NORTHEAST SNAPSHOT, JULY 2008

Philadelphia Multifamily Market

Yablon

While many apartment markets face substantial realignments of supply and demand in 2008, Philadelphia will turn in another year of solid performance. Demand for rental housing will remain steady, although rental supply will increase at a marginally quicker pace, nudging up the vacancy rate to the low 4 percent range. Some demand-side pressures could arise from the for-sale housing market, where prices are declining and affordability is improving. Still, the market’s Class A segment, which would be the most affected by favorable price trends in for-sale housing, will hold up well, based on recent performance.

During the last housing boom, vacancy in the Class A tier rose about 100 basis points to the low 5 percent range. Regardless of how affordability may improve in the quarters ahead, high-end apartments are still the least expensive housing option in desirable areas of the market, such as along the Main Line in Pennsylvania and in suburban Camden County. Meanwhile, Class B/C apartments in South Jersey are the most affordable option for many residents and will remain so. Accordingly, vacancy in South Jersey is expected to stay below 5 percent this year, in line with the long-term average.

In the investment market, institutions remain active, drawn to the market’s consistently stable fundamentals. Private buyers, relatively quiet now, are positioned to become active once uncertainty in the credit markets clears. 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 percent. In apartment complexes along the Main Line, owners expect to be able to raise asking rents approximately 3 to 4 percent this year. In the New Jersey counties within the metro, interest from buyers in the northern part of the state and New York City has not wavered. Assets in desirable areas, such as the Route 73 and Route 30 corridors, trade at cap rates in the 7 percent range.

By the numbers, marketwide, employers are projected to add 3,000 jobs in 2008, a 0.1 percent increase. In 2007, 16,800 new hires were made. In 2008, developers are forecast to complete 1,200 rental units, compared with 643 units in last year. Deliveries this year will expand rental stock by just 0.6 percent. Additionally, multi-family permit issuance continues to taper off in all areas of the market, suggesting that apartment construction will be limited after this year.

The marketwide vacancy rate is expected to rise 10 basis points this year to 4.5 percent as supply growth exceeds demand by a slim margin. A reduction in job creation in the Wilmington section of the market will support a 40 basis point increase in vacancy to 7.5 percent. The pace of rent growth will gradually subside during the year as demand growth slackens. In 2008, asking rents are forecast to rise 3.2 percent to $1,033 per month. Effective rents will also gain 3.2 percent by year end, reaching $994 per month.

Despite the market’s history of stable, relatively predictable property performance, transaction velocity has declined 45 percent over the past 12 months. Deal flow was down among most buyer pools and across all price points. Although velocity decelerated, property prices have risen modestly. During the last year, the median price has increased 6.4 percent to $71,000 per unit. For properties in Pennsylvania, the median price has climbed 5 percent year over year to $74,600 per unit.

Class B/C assets generally price with cap rates in the low 7 percent range, although management-intensive properties in urban areas trade at more than 8 percent. Top assets near public transportation in Montgomery and Chester counties can price at cap rates around 6.5 percent, regardless of property age. Institutions are expected to remain active this year, drawn by the market’s typically steady fundamentals.

— Spencer Yablon is the manager of corporate affairs in the Philadelphia office of Marcus & Millichap Real Estate Investment Services.

Philadelphia Apartment Forecast First Quarter 2008 • EMPLOYERS are projected to add 3,000 jobs in 2008, a 0.1 percent increase. • DEVELOPERS are forecast to complete 1,200 rental units, expanding rental stock by 0.6 percent. • VACANCY is forecast to end the year at 4.5 percent. • ASKING RENTS are forecast to rise 3.2 percent to $1,033 per month. • EFFECTIVE RENTS will gain 3.2 percent, reaching $994 per month. Source: Marcus & Millichap’s 2008 First Quarter Apartment Market Report for Philadelphia

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