionals to the Union League. A dearth of quality product is one reason, while questions about the area's future job growth may also give owners pause, panelists said.

That continues to be the case even as institutional investors and other newcomers have set their sights on Philadelphia multifamily and the city's share of the generation most likely to rent by choice—20-to-34-year-olds—is among the nation's largest. A recent study by the Pew Charitable Trust showed that the city added 100,000 residents in this age bracket between 2006 and 2011, said Karen Iman, senior director with Cushman & Wakefield.

“They're not second-class citizens,” Bradley J. Korman, co-CEO of Korman Communities, said of renters by choice. “And they're willing to pay for it.”

A good number of first-time investors are coming to Philadelphia multifamily. “I think you'd be shocked by the amount of new capital,” said Mark Thomson, senior managing director at HFF, who runs the firm's recently opened office here. And those new capital sources aren't coming to the region for one-off deals, pointed out Lizann McGowan, SVP at CBRE. “They want to stay here and grow.”

With an investor spotlight shining on Philadelphia multifamily, it's not surprising that there's plenty of development, although RealShare's experts downplayed the possibility of a bubble. At present there are about 17,000 apartments in the city, and when all is said and done with current and proposed new construction, the inventory will have increased by about 4%, Iman said.

“We're building a lot, for us,” said Korman. “But we're not going crazy.”

In the suburbs, including South Jersey, multifamily inventory runs to approximately 300,000 units, albeit over a fairly large geographic area, said McGowan. With much of the product more than 40 years old, vacancy nonetheless is under 5%. There could be as many 10,000 more units built in the suburbs in the near term, although McGowan said, “We don't think all of that is going to happen.”

CEO Mike Pestronk of Post Brothers Apartments noted that 40% of the renters in his company's Philadelphia projects have moved in from outside the city. To compete, new suburban construction will likely be transit-oriented and provide what Thomson called “an urban feel,” in the process starting to set new price benchmarks. Added McGowan, “You're giving them a quasi-urban experience in the suburbs.