While there’s an increasing weariness that the multifamily rental market in Philadelphia is becoming overbuilt, developers such as David Perlman are finding a lack of inventory has made their bets on new for-sale projects less of a risk.
Perlman is moving forward with a new 43-unit residential development at 600 N. 5th St. in Northern Liberties and he’s confident the townhouses will sell. “We just completed 25 units across the street,” he said. “That took us two years to sell and that’s about a fair pace.”
Real estate agents have been bemoaning about the lack of inventory throughout the city and suburbs. In Philadelphia, the first quarter proved to be unusually strong despite what is typically viewed as a slow time of year because of the weather.
“Home sales volume in the first quarter was also both exceptionally and unusually strong,” according to a report by Drexel Unviersity’s Lindy Institute for Urban Innovation. The report later said that the activity was “exceptional because it was the strongest first quarter since 2007 and unusual because home sales activity typically declines from the fourth to the first quarter, due to the holidays and winter weathe … A likely driver of this seasonally uncharacteristic price appreciation is the very low level of current inventories.” Nationally, inventory has become an issue as well. Single-family housing starts rose to 835,000 in April, which is half a previous peak of 1.72 million in 2005.
“We’ve hit a point where there is so little inventory real estate agents are throwing out ridiculous numbers and getting them,” said Ori Feibush of OCF Realty, which builds houses in several Philadelphia neighborhoods including Point Breeze, Graduate Hospital and Old City. “You have two-and-a-half months of inventory, which is an incredibly unhealthy supply. I foresee that will continue.”
There are several factors influencing the lack of supply. A nearly 10-year focus on the multifamily rental market, what can be a lengthy approval process and an increased desire to live in Philadelphia have contributed to limiting how much new housing has hit the market. There are also signs that millennials, who have all but shunned buying a house over renting, are starting to come into the market to buy.
Low interest rates, a limited supply of new and existing homes hitting the market, a drop in unemployment, stock market gains and consumer confidence have also started to bring more buyers into the market. This was the first time in a decade that new buyers outstripped the number of new renters, according to Trulia data.
Developers such as Feibush, who focus on Philadelphia’s established and emerging neighborhoods, are finding that this is their moment to seize. In fact, developers are finding they can't construct new units fast enough to meet demand and as a result prices are on the rise.
“We have 20 homes we are developing and 10 have either settled or are under agreement,” said Nino Cutrufello, co-founder of Callahan Ward, which has projects in Northern Liberties. “This spring has been very strong.”
While it’s not unusual for Northern Liberties to have $1 million-plus sales, Callahan Ward targets those willing to spent between $400,000 to $600,000 to buy a new home. “We want to stay just below the high end of the market and those prices are getting a lot of first-time home buyers and young move-up buyers,” Cutrufello said. “I feel very confident where the market is right now.”
In what appears as a bit of a frenzy, prices are rising and sometimes week to week. Philadelphia housing prices are up 22 percent in the last 12 months, according to Econsult Solutions. A residential property sold on average for $112,000 in April compared with $92,000 a year ago. Not only did prices rise significantly over a year, they increased by 6.1 percent over the last quarter, according to Econsult data.
Ryan McManus of Agent PHL is marketing 12 townhouses that are under construction. Each is 2,150 square feet with four bedrooms, three full bathrooms, furnished basement and roof deck for Argo Property Group in Brewerytown. Called Brewers Mill, each townhouse started at $425,000 and two properties went under contract at full price. An appraisal came back at $450,000, McManus said. David Waxman of MM Partners initially priced houses that he has for sale in Brewerytown at $330,000 but upped it to $350,000.
It's not just Brewerytown. Feibush said he has identical duplex projects a block away from each other in Frankford in which one unit went for $350,000 and another unit a block away sold for $400,000. In Point Breeze, there’s across the board increases between 5 percent and 7 percent and a project in the Art Museum area started in the mid-$800,000 only to now sell for $1 million a unit. At one of Feibush’s projects the interior units have been selling for more than the end units, which were sold first.
“There is significant demand for new construction and a subset of that is new construction with parking,” he said.
PRDC’s project, called Liberty Square, is scheduled to break ground later this month. It will consist of a four-story, townhouse complex and units will start at just shy of $700,000. It’s a starting price Perlman anticipates will rise. At the project across the street from Liberty Square, pre-construction sale prices were $579,000 and ended up at $824,000. One caveat inflating that figure is there was one unit with a $1.5 million elevator.
“We’re planning to sell two a month,” Perlman said. “Inventory has dried up even more and it’s difficult for a buyer to find inventory.”