Philadelphia Apartments Post Positive Trends as Job Growth Returns

Excerpt from Marcus & Millichap 2010 National Apartment Report:

The Philadelphia apartment market staged a solid turnaround last year and will continue to settle into its traditional pattern of limited development, steady tenant demand and rising rents in 2011. Following

two years of depressed multifamily permitting, deliveries of new rentals will drop to one of the lowest annual totals in the past decade. Permitting will remain subdued as the challenging process of advancing projects from conception to completion deters all but the most capable developers. The current lull in construction will magnify improvements in tenant demand in the months ahead. Nearly every submarket recorded positive net absorption last year, and additional gains will occur in 2011. Stronger job growth will drive greater demand in Center City and the New Jersey submarkets, areas where positive trends have slightly lagged improvements in market-wide conditions . A significant reduction in vacancy will also occur in New Castle County as the creation of 6,000 jobs spurs rental housing demand.

Strong operations will continue to lure some out-of-area buyers, but Philadelphia will remain dominated by local investors. Many owners will utilize low interest rates to refinance and improve properties, while others will dispose assets to reinvest in others with greater upside potential.  Interest in properties in prime central locations will remain intense, while lower-quality assets in secondary locations will garner greater interest as operations strengthen. Cap rates compressed in 2010 but will likely stay near current levels as long. Assuming that low interest rates persist, top Class A assets will trade in the 5.5 percent to 6.0 percent range, while complexes in strong suburban locations will sell from 6.5 percent to 7.5 percent.

2011 Market Outlook

◆ 2011 NAI Rank: 10, Down 5 Places. Philadelphia retained a top 10 position in the NAI due to a rapidly falling vacancy rate.

◆ Employment Forecast: Expansion of the trade and education and health services sectors will increase total employment 1 percent in 2011 with the creation of 28,000 jobs. Last year, 13,000 positions were added.

◆ Construction Forecast: Approximately 1,200 units were completed in 2010, but developers will deliver just 500 units this year.

◆ Vacancy Forecast: The vacancy rate will dip 160 basis points in 2011 to 3.9 percent due to the slowdown in construction and continued strengthening of demand. Last year, vacancy fell 100 basis points.

◆ Rent Forecast: Following a 1.7 percent increase in 2010, asking rents will surge 3.5 percent during the year ahead to $1,055 per month. Effective rents will advance 4.1 percent to $1,011 per month, compared with a 2.6 percent gain last year.

◆ Investment Forecast: The low 10-year Treasury rate continues to raise prepayment penalties and yield maintenance requirements as a potential impediment in transactions involving properties with existing financing. Nonetheless, improved financing capacity will drive robust sales activity.

Philadelphia

8 Penn Center

1628 John F. Kennedy Boulevard

Suite 1200

Philadelphia, PA 19103

Tel: (215) 531-7000

Spencer I. Yablon