Philadelphia Market Rate & Affordable Housing: Lack of Supply, Too Expensive to Build

Last Tuesday, we had the pleasure of dropping in on a great panel at the Cornell Real Estate Council Philadelphia Chapter’s monthly luncheon. The meeting, held at the Philadelphia Racquet Club, was centered around Market Rate and Affordable Housing in Philadelphia. The impressive panel was made up of Richard Barnhart, CEO of Pennrose, Joseph Staugaard, Founder of Haverford Properties, John Ungar, Executive Director at Dignity Housing, and David Weisel, CEO of Delta Associates.

Lack of Supply?

Between 2016 and 2018, the pipeline delivery schedule of new multifamily units for Philadelphia is predicted to be at 5,778. That makes the city 34th on the list of markets.

Here are some other quick facts to keep in mind about Philadelphia:

  • 5th Largest Population in the U.S. estimated 1,555,072
  • Median household income is $38,25 (2011-2015)
  • Vacant housing units: 13.3%
  • Median Rent for a two-bedroom apartment: $1,202/month

In a city with a cost of living that is 0.6% above the national average, with one of the largest homeless populations, it seems a little contradictory to be ranked number 34 on the list mentioned above. Compare it to other East-Coast cities and Philadelphia is far behind.

The panel kicked off with an overarching question regarding tension in different Philadelphia neighborhoods. “We are seeing a lack of affordable housing in the areas undergoing a high amount of gentrification. This includes University City, Fishtown, and parts of South Philly,” John Ungar of Dignity Housing pointed out. Dignity Housing works to provide quality, affordable subsidized housing to homeless individuals and families.

David Weisel of Delta Associates, a consulting and research firm which covers commercial real estate, chimed in to remind us that CRE is cyclical, after all. “Even if there is a glut, whatever that means, the cycle will continue,” he said. Weisel also noted that regulatory problems in the city are having an immense effect on the cost for developers.

On the other end is Rich Barnhart of Pennrose, a developer of market rate multifamily housing for those at or below 60% of the median income. Barnhart believes that affordable housing is often not available to the working middle class. “What’s missing is the piece in between market rate and lower end affordable housing,” Barnhart noted, “there’s a need there.” He went on to point out the ultimate cause of this lack of Middle Market Housing:

“The available housing stock is dated and mostly unattractive to this population. The alternative is to seek housing within price ranges that are not necessarily affordable to their income status. Middle Market Housing is too expensive to build in the City, so there is a limit to what’s available now and what will continue to be available as long as construction costs increase.”

The solution? Addressing construction costs.

Construction Costs are High

Today, developers in urban markets are banking on high pricing per sq. foot and Philadelphia is known for having ridiculously high construction costs, even higher than New York. According to Barnhart, this has an intense ripple effect on the City.

The lack of Middle Market Housing causes people to flee to cheaper alternatives in the suburbs. With the reduction in the City’s population comes a reduction in tax base and funding for City-provided Services.

How do developers manage to continue to build? Joe Staugaard of Haverford Properties mentions that they are trying to cut costs on their new multifamily project on the Delaware River Front by building stick construction over podium – a popular cost-effective method also known as “one-plus-five”or “stick-built” construction. There’s also an uptick in modular building today, due to its cost-effectiveness.

Vacant/Abandoned Properties & an Opportunity to Praise the City

Where are our developers finding opportunity for multifamily in Philadelphia? Andrew Benioff, Founder & Chairman of CREC Philadelphia, brought up the idea of vacant and abandoned properties. “They are both an opportunity and a challenge. For instance, Germantown has a high demand and many abandoned properties,” noted Ungar whose non-profit is based in Germantown. Turning these abandoned properties into affordable housing is a win-win for both the neighborhood and the surrounding renters and property owners by increasing property values.

So, what’s the challenge? Well, it’s easier said than done. However, Barnhart and Ungar did acknowledge city assistance – a rare instance, seeing as we all seem to be criticizing limitations enforced by our local government. The initiative the two noted is the Philadelphia Land Bank. Created in 2013, the Land Bank aims to streamline the sales of vacant, tax-delinquent city properties to private developers. It’s been working for Barnhardt, who pointed out that before the Land Bank was introduced, he had to go through five different agencies when trying to acquire a row of vacant properties on Diamond Street. Barnhart went on to say that:

“The Land Bank solves the problem of  going from agency to agency for different vacant properties. It makes it so that all listings are in one place.”

In it’s latest Strategic Plan Draft, the Land bank expects that by the end of Fiscal Year 2017 (June 2017), 2,161 properties will be in the Land Bank’s ownership.

Barnhart also added that it could be helpful for the City to put together strategic neighborhood-specific plans. This would consists of the consolidation and sale of parcels to an array of developers, both big and small, enabling the land to be developed with different capacities. More affordable land coupled with favorable zoning and tax incentives would help to attract developers, noted Barnhart.

There’s an underlying fact here which is that private developers shouldn’t feel obligate to provide affordable housing due to high-construction costs and lack of City initiative. “It’s more of the government’s responsibility,” commented Ungar, “the nature of the private market is to make money.”

Today, the suburbs surrounding Philadelphia are experiencing much more growth than the city itself. The issue, as David Weisel points out, is the lack of supply because the demand for multifamily in the city is surely there.