Apartment Construction Is Booming. How Will That Change Philly?

For more than a century, the city’s fundamental building block has been the rowhome. That may soon change.

apartment buildings rental property growth

Apartment buildings are on the rise in Philly. / Illustration by Leticia R. Albano

The first week of November 2022 wasn’t all that different from most weeks on the construction front in Philadelphia lately.

On Wednesday, November 2nd, developer RREI LLC and property manager Scully Company celebrated the topping-off of the Carson, a 13-story, 382-unit luxury apartment building at 5th and Spring Garden. The building, which will have a 40,000-square-foot grocery store on its street floor, welcomed its first tenants ahead of schedule, on May 1st.

The very next day, three blocks east, National Real Estate Development, the firm that brought two apartment buildings to the Girard Square block on Market Street five years ago, broke ground on its newest Philadelphia project, 200 Spring Garden Street. This 13-story, 360-unit building, being developed jointly by National Development and Kushner Real Estate, should open in 2024, welcoming City Fitness back to its original location when it’s complete. And that project is just the first phase of a larger, East Market-scale development planned for the border between Callowhill and Northern Liberties.

Meanwhile, in Center City, cranes were also shooting into the sky. Right now, as you read this, two new apartment towers are rising on adjacent blocks around 12th and Walnut, and ground has been cleared for a third. They’ll add more than 860 new apartments to the city’s housing inventory. Over in Rittenhouse Square, Southern Land Company, the developer of the city’s tallest residential tower, has another project under way in the 1600 block of Sansom Street — this one 26 stories tall, with 310 apartments.

To put it bluntly, apartment construction is booming in Philadelphia and has been since the onset of the pandemic in 2020. And with that boom, a new and different Philadelphia is rocketing up before our eyes.

How different? For most of its existence, Philadelphia has been known as the “City of Homes” — think the humble rowhouse, which dominates our housing stock to a greater extent than in any other U.S. city. And throughout our history, most of those rowhouses were within reach of the average working Philadelphian, leading the city to take pride in its high rates of homeownership. Yet it’s fair to wonder if this outpouring of new apartments could bring our years as a majority-homeowner city to an end.

According to figures from the Center City District, more than 75 percent of all the new housing units completed in 2022 lay in “Greater Center City” — an area that includes Fairmount, Spring Garden, Francisville, Poplar, Northern Liberties, Queen Village, Bella Vista and Grad Hospital along with Center City proper — and adjacent zip codes in North Central and South Philadelphia. Of those 5,853 completed residences, more than 90 percent were in multi-unit buildings. And almost all of those were units for rent: The 107-unit Arthaus was the only significant multi-unit ownership project completed in Greater Center City last year.

While the bulk of the new rental housing is rising in and near Center City, new apartment buildings are also sprouting well away from the expanding city core. A stroll along Germantown’s two main commercial thoroughfares, Germantown and Chelten avenues, turns up seven new buildings with 10 or more units under construction or nearing completion. That’s on top of at least one other building rising near Greene and Rittenhouse and at least three apartment buildings that came on line last year — all in a neighborhood that hadn’t seen much new construction of any kind prior to the pandemic. And at the end of April, a developer unveiled plans to build a 148-unit apartment building just off historic Market Square — to general disapproval from the neighbors.

While this is undoubtedly a great moment to be in the apartment biz — or simply looking for an apartment — it’s fair to wonder what this transformation might mean, and what’s driving it.

The developers and property managers I spoke with say it all boils down to that Econ 101 foundation: They wouldn’t be increasing the supply if there weren’t demand. But they do note that changes in the economics of construction in the city have fueled the shift to apartment-building.

The demand, they say, comes from young adults, who fall into two large groups: students who came to Philadelphia to study and decided to stick around after they graduated, and younger renters who used to live in our Northeast Corridor siblings, where apartments cost more.

“A lot of this increased demand does stem from the pandemic,” says Andre Del Valle, vice president for government affairs at the Pennsylvania Apartment Association, which advocates for rental-property owners and managers statewide. “Folks from D.C., Boston, New York, who all came to Philadelphia — I think that’s why you’re seeing a lot more demand for apartments.”

Jessica Scully, president of Scully Company, a family-owned firm that has managed and developed apartments in this region for 75 years, attributes the rising demand for rentals to the way young adults in particular but also the career-oriented in general now answer the question of where and how they’ll live.

“Pre-pandemic, we were seeing the ‘renter lifestyle of choice’ movement,” she says. “For years now, people have expected to switch jobs more than they had historically, which means they don’t necessarily want to make the commitment of homeownership. They want the ability to rent, put some roots down where they’re renting, and move on” when the time comes to change jobs.

