Changing Tides and Market Resiliency in Philadelphia

By staff writer
September 2018 – 2 min. read

Some cities are currently booming, but there’s always a thought looming in the background that at any time the pendulum could swing in the other direction. Philadelphia’s industry leaders say that the city has recession-proof businesses, which were in full view 10 years ago during the economic crisis.

“Philadelphia is a dynamic market. It’s also a diverse economy; we don’t depend on just one thing. We’re slower and steadier than most,” Harris Heller, managing director – originations at Hunt Real Estate Capital, told Invest: Philadelphia when he sat down with our team earlier this year. “We never got too high, therefore we don’t get too low.”

While its real estate market has not traditionally been investors’ first choice when compared to other more glamorous markets like nearby New York City, there’s no denying that its steady growth creates low-risk investment opportunities with excellent potential for appreciation. Slow and steady is what will keep Philadelphia strong and sustainable.

 

 

Harris Heller, Managing Director – Originations, Hunt Real Estate Capital.

Jason Wolf, Managing Principal, Wolf Commercial Real Estate.

“This is a very positive and exciting time to be in real estate in Philadelphia, and we want that to continue,” Jason Wolf, managing principal of Wolf Commercial Real Estate, told Invest:. “Philadelphia is seeing a lot of investment coming from New York and New Jersey. Buildings that trade for $100 or $150 per square foot in our market are opportunities to make an investment at almost half the cost of what someone would spend in the New York market. This makes us an attractive market for investment, which is why we are seeing so much capital come in from these neighboring, more expensive markets.”

Innovations in technology and e-commerce that are upsetting the real estate industry in other cities have led to exciting trends in Philadelphia and increased investment from outside channels. As Credit Suisse reports, roughly one-fourth of the nearly 1,100 malls in America are in danger of closing. (However, it should be noted that the King of Prussia Mall, the largest shopping mall on the East Coast, is in no danger of shutting down and remains a huge economic driver for Montgomery County.) Moreover, a report from the U.S. Bureau of Labor Statistics indicates that department stores have lost 500,000 jobs since 2002, while online retailers created only 200,000.

 

In order to make up for this deficit, one of the biggest shifts in commercial real estate has been the move to a more experiential retail model, hence the concept of “de-malling.” De-malling refers to the partial or entire demolition of malls to create a more dynamic kind of retail experience, placing a bigger emphasis on things such as restaurants and movie theaters.

“Take a look at the Gallery Project in the Market East neighborhood of Philadelphia,” John Adderly, executive vice president of NAI Mertz, told Invest:. “They are changing a mall-like space and bringing the focus back to the street. These are trends we are seeing in the region.”

“Industrial has much more development going on right now,” Adderly noted. “There is a demand for it, especially in this region. Philadelphia is in a great location: the least expensive primary market in the Northeast Corridor.”

Opportunities in this market are on the “value-add” side of things. Investors and developers are searching for old malls or large decommissioned shopping centers with large vacancy boxes and generating novel plans for revitalizing these spaces.

As Adderly notes, Philadelphia offers something that other dynamic cities do not: an affordable cost of living. As such, the city can retain a robust and talented labor pool; the skilled analysts, graphic designers and marketing professionals aren’t getting priced out. In Philadelphia, young professionals can live affordably, and that has fostered a healthy live-work balance. As long as existing structures can be co-opted for the times and the younger generations are encouraged to land here, Philadelphia looks to maintain its trajectory of steady, sustainable growth for many years to come.

John Adderly, Executive Vice President, NAI Mertz.

For more information on our interviewees, visit their websites:
NAI Mertz:  http://www.naimertz.com/
Hunt Real Estate Capital:
https://huntrealestatecapital.com/
Wolf Commercial Real Estate: https://wolfcre.com/

Philly Suburbs on the (Millennial) Rise

February 2018—Philadelphia’s office market had a really good year in 2017, and that was largely thanks to the suburbs.

While being downtown can be advantageous for companies, placing them closer to the millennial workforce and their demand for the trendy live/work/play lifestyle, there are signs that the tides might be starting to shift in the City of Brotherly Love.

In 2017, the suburbs saw more than 1 million square feet of positive absorption, according to CBRE’s year-end report. Half of that was Class A office space, which had a vacancy rate of 11.9 percent, just over half the peak 2010 rate of 21.1 percent.

