The coronavirus outbreak has impacted every facet of the real estate industry, with developers and contractors among those suffering the hardest economic impact from pandemic closures. In Pennsylvania, all nonemergency construction was halted as of March 19 to assist in mitigating the spread of the virus. Six weeks after the health crisis shuttered the state’s real estate market, the construction industry has finally received the green light to resume work on May 1.
In an interview with Multi-Housing News, Rittenhouse Realty Advisors Managing Partners Ken Wellar and Corey Lonberger explained how the metro’s multifamily industry has been altered during the outbreak and shared their clients’ most common woes going forward.
What type of multifamily assets did Philadelphia investors focus on prior to COVID-19?
Lonberger: Prior to the COVID-19 crisis, the multifamily market was a very attractive product type for investors, both locally and regionally. With the new rent control laws in New York City, we saw an influx of buyers for market rate, student and affordable housing assets. We are confident that when the crisis is over, it will be back to business as usual.
How is the biomedical sector impacting the multifamily market today?
Wellar: The biomedical sector is a big part of the University City market of Philadelphia. Most of the workers want to be able to walk to their jobs, which is driving occupancy in the University City and West Philly markets. With the announcement of the new 10-year lease with Wistar at 3.0 University Place at 4101 Market St.—which includes 250,000 square feet of lab and office space—the city will continue to attract biomedical research and advanced life sciences companies. This will add fire to the demand for multifamily in University City and West Philly, as biomedical employees seek convenient places to live.
Tell us about the transactions you recently orchestrated.
Wellar: We’ve closed five deals since the COVID-19 outbreak. Three of them were Center City boutique buildings totaling $10.9 million. We are seeing investors flock to quality core assets in these times of uncertainty. We believe that given how heavily the Philadelphia rental market is driven by health-care workers, core assets will hold up in the downturn.
We were also able to close a 60-unit development site in the heart of Center City for $4 million. We are still seeing a lot of activity from developers looking for prime development opportunities. Our most recent sale was a 42-unit community in Wilmington, Del. All five deals closed at the original contract price.
Has anything changed with rent collections in Philadelphia?
Wellar: From speaking to our clients, Rittenhouse Square and Fishtown have done well in terms of collections, with April collections being in the 90-percent range. Landlords are also seeing a higher renewal rate with tenants because tenants would rather stay put than move right now.
What are the most common concerns among your clients now?
Lonberger: The main concern is the availability of financing for multifamily assets. The debt markets really control the values and the velocity. Right now, the only options are bridge loans and the agencies, neither of which have very attractive terms at this time. This is having a major impact on current listings, as well as on how we are pricing out new opportunities for the market.
To what extent has the lockdown impacted your activity?
Wellar: We can’t tour any occupied units for inspections. We have new contracts and letters of intent signed, but can’t start unit-by-unit inspections or appraisals until the restrictions are lifted. We are also working on a lot of development sites that need final zoning approval or civic design review from the city, but the city has been shut down, so all the timelines on those deals have been pushed back for 60 to 90 days.
The shutdown of construction has been a huge problem for developers delivering their projects on time, especially if the product is student housing and needs to finish construction for fall move-ins. Pennsylvania has been hit harder and had more restrictions on development because of COVID-19 than any other state.
Tell us about your recent partnership with Greystone Real Estate Advisors?
Lonberger: We formed a joint venture with Greystone so that it would allow us the opportunity to offer our clients a direct lending source for Fannie Mae and Freddie Mac, and to grow our brokerage into other markets.
How do you expect the Philadelphia multifamily market to perform this year?
Wellar: We believe all sectors of commercial real estate will be hit hard because of COVID-19, but multifamily in Philadelphia will hold up better than most sectors in commercial real estate. We do think there will be a higher collection loss due to unemployment, and rent growth will be pretty flat or may decrease by 1 percent or 2 percent, depending on the submarket.
Overall, Philadelphia doesn’t experience the highs and lows that other markets experience, because the market is driven by great education systems and hospital networks with great health-care workers. We believe there will be huge growth in the biomedical sector, which will keep the multifamily market pretty stable. We will see mortgage lenders increase their lending requirements for home buyers, and look for higher credit scores and larger down payments. This will keep more tenants in apartments longer, and reduce the number of first-time home buyers.