The other reason we’re seeing much more apartment construction right now has to do with a change in city housing policy. Many of the projects now being built received their permits prior to the halving of the city’s 10-year property-tax abatement for new construction and renovations. “The increase in construction costs and the changes to the 10-year property-tax abatement have had an impact on certain projects because it’s made them more difficult to pencil,” says Lizann McGowan, executive managing director for multi-family capital markets in the Philadelphia office of Newmark, a global commercial real estate firm. (A building is said to “pencil” when either sale proceeds or rental income will cover its construction cost and return a reasonable profit to the developer.)

“And then, more recently, there’s the increase in interest rates,” she continues. Those higher interest rates have pushed the demand curve toward renting in two ways: Builders find that multi-unit projects can cover the interest costs more easily than single-family residences, and would-be home or condo buyers are discouraged from buying by those same higher borrowing costs.

To all of this, Del Valle adds the costs of complying with city rules. “To just put up a single house, you need to go through a number of steps,” he explains, including licensing, permits and approvals from the Zoning Board of Adjustment, which in turn require review and approval by neighborhood organizations. “If you walk through that whole process, you see how incredibly challenging it is to develop. When you’re able to put 50 to 100 units into a building, it’s a little easier, because now you have a number of different forms of revenue coming in.”

After accounting for the costs of this process, he says, a developer’s profit is little better than what a supermarket makes on sales: “Only nine cents [per dollar] per unit actually comes back.” So just like the supermarket, developers make it up in volume.

Philadelphia as a whole is still relatively undersupplied from a rental-housing standpoint.”

Or by charging more in rent. McGowan points out that rents in Philadelphia weren’t hit as hard by the pandemic as they were in some of our peer cities. According to a report from real estate research firm CoStar, though Pennsylvania was the second U.S. state to order all non-essential businesses (which originally included real estate sales) closed after COVID arrived in force, asking rents in Philadelphia held up better in the months afterward, actually rising from March to July of 2020. We were the only one of the nation’s 20 largest markets to see rents rise after the onset of the pandemic.

CoStar attributes this to the city’s affordability relative to its big-city peers. The rise also meant that fewer landlords here had to offer the kinds of concessions, such as free months of rent, that developers and property managers use to fill new apartments.

And, says McGowan, those favorable winds continue to blow toward apartment-building owners and managers, because “Philadelphia as a whole is still relatively undersupplied from a rental-housing standpoint.”

That’s true in the suburbs as well. But, says McGowan, building new apartments in the suburbs isn’t as easy as building them in the city for a different reason. “Historically, there has been a lot of NIMBYism” in the ’burbs, she says. “That’s shifted a little bit over the last several years. But because that NIMBYism factor was there for such a prolonged period of time, again, we’re undersupplied.”

Longtime Center City District president Paul Levy, however, argues that city-dwellers aren’t necessarily more accepting of renters as neighbors. Thinking back on the days of his involvement with civic associations in Queen Village as well as his work with civic groups elsewhere in the city, he says, “There is this kind of accepted wisdom that the people who care most about our neighborhood are the homeowners, and the renters are transitory and don’t care or are not involved.”

Scully would take issue with that characterization of renters. “There are definitely people who take less care,” she says, “but who’s to say they wouldn’t treat their own properties that way, too?”

According to figures published in a September 2021 Economy League of Greater Philadelphia report on declining homeownership, Philadelphia is the only Northeast Corridor city where a majority of homes are owner-occupied. But Census Bureau American Community Survey single-year data show that the city’s homeownership rate has tumbled since 2006, when it stood above 58 percent; in 2019, that figure was just 52 percent.

The five-year average paints a slightly brighter picture, standing at 56 percent in 2021 — but it, too, has fallen, from a high of 60 percent in 2009. These trend lines, combined with the number of new rental units flooding the market, point to the possibility that before this decade is out, Philadelphia could become a majority-renter city for the first time in its modern history.

And what might that do for the city’s sense of itself? Its politics? Its housing policy?

Before getting to that, I should note that most of the people I spoke with don’t share my view that there’s a decent chance of this happening. After all, Greater Center City has been majority-renter for several years now, and the slope of the falling homeownership curve seems to have flattened since 2019.

But whether or not Philadelphia becomes majority-renter, the issue of keeping both rents and house prices within reach of the average citizen will remain a live matter, as recent City Council hearings on rent control demonstrate.

