If the analysts viewing Philly from 10,000 feet put it in the middle of the nation’s large real estate markets, the analysts close to the ground have a much more positive view of it.
Where the more than 1,000 industry insiders the Urban Land Institute (ULI) and PwC surveyed for their “Emerging Trends in Real Estate 2014” forecast recommended holding but not buying real estate assets in the Philadelphia market, the panel of specialists who spoke at last Friday’s ULI Philadelphia seminar on local market trends saw much more upside potential.
Where the locals agreed with the national survey was that the region's industrial real estate market was strong. "Industrial is still the product class of choice," said David Ricci, partner at The Flynn Company, to the capacity crowd that filled the Union League's Lincoln Room ballroom.
But the local experts saw more opportunities for profit than the outsiders did in the other sectors. "Retail performance has been incredibly strong," said Larry Steinberg, a member of the investment sales team at CBRE Fameco. "In the second half of 2013, we surpassed the absorption rates we had in 2006-’07."
Given that both the number of millennials with steady employment and the number of adults living alone are rising, Julie Smith, president of Bozzuto Management Company, sees plenty of upside potential for multifamily residential as well. "We've seen a big change in our residential profile," she said. "People are valuing access over ownership. The migration to urban centers and upgrading of the quality of properties puts us in a fantastic position."
Smith, whose company is based in Greenbelt, Md., was speaking as much about the entire Northeast corridor as about Philadelphia in particular -- her firm manages some 40,000 units from Boston to Washington -- but she said the same trends that are driving multifamily growth in the rest of the Northeast are also at work here. In particular, she said, continued strong growth in the "eds and meds" sector is in turn driving growth in apartment rentals.
The office market is the one market where turbulence is a large part of the forecast, due in part to the changing nature of office work. Both the increased emphasis on amenities and trends such as "working alone together" in places like coffee shops has changed how much and what type of office space is in demand, said Ron Carriola, managing director of Jones Lang LaSalle Americas, Inc. The result is that owners of traditional office space in less amenity-rich locations are likely to get burnt. When new properties like the recently announced FMC Tower at Cira Centre South come on line, he said, "the people who have commodity, run-of-the-mill office buildings are going to lose. The suburbs are going to lose."
But the suburbs aren't going away, either as a place to live or a place to do business. Carriola noted that when he asked a roomful of millennials taking a class he taught how many eventually wanted to own their own home in the suburbs, "100 percent raised their hands." And Ricci noted that the hottest markets for distribution facilities, which are the prime drivers of industrial real estate right now, are on the exurban fringes and in the satellite markets of the Philadelphia region. "The Lehigh Valley is hot right now. Central Pennsylvania" -- Reading, Lancaster, Harrisburg -- "is hot right now," he said.
Ricci went on to note that one reason the industrial property market is so hot is because so little new supply has come on line. “Historically,” he said, “about 260 million square feet of space have been delivered annually. Last year, that figure was 65 million.”
In the other three sectors, the interplay between living, working and leisure, where the three activities are increasingly taking place in the same area, are driving big shifts in the market. For instance, Steinberg noted that where residential growth is not accompanied by employment growth, retail growth is struggling: "The Piazza [at Schmidt's in Northern Liberties] changed hands recently," he said. "The new owners asked us, 'What can we do to improve the retail business?' We replied, 'It's not ready. One of the fundamentals is missing -- a daytime population."
By contrast, retail on Walnut Street, nestled between large populations of office workers and residents, is doing well. "Our high street is renting at $140 a square foot [on average], and the small supply of space is being outpaced by demand," he said. "One of our clients is bidding on space on Walnut at $200 a square foot. Those numbers are incredibly strong."
Another positive sign for the market: conservative institutional investors are coming back in. "There was an interesting case study from two weeks ago: 1619 Walnut," Steinberg said. This 1937 International Style building has retail on its first two floors and six floors of office space above. "The buyer was a pension fund" -- TIAA-CREF, a major investor in real estate nationwide. "We haven't seen that before."
Some things, however, remain constant. "For the first time in 20 years, we have a growth story to tell in Philadelphia," said panel moderator Sam Chandan, president and chief economist at Chandan Economics and an adjunct faculty member at the Wharton School of the University of Pennsylvania. "But our most negative audience is other Philadelphians. People from the outside come in and say, 'I hear you have a good story to tell. We're receptive to your growth story in Philadelphia.'
"These people don't want to hear about cheesesteaks, Rocky and Santa Claus. They want to hear about growth, opportunities and development. And we have a lot of growth opportunity."
Or put another way, Philadelphia isn't as bad as Philadelphians say it is.