Meanwhile, City Center slid a little, and price-sensitivity may have been a factor. Incentive programs like Gateway Philly and WeWork’s commitment to helping smaller businesses shoulder the local wage tax help encourage suburban companies to relocate their offices to the city proper, but costs can still be prohibitive for many.

It’s no secret that millennials have been a huge force in reshaping city centers and driving real estate markets across the nation. In the last decade, Philadelphia added the largest percentage of millennials of any of the country’s 10 largest cities. In fact, today individuals between the ages of 18 and 34 make up almost one-third of the city’s population.

These younger workers want collaborative work environments, open space, seamless integration of technology, greener offices and walkability, not sterile office parks with their bland, blocky buildings and endless swaths of parking lots. Suburban developers are taking note.

Eric Goldstein, executive director of the King of Prussia Business District, has spent the past six years and $1 billion turning a mega mall into a desirable and trendy place to live, work and play. Located just 20 miles outside of Philadelphia, King of Prussia has already attracted business headquarters to its office space, national retailers to its town center and residents to its renovated luxury apartments. Thousands of square feet are already under construction, and there’s plenty more to come.

Suburban mixed-use developments like these are attracting millennials away from the city center, both to live and to work (triggering a rise in the “reverse commute”), but their continued growth will really depend on transit. For that reason, perhaps the most highly anticipated part of the KOP project is the King of Prussia Rail Line, which hopes to connect the business district with the Norris High Speed Line (NHSL) by 2025. SEPTA has made the rail line a high priority, noting that it will help to alleviate the notorious road congestion in the area.

The real estate community has been asking itself for years whether urban-loving millennials would follow in their parents’ footsteps and move to the suburbs as they grew older. In Philadelphia, at least, the success and adaptability of the suburban office market seems to be answering that question.

When is urban, not urban?

July 2017 – With some of the most respected universities in the U.S., an abundance of well-paid IT jobs and an arts and leisure sector to rival any other major city, Atlanta is seeing a large influx of young professionals. With this changing demographic has brought new opportunities for the real estate sector. However, the image of classic white picket fence with a car in the driveway is disappearing as professionals want to be closer to their place of work, amenities and areas of social activity.

In January 2017, the City of Peachtree Corners, part of Gwinnett County in North Atlanta, saw the breaking ground of a 300-unit, 39-acre mixed-use development. Once completed, the Overlook at Twin Lakes project, developed by Brand Properties, will feature modern retail, cyber cafes, a pool, a gym and dog park. Accommodation will be mainly 2-bed apartments. The main impetus behind the development is to house the young professional demographic, many of whom are attracted to the area because of the nearby Technology Park, a mixture of IT companies and coworking opportunities.

“The new trends in coworking environments mean that office development is mixed with hospitality and residential. Companies are using the new generation of offices as a way of attracting and retaining the best talent,” Kurt Hartman, senior managing director – Atlanta for Hines told Capital Analytics

The development is part of a growing trend across the U.S. that recognizes the differing requirements of young professionals, or “millennials”. In a poll conducted by National Association of Realtors and the Transportation Research and Education Center at Portland State University the 18-35 age group showed a strong preference to walking over driving as a method of transport. The gap of 12 percentage points of 71 percent for driving to 83 percent for walking suggests that environmental and health concerns are influencing the way people want to travel. With demographics in Atlanta shifting towards the 18-35 age range, these are facts that developers and agencies need to take into consideration.

“The corporate relocations have been a big deal for Atlanta. Young professionals are coming into the workplace and want to live in dense, urban communities,” Kirk Demetrops, principal of MidCity Real Estate Partners told Capital Analytics.

However, although an increase in employment opportunities drove a net increase of 10 percent for renters in the urban areas of Atlanta from 2010-2015, according to rentcafe.com, the high price points are still turning off the younger demographics. “Affordability is going to be a huge issue as we head into the future. If you look at Midtown, the apartments are reaching unprecedented highs. Millennials will not be able to keep up with $2,000 for rent. We want to focus on projects that have density and affordability,” Brent Story, president of Avalon Real Estate told Capital Analytics.

