MARKET REPORT: Philadelphia Remains Relatively Healthy Apartment Market

Philadelphia—The basic apartment fundamentals in Philadelphia are stronger than most other metro areas in the nation, asserts Joseph Pasquarella, managing director of Integra Realty Resources-Philadelphia, a commercial real estate valuation and consulting firm.

For starters, the unemployment rate in the city was 8.2 percent as of December 2009, according to the U.S. Bureau of Labor Statistics. Pasquarella attributes this to the diverse economic base, as well as its large medical-related industry and the large number of universities in the city.

Demand, while it has softened compared to its 2007 levels, is faring better than most of the rest of the country because of the comparatively low unemployment rate, as well as the relatively low level of development that has taken place.

The market is still seeing a downward pressure on rents and an upswing in vacancy rates, however, but Pasquarella maintains that the city has “done well compared to the rest of the country.”

Vacancy in the overall market is just over 6 percent and rents declined only 0.4 percent. And though concessions are being offered in some submarkets, they are not being seen across the board.

Class A assets are experiencing the most pressure on rents, as vacancy in this product type is approximately 8 percent. Pasquarella does note, however, that Class A assets continue to remain desirable to investors, as cap rates have compressed in higher quality buildings in areas like the Main Line and Montgomery County.

Meanwhile, the CBD is experiencing vacancy rates of 5 percent, though the shadow market from condos may put pressure on Class A apartments. At the same time, Pasquarella observes that first time homebuyers have been able to take advantage of the low pricing and interest rates, creating some vacancy in B+ and A assets—but it hasn’t had too much of a negative impact due to the difficult qualifying requirements.

Transaction-wise, some deals have taken place, particularly from institutional capital or other investors that had existing portfolios in the area, explains Pasquarella. “In Philadelphia, and primarily in the suburbs, we are seeing transactions at competitive cap rates, compared to other investment sectors of real estate.”

Cap rates are in the low-7 percent range, though this is compared to the high-5 to low-6 percent range at the market’s peak. “But most people who bought at a 5.5 to 6.25 overpaid for properties, with the benefit of hindsight,” Pasquarella adds.

In terms of opportunities, he advises investors to look for Class A products that are well-located and professionally managed, which he believes will be the first to return.

Although Philadelphia has fared relatively well in the downtown, Pasquarella warns that it does tend to lag behind other national markets. “We [tend to] get caught in the last wave, so I have a feeling that we may feel a more downward pressure on rents and an upward pressure on unemployment rate, particularly if the economy doesn’t improve in the next year or so.”