Philly Real Estate Market Forecast for 2014: Just Right

Image from an old Goldilocks comic book. Read on, below. It’s relevant.

Many observers have commented on the “Goldilocks” nature of the Philadelphia regional economy: It’s neither too hot nor too cold, but just right to sustain a decent level of growth and activity.

In real-estate-speak, that translates to: If you own or develop commercial property in this area, hang onto it. But if you’re torn between buying and selling, sell. If you’re a homebuilder, you can probably keep on doing what you’re doing already or even do a little more of it.

That’s a rough summary of the forecast for greater Philadelphia contained in the 2014 edition of “Emerging Trends in Real Estate,” the annual nationwide survey of real estate industry professionals jointly conducted by the Urban Land Institute (ULI) and PwC (formerly Pricewaterhouse Coopers).

Nationwide, the good news is that real estate, especially housing, is no longer a drag on economic growth. “The fundamentals have strengthened,” said Mitchell Roschelle, partner at PwC, in a media Webinar tied to the report’s release. Citing snippets of the more than 1,000 survey responses Zagat-style, Roschelle characterized the state of the overall economy as “in the middle innings of the recovery from the recovery.”

What this also means is that investors and lenders in search of higher returns are casting a wider net and looking at markets beyond the top five or 10 as prospects for high yields become harder to find in places like top-ranked San Francisco, New York, Boston and D.C. (which fell out of the top 10 completely this year, a development the survey attributed to “Fed fatigue” — uncertainty arising from political gridlock).

Boding well for Philadelphia are predictions of “good if not great” job growth in several sectors, including one of this region’s linchpins, healthcare and biological research. Boding well for the urban core is a generational shift in locational preferences: The Generation Y cohort, also known as Millennials, is the largest demographic group since the Baby Boom generation, and its members are displaying a shift in residential preference from suburban to urban communities.

Another positive sign: The forecast predicts that infill and in-town residential construction would outperform all other sectors of the residential real estate industry in 2014.

Another national trend that should bolster the local market is the increasing availability of capital for real estate development and investment. Survey respondents said capital should be easier to come by in the year to come, continuing a trend that has been building since the bottom of the real estate trough. But while interest rates remain reasonable, Roschelle said, “interest rates are going up. We just can’t tell you when.” He did, however, say that underwriting standards for debt and equity were not likely to loosen anytime soon: Of the 30 percent of survey respondents who said equity underwriting standards would be looser in 2014, he said, “they must have been in a coma when we sent out the survey.” And of the more than 40 percent who said the same about debt underwriting, he said, “we need to meet these people.”

Philadelphia may also benefit from what Stephen Blank, senior resident fellow for real estate finance at ULI, called a “return to the ‘smile’ philosophy of real estate investment” — that is, that the best markets for real estate investment and development lie along the three coasts and in the Sunbelt.

Overall, the residential real estate market should continue to perform well in the year ahead, according to survey respondents. Aside from the continued good prospects in single-family home construction, the largest share of survey respondents — nearly 42 percent — recommended buying multifamily residential property in the region, and an additional 37 percent recommended holding. Only 21 percent recommended selling.

Survey respondents were neutral to bearish, though, on the local commercial real estate market. While the plurality of respondents recommended investors and developers hold onto their Philadelphia commercial real estate assets, and a majority recommended holding in the retail sector, the percentage who recommended selling outnumbered those who recommended buying in all commercial market sectors save for industrial and distribution property, and more respondents recommended selling industrial/distribution, office, retail and hotel property in Philadelphia than in any other market surveyed.