The same survey suggested an increase of 26 percent for the same time frame for suburban areas. In 2017, average rents for suburban vs urban saw a difference of around $200 per months with urban asking $1,277 and suburban, $1,006. This is a difference in line with areas such as Chicago and Los Angeles. All this points to the rise of the mixed-use development in an attempt to create urban feel and convenience in a suburban setting, with Alpharetta, Roswell and Tucker all becoming places of attraction.

With slower wage growth, the trend of starting a family later and an emphasis of flexibility means the 18-35 age group are leaving it longer than ever before to buy homes, creating investment opportunities for letting agencies and driving rent prices, although Atlanta still offers great value. “Atlanta is still considered to be affordable. New industries and increase in job growth will keep rents at the current price levels, but the increase in prices won’t be as fast as it was before,” Jeffrey Graham, managing partner of the Graham Group told Capital Analytics.   

The Atlanta real estate market was one of the worst hit by the recession of 2008, with unemployment peaking over 10.5 percent in 2010, 0.8 points above the national rate of 9.7 percent. The growing demographic of young professionals points towards a decade of healthy recovery, and is one welcomed both by the real estate sector, as well as the Atlanta area as a whole.

“People in Atlanta are vested in making this a place of prosperity. This is evident by the growing number of graduates staying in Atlanta,” Monetha Cobb, managing director of Franklin Street told Capital Analytics.

With so much investment going into new-style developments, it seems likely that growth will continue.

Better Together

Invest: Miami speaks to Nicholas Remillard, President & CEO, World Strategic Forum

What was the initial vision of the World Strategic Forum, and how has it developed over the years to what we see today?

A lot of the forums in Miami deal with solely Latin America, but we want to bring all the regions together. There’s still a strong component of the Americas, but there’s also a large component for Asia and Europe. Miami has a mixed population. There is an increasing amount of Europeans living here, as well as people from Africa and Asia. People come from all over the world to Miami to do business.

The airports and ports are increasing the amount of trade they do and expanding their shipping mandates beyond Latin America. A lot of the cargo shipping contracts are with China, for instance. Miami International Airport is running daily flights to the Europe and the Middle East.

What is the significance of holding the forum in a place such as Miami and how does the audience here differ from other locations like Paris or in Canada?

Miami, it’s a brand by itself. It has a lot of appeal, and people tend to come here with their spouses or family so that they can have  a vacation as well as attend the forum. The Biltmore in Coral Gables is a perfect location for us. It’s a nice area, and on the practical side, we don’t lose our clients up to 2 o’clock on the beach.

There has been a lot of infrastructure development in Miami. So in the 2017 program, we had a bigger component on infrastructure. There’s also a large section on cybersecurity, which is another big issue in Miami. But it’s a work in progress. We’re developing new content for 2018. It will bring a different identity to the Miami conference that will make a difference from all the other events.

We don’t want to have an event in Miami and then have a similar one in Paris because they would be competing even though the same organization. However, the branding makes a big difference. Those attending the event in Miami have a unique experience.

How can we ensure that innovation and ideas are nurtured across borders?

There’s not enough communication between countries. Latin America is a perfect example in that it is a group of countries that don’t connect enough on a regular basis. They are a number of countries with a lot to share, but there isn’t enough dialogue. In our mind, unity is the key to everything. For example, even though the UK has voted to leave the European Union (EU), Europe has never been so strong. It’s amazing how the different EU states communicate and trade with each other. They exchange policies, and they have regulations that don’t just affect one country, but the entire union.

Given the recent political change in the U.S. What are the biggest challenges to cross-border corporation in the Americas?

President Donald Trump wants to redefine all the agreements between Canada, Mexico and the US. This is not exactly a bad thing, because they’re old agreements that need updating for all parties. Now it’s an opportunity to go back to the drawing board, but the biggest obstacle is the change in governments.

There next general election in Mexico is scheduled for 2018, so we’ll get a chance to see what the reaction is there. Mexico is a huge market for the US, and it’s bad to have economic or commercial conflict with your next door neighbor.

What is the biggest issue that has an impact on the global economy?

