Stepped-Up Development Takes a Toll in Philadelphia

Echoing a trend that marks some other major metros in 2018, the pace of construction has caught up with demand. That, in turn, is keeping rent growth at modest levels.
Philadelphia rent evolution, click to enlarge
Philadelphia rent evolution, click to enlarge

The pace of development in Philadelphia caught up with demand, leading to a middling rent growth rate during the year’s first three months, a trend that’s visible in several major U.S. metros. The number of units delivered reached a cycle peak in 2017, when 5,000 units came online, and 2018 is expected to set a new high, with an estimated 7,000 completions. The new inventory is being absorbed by Millennials attracted by tech jobs and downsizing Baby Boomers, who make up a large part of the renter pool.

Professional and business services led job gains (11,700), followed by Philadelphia’s traditional “eds and meds” sector (8,600), which led to a fast absorption of office developments nearing delivery. Roughly 80 percent of the new office supply in the metro’s core submarkets is set for completion in 2018, according to a JLL report. However, a number of employment sectors saw significant job losses in 2017 (-4,500). Half of those were in the trade and transportation sector, expected to take a new hit with the closing of two Pennsylvania Kmart stores.

Higher demand in the working-class Renter-by-Necessity segment has led to a 2.1 percent rent growth year-over-year through March, compared to a 1.5 percent increase in rents for Lifestyle assets. Overall, rents are expected to rise moderately—at a rate of 2.3 percent for the rest of 2018.

Read the full Yardi Matrix report.