Philadelphia had a rent-control ordinance in the 1950s, enacted in response to what the city called a housing emergency. But a 1956 Pennsylvania Supreme Court case invalidated it on the grounds that no such emergency existed, and the subject hadn’t come up since.

Until now. Even though the city’s median gross rent remains fairly reasonable — in 2021, it was $1,149 per month for a one-bedroom apartment, according to Census figures — most of the new apartments rent for a good bit more than that. And that puts them out of reach of a big chunk of the city’s population. As a result, tenant advocacy groups like the Philadelphia Tenants Union and the Alliance for a Just Philadelphia have issued calls for rent-control laws.

Seth Anderson-Oberman, a labor organizer who recently ran against incumbent 8th District City Councilmember Cindy Bass, hasn’t joined the calls for rent control yet. He’s more focused on increasing the supply of what he calls “deeply affordable” housing — units that a household earning the city’s median income can afford. As of 2021, that stood at $52,649 — well below the metro area median income of $94,500 used to determine eligibility for federal loans, grants and subsidies.

Anderson-Oberman also says he wants to enable more low-income Philadelphians to become homeowners through programs that help with various up-front costs of ownership. In particular, he’d like to see the city encourage more people to take advantage of existing programs that provide housing assistance and add its resources to further fund state programs that help lower-income homeowners with things like basic repairs.

But he acknowledges that if the city does become majority-renter, tenants “will have a stronger voice in our city’s politics. And so we’ll see more support for things like rent stabilization, rent control, extension of renters’ rights.”

Newmark’s McGowan notes that the issue of housing affordability is one that many cities are dealing with now and adds, “It’s something that should be looked at in a responsible way.”

The last thing building owners and property managers want to see, of course, is rent control. Citing news reports that income from rent-stabilized buildings in New York City fell by 14 percent between 2016 and 2021, Del Valle says, “Is that what we want to see here in Philadelphia? It doesn’t help anyone. It disincentivizes those property owners to want to maintain or invest in their properties, because there is no margin for them to do that.”

Some tenants, however, would beg to differ. Katie Dillon Low, a longtime renter in Washington Square West, puts the lie to the claim that renters don’t care for the neighborhoods they live in: She currently serves as a member of the Washington Square West Civic Association’s board, though she speaks only for herself here. And she argues that tenants do need some protection from steadily rising rents as well as policies meant to let those of modest means remain in the apartments and neighborhoods they love.

At a recent plant exchange in her neighborhood, she spoke with three people looking to rent apartments in Wash West. “They all had the perspective that everything is too expensive,” she says. “And they’re not wrong.” New apartments and those managed by large companies are particularly pricey, she adds.

While Low thinks rent control “is an awesome idea,” she doesn’t believe it’s something Philly would enact, even if renters came to outnumber owners. “I don’t think even our most progressive declared candidates for office would get it done,” she says. The same goes for requirements that a certain percentage of the units in all big new apartment buildings be affordable to lower-income renters, which she says would face fierce opposition from the city’s building industry and apartment-building owners.

Something that could and should be done, she says, is for the city to adopt policies and practices that encourage the growth and preservation of small landlords. Not only do these landlords provide the bulk of what policy wonks now call “NOAH,” or “naturally occurring affordable housing” that needs no subsidies; they’re more likely to develop the mutually beneficial relationships with their tenants that promote stability.

And on this score, she has allies in the industry. Del Valle, for instance, likewise wants to see more small landlords providing rental housing. He says city requirements for permits and L&I fines actually drive such “mom and pop” property owners out of business.

Scully sees one role for financial incentives to play in the production of more affordable rental housing: “I think looking for ways to incentivize affordable housing, tax abatements, things like that that help make the business model for affordable housing desirable, is the way to go.”

And the current wave of apartments may prove to be just a phase the city’s going through. After all, a number of rental apartment buildings completed from the ’60s through the ’80s, including Society Hill Towers, Independence Place and Hopkinson House, were later converted to condominiums. As Low points out, “We keep being told by various ­sources — the media, our parents, financial-adviser types — that homeownership is the way to build wealth.”

As young adults age, building wealth becomes more of a concern. When it does, many Philadelphians will, in all likelihood, eventually seek to own, even if easier ways to build wealth exist. Presented with the option of buying their apartments, a building’s tenants may well opt to become owners. If and when that happens, Philadelphia could go squarely back to being a “City of Homes” again, even if renters do make up more than half of us for a while.

Published as “Philly’s Future, Now for Rent” in the June 2023 issue of Philadelphia magazine.