The threats to cyber security are worrying. The autopilot systems in airplanes and computer systems in cars make them vulnerable to hacking. There are a lot of smart technologies and innovation in industry at the moment. Yet there isn’t enough regulation to stop hackers. Smart technology is becoming a part of our everyday life, with the Internet of Things. It is even being used in the healthcare industry. Threats to cybersecurity can mean life-threatening situations. There needs to be industry-wide best practices to prevent serious incidents caused by hacking. This takes some kind of international consensus, which means cross-border cooperation.

 

Project: Liberty

How construction is providing homes for a new demographic of young professionals

Albert Milo Principal & Senior Vice President – Related Urban Development Group

 

What have been the main achievements of the Liberty Square project?

By far, our biggest achievement is creating a redevelopment plan that fulfills the needs and desires of those that will ultimately call Liberty Square home. From the onset, we faced significant anxiety, fear of gentrification and displacement. We’ve taken those concerns and, along with the community, created a phased redevelopment plan that completely eliminates any displacement and greatly improves the lives of all residents. With Liberty Square, we have an amazing opportunity to not only redevelop 58 acres within Miami’s urban core, but to also create a catalyst for broader redevelopment throughout the area and the city as a whole. There are very few times in your career when you’re able to make such a drastic difference, where you can take something that is in a pretty desperate state as well as creating something that is truly magnificent.

What are the main benefits and challenges regarding workforce housing?

The main challenge of workforce housing is the significant number of young professionals with a salary that is above the cutoff point to qualify for affordable housing but not enough that they can afford to live downtown. So, we have a whole generation of Miamians stuck in limbo and unable to find a home that they can afford. In order to achieve the goal of creating middle income workforce housing, we have been advocating for policies and incentives that the local government can put in place to help us and other developers be able to build the type of housing Miami so desperately needs. We believe it is not only important to focus on areas like Downtown and Brickell, but also bring this approach to areas around the in desperate need of mixed-income housing solutions.

What public policies can be pursued to help build up Miami-Dade’s affordable residential real estate market?

The future of Miami-Dade’s residential market is mixed-income housing. It will require some changes at the local level, which is why we have been advocating specific initiatives such as the deferment of impact fees for workforce housing units, a measure that the City of Miami agreed to implement. Another measure that has been adopted are ordinances that allow for increased densities for mixed-income developments, specifically focused on low-income units. This means that developers can obtain additional density if they take a portion of their workforce and affordable housing projects and make units for extremely low-income residents.

A changing investment landscape

Invest: Miami speaks with Jose Parrilla, CEO & president of InvestQuest Partners

What were InvestQuest Partner’s most important successes and milestones for 2016?

We achieved many important milestones in 2016. From the business standpoint, we were able to open an important number of developments. Our primary business is buying, renovating and flipping assets. We wiped out over $10 million in liens held by the local municipalities and completed over 200 flips. Our success this year has allowed us to grow the company to 300 employees.

With the deceleration of real estate growth, what is the expected impact on real estate investment in 2017?

The current slowdown in the market is a temporary one. We strongly believe that Miami will continue on a path of long-term growth because of its history of continually attracting affluent investors. We are confident that in a two-year period we will be able to sell our new projects at similar or higher prices to the ones today. Even when you take into account that, for Latin American investors, it has become more expensive to invest in the U.S. due to the strengthening USD and that the proportion of foreign money in the market has decreased in the last few years, there have still been an increase in foreign investors with significant presence, such as those coming from Spain and Canada.

What has been the performance of the REO vs the short sale market?

The Real Estate Owned (REO) market has completely dried up. According to our data, which is very conservative, there are people in that market segment who are overpaying for properties. This might be related to some speculation in the market, with many players assuming that the market is slowly going to increase. However, our data suggests that we should be preparing for a slight downturn.

The opposite situation is happening in the short sale market. It is an important opportunity in Miami because it not only gives players a chance to help people by taking them out of a difficult situation offering “cash for keys,” but it also is the most lucrative investment in real estate because of its many revenue sources: commissions from the banks, commissions from the mortgage holder, and the property at a huge discount.

How can investors take advantage of the zoning in Miami?

The optimum zoning we are currently focused on is  T6-80, which allows the developer to build up to 12 stories with a density of 150 units per acre.  One of the main challenges for developers that are trying to build under Miami21 is compliance with the parking spaces that are required in order to be allowed to build the units. However, since one of our projects is near the border between Downtown and Brickell, we received the first permission to build our units without the required parking spaces. This shows that the city is evolving and adapting to a structure better suited for high population density.

