2 min read February 2022 — Philadelphia and the areas surrounding the city offer a number of opportunities for investors and developers in commercial real estate. Regional Manager Sean Beuche of Marcus & Millichap spoke with Invest: about the opportunities and challenges for the city. He also shared his optimism for Philadelphia and the surrounding regions.
What makes Philadelphia an attractive real estate market?
Following the last Great Recession, Philadelphia experienced far less impact in comparison to other Northeast/Mid-Atlantic markets relative to a reduction in asset values. We saw a similar trend emerge with the Pandemic. Philadelphia has a diversified market relative to tenant types, industry groups and growth opportunities in the secondary and tertiary markets. While we’re the sixth-largest city in the country, there were many opportunities that benefited the suburbs and secondary markets outside of Greater Philadelphia.
Our value and upside for rental growth is large in the city. We had a muted low and are seeing double-digit rental growth rates. We’re optimistic that the rents, while rising rapidly, have a high amount of upside. The development costs are challenging in Philadelphia but the fundamentals and opportunities that are present in the city support the development of a number of product types.
How does commercial real estate activity compare between pre- and post-pandemic?
2021 was a record year in regional investment sales for the company. There was greater transactional velocity and volume than we had seen prior to the pandemic. The confluence of pent-up demand from 2020 and historically low interest rates, the high volume of equity in the marketplace, government support, subsidies toward the consumer, the lack of travel and many other traditional expenses led to historic growth in savings that propelled a number of industries we saw take off in 2021. Our local office experienced outsized gains that nearly doubled from 2019 to 2021. Commercial real estate has been propped up by historically low interest rates and this availability of aggressive debt led to our company having its best year in its greater-than 50-year history.
What is the origin of the capital entering the market?
We annually track the flow of capital entering and exiting each of the regions. The inbound capital to the Northeast in 2021 was $1.2 billion in commercial real estate investments from Pennsylvania to Maine; $4.8 billion of capital exited the Northeast, flowing toward other regions. We experienced $100 million of annual net in-bound capital flow in Pennsylvania over that period of time. There is a tremendous amount of capital flow along I-95. Our company sees 46% of transactions occurring interstate, with either buyers being outside of the state or sellers shifting their capital into another state. Our research supports a large exodus from the urban markets of the Northeast to more tax-friendly states with warmer climates.
Which sector experienced the most demand?
Our office experienced the greatest growth in apartments and retail sales in 2021 relative to volume. We saw our local transaction velocity increase 150% while volume grew by nearly 250% between 2020 and 2021. We completed more transactions in apartments, with almost $500M in apartment transaction volume from our Philadelphia office alone. A close second was multitenant retail, which surprised many people. Although the retail sector experienced a decrease, they were doing relatively well across a variety of segments. We saw a substantial rebound in the larger, multitenant retail marketplace at a local level.
What is your perspective on the debt market?
We are closely watching the debt market as the Federal Reserve is signaling how they will be raising interest rates. We believe that most investors and developers are incorporating aspects of these increased rates into their underwriting to gauge the future pace of their investments. We’re going to see a nominal headwind within that area. There will be a level of discomfort for investors going forward as the threshold changes. It may cause them to place their capital and equity outside of the city center.
What trends are you following?
It is key to be aware of inflation and where it stands. The volatility of the stock market since March 2020 has been muted and is experiencing a steady climb. As inflation increases, the stocks that have experienced long-term growth might be challenged more in comparison to those that have hedged against inflation. I believe many investors are questioning where to maintain or reallocate their investments to best mitigate the challenges that come with inflation.
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