July 2022
Headlines assert commercial real estate values are at a pinnacle in Philadelphia. There is an infusion of national and international investment and almost daily announcements of new partnerships, new players, and new projects. According to Philadelphia YIMBY, the city is on track for record construction activity this year, based on the volume of plans filed with local authorities.
A drill down into the CRE sub-sectors provides more definitive information on what is thriving and having a slower climb. With interest rates beginning to rise and expectations of a recession, those watching the Philadelphia market are considering these challenges and opportunities.
A Return To Experiences
An enjoyable experience is a key driver of consumer behavior and smack in the middle of this is brick and mortar retail. Suffering in the lead up to the pandemic, partly due to over abundance and the online shopping effect, this segment may have had the toughest rebound to negotiate. Some relief has begun as permanent residents and leisure visitors are returning to the city, looking to satisfy their cravings.
Similar to retail is office, a sector also based on experience. Rent growth here is quiet as work from home routines continue. Although activity has quickened in the last few months, landlords have yet to garner rent increases. One small bright spot is Class A space as companies look to workplaces with amenities to entice employees, and attract and retain talent.
A City More Connected
Multifamily and industrial are the current darlings of Philadelphia commercial real estate. Yardi’s recent report noted multifamily occupancy reaching 96.9% as of February 2022, with average rent of $1,641. Driving the success of this sector are the rising medical research facilities, and multifamily development in adjacent corridors. Over 7,000 apartments delivered in 2021, and per Yardi, 70,000 apartment units are in planning and permitting stage. PwC recently projected multifamily continuing to expand until 2025, with rising interest rates actually helping landlords as single-family sales are expected to decline.
For industrial prospects for long-term growth are optimistic, as the sector remains in expansion mode due to an infusion of capital and activity. PwC’s report anticipates this continuing for a few more years with contraction beginning in 2025.
A City with the Right Stuff
Hotel room revenue is expected to improve in 2022, but the year overall is projected to average 19.6% below the 2019 level, per a Tourism Economics report to the Philadelphia CVB in February 2022. Leisure travel has returned more quickly than other travel segments, and AHLA estimates Philadelphia hotel revenue from business travelers in 2022 will be $562 million, a significant drop when compared to 2019’s $895 million.
While it will take a few years to get back to pre-pandemic levels, the hospitality sector should continue to grow as Philadelphia offers amenities integral in attracting leisure travelers the conference circuit – excellent location, major transportation hubs, proximity to other large markets, and ample tourist attractions.
Conclusions
Philadelphia’s recovery continues and while a national recession is most likely to come the northeast should weather it well. Acquisition activity will continue despite higher interest rates. There will be some pull out of investment and projects that were troubled from the start, but that ultimately is necessary to maintain a healthy real estate market.
