MARKET HIGHLIGHT, SEPTEMBER 2007

PHILADELPHIA MARKET HIGHLIGHTS

Philadelphia Industrial Market

There are two sides to Philadelphia’s industrial market story. One reflects the stagnation of the markets central to the Philadelphia Metropolitan Area, and the other reflects a booming industry along two of the major trucking corridors cutting through Philadelphia’s northern markets. While that side of the story is heating up, let’s first take a look at the tepid condition of the metropolitan area industrial sector.

With more than 383 million square feet of industrial space in the marketplace, the Philadelphia Metro Area has seen a supply increase of only 3 percent in the last 5 years, a sluggish figure that is expected to remain flat with little new construction in the pipeline. The area’s vacancy rate, which has fluctuated between 10 percent and 11 percent for more than 10 years, remains stable at 10.7 percent. Likewise, rental rates, averaging $4.93 per square foot, have gone up only 5 percent over a 5-year period. Labor costs and real estate taxes have contributed to the sluggish 1.8 percent per year growth, which is lower than the rate of inflation of rental rates during that period.

Moving into the northern markets, a different dynamic is at work, especially along the red-hot I-80 corridor running from Manhattan toward northwestern Philadelphia and all the way to San Francisco — making it the second-largest interstate highway in the country. Big-box warehouses are being built along this stretch of highway within Pennsylvania, giving trucks easy access to major interstates, and creating additional quality warehouse space for industrial tenants. In some Philadelphia markets, according to the most recent findings in The Beige Book of the Federal Reserve Board, overall demand for industrial space remains strong and vacancy rates are near record lows. Additionally, rental rates continue to rise, particularly for warehouse space, for which rents are at all-time highs.

The trucking corridor I-81, which runs north and south along eastern Pennsylvania, is also seeing a lot of activity. A number of multi-tenant facilities, and some single-tenant facilities, are being built along the route, including four speculative buildings totaling more than 1.1 million square feet of industrial space at the new CenterPoint Commerce & Trade Park East. All four buildings, according to developer Mericle Commercial Real Estate Services, will be completed and ready for tenants before year-end. While there is an abundance of warehouse development, there remains very little new manufacturing development due to the decrease in employment in that sector.

The health of Philadelphia’s industrial sector relies on proximity to the state’s major highways and thoroughfares, on new speculative development, and on state economic conditions. It is expected, according to The Beige Book, that Greater Philadelphia’s economy will continue to improve in the coming months. With that, the industrial sector can expect to see continually slow increases in rent and much more speculative development, especially along I-80 and I-81.

— Art M. Wegfahrt is the corporate managing director for Studley in Philadelphia.

Philadelphia Multifamily Market

Philadelphia’s multifamily market shows it’s a great time to buy Center City housing. The for-sale market is clearly at the bottom of the cycle, a large volume of units are available, and buyers aren’t competing as much. This means buyers can make offers 5 percent to 10 percent below asking price.

Who are these buyers? Baby boomers, and for two reasons. One, boomers want their children to have comfortable homes and stable assets. So ,they’re helping their children purchase property downtown, and transferring family wealth at the same time.

They are also buying for themselves because their kids have moved out and they want the conveniences and services of the Center City lifestyle. Additionally, condos are popular because they’re easier to maintain if boomers have multiple homes.

The No. 1 residential location by far is still Rittenhouse Square. It is a vibrant hub of renowned restaurants, high-end retail and luxury residences that are all within walking distance to many employment centers.  And, it is the only neighborhood in Center City that has held its value throughout the pause in the housing market. Two of the newest developments around Rittenhouse Square are Parc Rittenhouse and The Warwick Condominium.

In addition to Rittenhouse Square, Washington Square and Society Hill continue to be hot neighborhoods. These areas appeal to buyers who come from the suburbs and want to live in a quieter, smaller community. The newest buildings in these areas are The Lippincott on Washington Square and 22 Front in Society Hill.

Another major characterization of Philadelphia’s multifamily market is its extremely high rental occupancy — nearly 98 percent. Many rental buildings are being converted to condos, which takes rental units out of the market. For example, when Rittenhouse Regency became Parc Rittenhouse, it eliminated 190 rental units.

