West Philadelphia Multi-Housing Trends
The large institutional and private owners that dominate the landscape of Center City Philadelphia multi-housing have started to move even deeper west. The recent sale of The Verona Apartments to AMC Delancey Group on the 4700 block of Walnut Street at a 6.2% cap rate represents a trend in rising multi-housing pricing in the far reaches of Philadelphia’s city limits. Long have been the trends of deep pocketed apartment owners from New York and Northern Jersey searching for yield in our neck of the woods. However, those owners were buying assets at pricing levels far and away better than in their own markets. Now as the continual and ever enduring search for yield continues, Philadelphia is becoming even more widely known for strong rental pools filled to the brim with Ed’s and Med’s. This has attracted investment from all over the country looking for income and capital appreciation as Philadelphia rents chase down those of our northern neighbors. Gone are the days of the 9%-10% cap rate deals (of scale) in neighborhoods outside of the borders of University City that private owners salivated over. Post Brothers Apartments recently spent approximately $250 million dollars in acquisition and repositioning efforts in West Philadelphia. Campus Apartments has grown from a small University of Pennsylvania student housing owner to a full service student housing development and management firm all throughout the United States. Radnor Property Group, Korman Residential, Post Brothers Apartments, Brandywine Realty Trust, AIMCO, Southern Land Company, UDR Apartments, and University Communities all own and operate assets in West Philadelphia with large chunks of institutional equity in their coffers. Long story short, the smaller private owners seeking scale are getting squeezed out.
All is not lost though. As we travel even further west new boundaries are being established. Legacy apartment owners are being presented with opportunities to reposition their assets, or simply sell for low cap rates and thus, high prices (see The Verona). In many cases legacy product that has provided significant income production over the last 15-20 years now has the opportunity to live new life as a modern building with new market rate rents and stylish common areas. Small walk-up buildings that lag their bigger brothers in scale and amenities have the opportunity to produce significant value added returns as rents in West Philadelphia rise to meet the demand of transit oriented tenants looking for shelter from sky high center city apartment rents. All of this bodes well for owners both old and new. Those who can’t afford to pay for scale can still earn strong returns on smaller buildings. Owners, big and small, who do not wish to improve their buildings can now justify higher sales prices to buyers willing to develop market rate housing. Groups with patient capital seeking scale have readjusted their yield thresholds to incorporate more modest cash on cash returns up front as they look toward long term investment time horizons that will pay off handsomely.
In summary, West Philadelphia’s time is now. Proximity to the Market Frankford Line, buses, Drexel University, University of the Sciences, and The University of Pennsylvania make these neighborhoods very desirable to renters from all walks of life. And guess what? Rents are still reasonable. Those who put their money to work in the right assets will see both capital appreciation and consistent income as even more gentrification moves both west and north of Market Street.
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Written by PRG Associate, Alan Krawitz
Connect with Alan on LinkedIn: Alan Krawitz