Philadelphia Skyline
Joan Brady

Good news: Philly rents could be dropping thanks to a real estate bubble

The city has more new construction than it needs, and the Fed is watching.

Philadelphia Skyline
Joan Brady
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The Federal Reserve is starting to send warnings of a new real estate bubble that could affect Philadelphia — for most of us, in a good way.

This latest scare is all about luxury apartment complexes, the favorite of developers here and in many other big cities the last few years. The Federal Reserve announced it was monitoring apartment towers as the next potential asset-price bubble, given so many new buildings are springing up and rental prices are skyrocketing. Unlike the housing bubble of a decade ago, this kind of bubble could mean something good for the average person. An oversupply of luxury apartments could soften the rental market, leading to flattening rental prices or at least smaller increases.

It’s going to be great for regular Philadelphians,” said Kevin Gillen, senior research fellow at Drexel’s Lindy Institute for Urban Innovation. “They might get something they can afford.”

While Philadelphia’s growth in housing supply and housing prices doesn’t compare to cities like New York or Boston, it has gotten more expensive to live here, and a glut of developments have hit the market.

For most of the ’90s, Philadelphia was only seeing a few hundred new units built per year. Condos then became the hot property before the market crash of 2008, with about a thousand built per year in the mid-2000s.  In recent years, the hype surrounding the city’s population growth and low interest rates changed everything.

According to Census data, in 2013, about 2,800 building permits were issued. That number rose to 3,900 in 2014 and 3,600 in 2015. The great majority of these units have been going up in Center City and surrounding neighborhoods and have been high-end apartments.

Though Philadelphia has been growing, it hasn’t been growing at the same pace. Center City and the surrounding neighborhoods have been growing at a rate of about 1,300 households per year the last few years, according to the Center City District. The expected number of new residential units from 2016-2018 is about 2,000 per year. That’s where the surplus of apartments comes in, unless growth rates increase or projects are canceled.    

The signs of a bubble started becoming clearer a couple of months ago. In addition to new apartments outpacing population growth, many median rent formulators — which, in fairness, aren’t always the most accurate — showed Philadelphia’s rental prices flattening toward the end of last year after years of increases.    

“They appear to have peaked,” Gillen said.

This softening of the market likely won’t last forever. Gillen said developers have just gotten too far ahead of the city’s growth. And they might not have it that bad. With low interest rates and the millennial generation getting older, an uptick in buying is expected. The surplus of apartments in Center City could be converted to condos.

Besides, Comcast II opens in 2018. Thousands of employees will be moving to Philadelphia, many of them likely searching for new apartments in Center City.

“That will provide a lot of support,” he said, “for the rental market.”