Philly Skyline
Danya Henninger/Billy Penn

Philly’s rent problem: We’re not building anything you can afford

More residences being built than in decades, but a ‘typical 25-year old can’t afford a newly-constructed apartment in Center City.’

Ori Feibush’s company OCF Realty recently acted as a broker for a new apartment complex at 1430 South St. Half of the apartments there are true one-bedrooms and the other half are essentially efficiencies, Feibush says, about 35 percent smaller than the one-bedrooms. They’re also cheaper, but only by about $100 a month.    

Conventional wisdom in most cities says renters would first seek the larger apartment. At 1430 South, the glorified efficiencies sold out faster. It’s something Feibush has seen time and again in Philly: People choosing price over amenities.  

“If they had an option of putting an Olympic swimming pool on the roof or charging $50 less on rent,” Feibush said, “they’d choose the $50 less on rent.

“It’s absolutely a Philadelphia thing.”

So at least anecdotally in Philadelphia, we like things affordable. Many of us also need things to be affordable. And for the most part rent is affordable here. Costs are much less than in New York, Washington DC or Boston, and, good lord, it’s not even worth mentioning San Francisco and Philadelphia in the same sentence.

The only problem is, new buildings here are not affordable. The majority of the newest apartments going on the market aren’t being developed for the types who’d prefer a rental discount over a pool. Census data shows the median rent for all housing built since 2014 at $1,554, more than 50 percent higher than the city’s overall median rent of $952. A recent Zillow study found 70 percent of all residential construction in Philly since 2014 was for high-end units and that average rent of the most affordable third of rentals available on MLS listings had increased by 18 percent since last year, compared to 7 percent for most expensive third. The 18 percent gain was the fifth-highest of the 15 cities Zillow studied and the four higher than Philadelphia were all in California. 

Despite a record building boom, Philly might not have enough of the right kind of housing.

“Your typical 25-year old can’t afford to pay the rent for a newly constructed apartment in Center City,” said Kevin Gillen, senior research fellow at Drexel’s Lindy Institute for Urban Innovation. “They don’t have that income.”

The last few years, Philadelphia has been building like never before. In 2012, according to Census data, 2,175 building permits were authorized for housing units. That number went to 2,815 in 2013 to 3,973 in 2014 before a slight decline to 3,666 last year. As of July, permits for 1,831 units had been authorized, putting Philly on pace to top 3,000 again. The great majority of these units are part of multi-family housing, i.e. apartment complexes.

In the ’90s, when development almost didn’t exist here, permits were granted for around 400 to 500 units per year, and most of them were single-family homes rather than apartments. Even at the height of the real estate bubble in the mid-aughts, Philly was seeing about half the number of permits we’re seeing now.  

Though last week’s news that a Jersey City developer was bailing on an East Market apartment tower caused concern the market could be getting saturated, Gilles Duranton, chair of Penn’s Real Estate Department, dismisses the likelihood of a major problem. He acknowledged the possibility of too many new expensive apartments being built but argued the increase in permits could be Philadelphia reaching a normal level of development. If 4,000 new units are constructed every year, it would equal about 1 percent of Philadelphia’s existing housing supply. Duranton said it’s not uncommon for new construction units in big cities to account for between 2-to-4 percent of their total housing stock.

“After 10 years that’s only 10 percent increase in the stock,” he said of a 4,000 building permits per year rate. “Even if it goes wrong we end up with a surplus of 5 percent. Some parts of the condo market and the penthouse market that could sell for $5 million will only sell for three. I’m not going to cry. … It’s hard to imagine a catastrophe with reasonably small numbers at stake.”  

This extreme emphasis on high-end development, not unusual in other big cities, appears to be a new phenomenon for Philadelphia, which has seen its number of households making $100,000 or more per year grow from 47,000 in 2005 to 97,000 in 2015. At the height of the real estate bubble, in 2007, the median rent for all the new construction was much lower than it is for today’s new construction. Census data shows that in 2007 the median rent on the newest housing, those built in 2005 or later, was $664, or about equal to median rent of the entire city at the time.  

Gillen would prefer Philadelphia get more medium-to-lower priced developments. He just doesn’t think it’s realistic because of expensive construction costs. Workers in Philadelphia’s union-dominated construction sector make about $28 an hour, according to the Bureau of Labor Statistics. The national average is closer to $23.

“We have New York consumption costs,” Gillen said.

Feibush blames zoning laws that sometimes prevent high density developments. He pointed out two similarly sized projects of his on South Street as an example. One of them zoned for higher density features 34 units. For the other they could only do 17, with the apartments being larger and more expensive than at the other building. Feibush said he would prefer the choice of more, smaller apartments like in the first option as it would’ve led to more money for the developer and cheaper rent for the tenants. But, he said, it’s not possible given the zoning regulations.

“The problem in Philly is that it’s harder to build the (less-expensive) units (OCF is) building than the more expensive ones,” he said. “And yet there are more people looking for less-expensive units. So you end up with an environment where we are in short supply.”

Zillow real estate data
Zillow

In housing there’s something called a filtering effect. It basically suggests an emphasis on high-end housing can benefit everyone because the people who can afford the high end will leave behind housing that can become affordable for medium-income people, who leave behind housing that can become affordable for lower-income people. While this large supply of high-end apartments could lead to a filtering effect in the future, there’s a problem with this now in Philly.

Zillow’s Aaron Terrazas said the lack of building in Philly and similar cities in the 1990s, along with higher rates of homeownership at the time, could mean a shortage of medium-tier rentals now. Instead of finding an apartment built 20 years ago that was once considered top of the line, people with average incomes seeking to rent are likely forced to find something older and outdated. About 55 percent of Philadelphia’s housing stock was built before 1950.  

So most anyone who wants to rent something reasonably new in Philadelphia will have to expect to pay up. And if supply continues to stay low for anything that’s not high end, rental prices for everything else could increase at disproportionate rates, too, to the point where more Philadelphians could be forced to spend more than a third of their income on housing.    

“We have some wiggle room before we hit that threshold,” Gillen said, “but it is trending in the wrong direction.”

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