To learn more about Invest Quest partners, visit their website at: http://investquestpartners.com/

A maturing market

How developers in Miami are adapting to a maturing real estate market

Edgardo Defortuna President & CEO – Fortune International Group

 

How was the performance of Fortune International Group during the slight sector downturn in 2016?

We are very happy with what we accomplished in 2016, even though, from a real estate standpoint, it was challenging in comparison to 2010 to 2015, where we saw very strong growth and plenty of activity. Toward the end of 2015 and throughout 2016, we saw a deceleration in terms of the speed of the sales and the projects being either built or launched. However, this shows that Miami, from a real estate point of view, has matured as a city. The economic cycles are not that extreme anymore. In 2016, even though there was a deceleration, the markets behaved very well. Developers weren’t selling as many as 20 units a month, but they did sell five to 10, which is considered a success in many cities around the world. The previous speed could not have been sustained for a prolonged period. Projects that are well funded with great sponsorship and great products will continue to be successful and continue to produce positive results. This may not be at the same pace as the period of 2010 to 2015, but they will still be producing value, without decreases in price.

Given that Miami’s real estate sector relies heavily on international buyers, how has the local market been impacted by the current global climate?

A lot of the pre-construction sales in Miami depend heavily on foreign buyers, mainly in Latin American countries. They all have been affected by the current slowdown of their economies and rate of exchange, making it a little bit more difficult to invest in Miami. However, in Latin America there is a culture of investing at least part of the wealth in safe tangible assets like real estate. Demand will continue to be strong. Miami is also seeing a strong focus from the Turkish market. Miami can provide the safety that they need to be able to diversify their assets. The U.K. is also an important market, not only because London has become incredibly expensive, but also because Brexit has forced many investors to look at diversifying their portfolio. Miami offers a lot to these investors.

In a market with many new players entering, how does Fortune International stay competitive?

We stay competitive by staying disciplined, concentrating in a small number of projects but at a high-end level. We love to do that for two reasons. First, with fewer projects, you are able to pay a lot of attention to the details. The key component of all of this is the people you surround yourself with. The quality of the architect and the interior designer, combined with the materials and spaces in which you create – the combination of all these assets together is what makes us successful.

Robert Reffkin, President Compass Florida

Invest Miami speaks with Robert Reffkin, CEO, Compass Florida

This is a transcript of the interview, which has been edited for grammatical and editorial purposes. It is not the final article, but rather the text from which quotations shall be selected for the final article to be published. Kindly review the transcript to confirm that its contents reach your approval. Highlight specific quotes you feel are most relevant or of particular interest. You may also add information you think important. Please return any comment you wish to make regarding your interview within 5 working days.

How would you assess Miami as a growth market?

We are launched in New York, and New York clients have the greatest crossover with Miami of any market. A lot of our clients want to buy in Miami. Because of that, we want to be here. Miami is a true international hub. It is very important to have a strong, international brand and a strong client base. One can build that reputation in Miami. Third, this is an active real estate investment market. It has a lot of development, and a lot of transactions.

Compass incorporates a lot of technology for its selling platform. Can you comment on what Compass is working on?

Our “Compass Markets” app provides real time analytics that help you look at prices and transaction volume, over periods of time. Secondly, we have a very extensive valuation tool called “Value Properties,” which was build in house. Then there is “Collections,” which is really for buyers, where it is almost like Pinterest for real estate. You can put all the properties that you want, with your added notes and share the information with your relatives, so everyone can comment. The alternative now is many emails from your broker, each with its own set of email chains. Technology creates simplicity, and this is an industry that has one of the most complicated processes. We are trying to simplify all the processes and these apps accomplish that.

What have been your observations of trends in Miami, when compared with other markets?

We can tell you that across the country, we have seen an uptake in real estate transactions. We see that one of the greatest benefits is the second home market. The Hamptons, Aspen, Santa Barbara and Miami. The stock markets have gone up, and when that happens, people feel more confident. In 2016, the luxury market, in general, was depressed. The highest level of luxury is the second home. That hurt places like Miami. Now that the market is bouncing back, we are starting to see more activity.

To learn more about Compass Florida, visit their website at: https://www.compass.com/