PHILADELPHIA-Despite a modest uptick in supply, demand for rental housing in the Philadelphia market will hold steady in 2008, boding well for investment sales in this sector, says a report from Marcus & Millichap. “In the investment market, institutions remain active, drawn to the market’s consistently stable fundamentals,” according to the report. “Private buyers, relatively quiet now, are positioned to become active once uncertainty in the credit markets clears.”

Donald MacLaren, a Philadelphia-based senior director in Marcus & Millichap’s national multihousing group, tells GlobeSt.com that “debt certainly is a driver of deals. Since 70% to 80% of the deal cost is involved with debt, as the debt market goes, so goes your deal. As the debt market gets a little looser and as more money comes back into the market and it gets a little cheaper, you’ll see a pickup in the number of deals that get done.”

As an indication of the low profile would-be investors are keeping lately, the first two quarters of ’08 have seen just eight rental apartment property sales in Philadelphia of $5 million or more, compared with 12 during the first two quarters of 2007, according to data from Real Capital Analytics. “You’re going to see a slowdown,” MacLaren says. “Before you would see nine or 10 bidders on a property, and now you’re seeing five or six bidders. Deals are taking longer. If you did 100 deals last year, you might do 90 this year.”

With 1,200 new rental units slated for completion in ’08, the report predicts an increase of 0.6% in rental supply, which will nudge the vacancy rate upward 10 basis points to the low-4% range. “Some demand-side pressures could arise from the for-sale housing market, where prices are declining and affordability is improving,” according to the report. The newly released Q1 Standard & Poor’s/Case-Shiller home price index found that home prices nationally fell by an average of 14%, although Philadelphia was not one of the markets measured in the index. Additionally, as in other markets nationwide, some for-sale construction could end up going on line as rental units instead.

“There will be some condos that go to rentals,” MacLaren says. He adds, however, “Philadelphia is a market that’s very stable. You don’t see high increases and you don’t see high decreases. ‘Steady as she goes’ is the Philly mantra.” The report notes that multi-family permit issuance continues to taper off “in all areas of the market, suggesting that apartment construction will be limited after this year.”

Properties along the Main Line in Montgomery and Chester counties are in high demand from investors and trade for $100,000 per unit or more, with cap rates starting at about 6.2%, the report says. “In apartment complexes along the Main Line, owners expect to be able to raise asking rents approximately 3% to 4% this year,” according to the report. Overall, asking rents are forecast to rise 3.2% to $1,033 per month. Effective rents will also gain 3.2% by year’s end, reaching $994 per month.

Creation of new jobs will see a modest upturn in ’08, with employers expected to add 3,000 positions this year for a 0.1% increase, according to the report. One catalyst for employment growth in both the short and long terms is expansion of the Pennsylvania Convention Center, which is projected to create 2,500 construction jobs during construction and 2,000 permanent positions in the hospitality sector once it’s completed, according to the report.