Meanwhile, little new rental product has been built because such high construction costs have made it less economical to build. This scarcity increases rental demand and rates, which have risen 5 percent to 6 percent over the last 18 months.

It’s all further evidence that buying is the ideal option right now, as prices remain stable, interest rates stay historically low and Center City offers a desirable lifestyle.

— Allan Domb is president of Allan Domb Real Estate in Philadelphia.

Philadelphia Strives to Be More Pedestrian Friendly By 2012

In the spirit of new urbanism and the era of global choice, some of the newest plans to improve Philadelphia’s infrastructure by 2012, particularly in Center City and along the Delaware and Schuylkill rivers, focus on revamping the city and riverfront areas to offer residents and visitors great spaces and places to live, work and play.

William Penn’s original city plan for Philadelphia provided narrow roads to support horses and carriages, which, in today’s auto-centric community, leads to congestion. The newest plans show an ambitious goal to increase the city’s pedestrian traffic and to reduce auto traffic on the streets. The city’s first new office towers in more than a decade, Cira Centre and Comcast Tower, spotlight the type of pedestrian friendly development foreseen over the next few years. They are strategically positioned close to the city’s public transportation network, providing easy access to more than 200 restaurants and 2,000 retail shops.

The World Trade Center of Greater Philadelphia, a $560 million mixed-use development located at Spring Garden and Callowhill streets, will drive economic growth, while reducing the need for cars with the addition of a 28-story, 265-unit residential tower, two high-rise office towers totaling 1.5 million square feet and 118,000 square feet of retail space.

Besides strategic deployment of new developments across the region, one of the most innovative and sustainable market-driven solutions to Philadelphia’s congestion has been PhillyCarShare.  The not-for-profit car-sharing program reports that more than 20,000 Philadelphians have traded in their cars for PhillyCarShare, walking or public transportation.

Live, work and play communities of today offer a plethora of amenities. Most importantly, they keep working residents from seeking socialization elsewhere. Building on that philosophy, current and future developments reflect more of a fun-filled Philadelphia by 2012.

The addition of two new first-class casinos — Foxwoods and SugarHouse — to the area will add new places to play while providing jobs and tax dollars. Foxwoods Casino supports the city’s plan to reinvigorate the riverfront and provide public access to the Delaware River. The $560 million investment will provide new restaurant and lounge venues open to the public, ranging from fine dining to sports bars, site infrastructure including a public riverside walkway, 3,000 slot machines, a 2,000-seat showroom and retail shops.

Just down the road is Waterfront Square Condominiums & Spa. The property is just the first of many innovative residential developments to come that offer the best of city living. Located minutes from restaurants and nightlife, the business district, and sports complexes, Waterfront offers luxury amenities including a spa, a health club and a fitness center with an array of resort-like facilities including sauna and steam rooms, massage and body treatment rooms, a semi-Olympic (25 meters) swimming pool with lap lanes and a poolside café.

On the Schuylkill River side of town, the Schuylkill River Development Corp., led by ULI Philadelphia member Jerry Sweeney, is redeveloping the Schuylkill River corridor with plans to create a 14-foot wide asphalt recreation trail along a section of the river’s east bank in the 34th Street/Grays Ferry Avenue area. Providing recreational riverfront access that is now lacking, the trail will ultimately connect to the Schuylkill Trail and Schuylkill River Park and to Bartram’s Garden on the west side of the river, about a quarter mile downstream.

Overall, organizations such as ULI Philadelphia, Central Philadelphia Development Corp., Brandywine Realty Trust, Liberty Property Trust, AMC Delancey Group, Isle of Capri Associates, L.P., G.S.R. Development, and DePaul Realty have already embraced the needs of the city’s stakeholders. Continued growth and redevelopment will require the city’s upcoming administration to support public/private partnerships that spur economic growth for Philadelphia and the region, while also continuing responsible and practical use of land for future generations to enjoy.

— Kenneth P. Balin is the chairman of the Philadelphia District Council of the Urban Land Institute and the president and CEO of AMC Delancey Group, Inc.


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