Philadelphia Area Commercial/Investment Real Estate Report – 4th Quarter, 2011

Guest Author:     Craig Fernsler, CCIM
                              2012 President PA/NJ/DE CCIM Chapter

Craig FernslerAs I attended “Real Share” at the Union League in Philadelphia on March 7, the sentiment from the expert panelists were generally upbeat and positive regarding the Philadelphia commercial market.  One main factor regarding Philadelphia is that it is “sandwiched” between New York City and Washington, DC.  This geographical fact creates the perception that the Philadelphia market and submarkets are “cheap” because rents and sale prices are consistently lower and is perceived by outsiders as a “value play.”  There is also a constraint on supply in the Philadelphia region with the difficulty for new development and buildings getting approved by municipalities and to come onto market economically. 

2011 transaction volume was up 80% from 2010 nationally.  As we are 2/3 through Q1, 2012, there seems to be a tremendous amount of activity overall in the real estate market.  From residential properties to office properties to retail properties, more showings, more interest, and more proposals are working through the cycle.  It remains to be seen whether this trend is the start of a true recovery, or if it is a “ blip” on the radar screen.  

The multi-family market is especially desirable for purchasers.  More and more people are choosing to rent than to own a home because of economic fear.  Also, many of these renters have increased credit issues that must be dealt with by property managers.  There are many buyers for the apartment property type and there is also significant capital to lend for apartment purchase.  The key is that the numbers have to work.

A little look back - The improvement of the Philadelphia apartment market slowed in the third quarter of 2011 as net absorption was only moderately positive.  The vacancy rate was down 10 basis points from the prior quarter, and 110 basis points from a year earlier.  The average asking rent rose 0.6%, with the average effective rent increasing 0.7%.  The year-over-year increases are 2.0% and 2.4%, respectively. (1/8/12)   The following information from ReisReports, shows their research on apartment rent change:


Burlington County

-0.7%

West Philadelphia

-0.5%

Center City

-0.4%

W Delaware County

-0.2%

Moorestown/Maple

-0.2%

Somerton/Bustleton

-0.2%

Roxborough/Chestnut Hill

-0.1%

E Delaware County

0.0%

West Chester

0.0%

Torresdle/Bensalem

0.1%

Bala-Cynwyd

0.3%

Upper Montgomery

0.3%

Cherry Hill/Evesham

0.3%

Germantown

0.4%

Gloucester County

0.5%

Moreland/Abington

0.6%

Upper Bucks County

0.7%

Norristown /Plymouth

0.8%

Upper/Lower Merion

0.8%

Lansdale/Gwynedd

0.8%

Camden West

1.0%

N Delaware County

1.1%

Lower Bucks County

1.1%

Central Chester

1.2%

Camden

1.3%

Foxchase/Lawndale

1.3%

North/Frankford

1.4%

Olney/Oak Lane

2.1%

As reported by LoopNet, sales figures for the 4 major product types are noted below:


Multifamily:

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Sale prices for multi-family properties in the metro area appear to have a seasonal cycle to them. Over the past year sale prices have fallen 12.8% to $72,895 per unit.  Though the median sale price per unit for multi-family properties in the metro area has been falling for five straight months, the decline has slowed in the last month. The median sale price for this month was the lowest it has been in three years.  The previous low was $73,597, set last month.

Office:

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Though the median sale price per square foot for office properties in the metro area has been falling for four straight months, the decline has slowed in the last month. Sale prices per square foot for office properties are $78.74, representing a 0.2% decrease from the end of the prior quarter.  Likewise, sale prices have dipped for the year, showing a 14.8% decrease.  The highest median sale price over the past three years, which was $120.76, was set in May 2009. In comparison, the current median sale price is down by 34.8%. However, the current price is 14.9% higher than the three-year-low of $68.55 which was set in June 2011.

Retail:

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Compared to last quarter, the average sale price per square foot for retail properties rose by 0.6% to $56.34.  For the year, however, sale prices are down 31%.  The median sale price per square foot for retail properties in the metro area is down for the year despite a two month rising streak.  Over the past three years, the median sale price reached its highest of $106.92 in September 2009.  In comparison, the median sale price is now 47.3% lower.  However, the current price is 0.6% above the three-year-low of $56.01 set in December 2011.

Industrial:

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Sale prices per square foot for industrial properties increased to $38.41, a growth of 1.2% compared with the last quarter.  For the year, sale prices showed a decline of 11.6%.  Over the past year, the median sale price per square foot for industrial properties in the metro area has been falling but it has risen over the past two months. The highest median price of the past three years was set in May 2009 at $63.18.  In comparison, the current median sale price is down by 39.2%.  However, the current price is 1.6% higher than the three-year-low set last month.


Forecast:
So where do go from here?  Interest rates are the lowest in a lifetime.  Bankrate.com has listed mortgage rates as of March 9, 2012:

Product

Rate

+/-

Last week

30 yr fixed mtg

 

3.88%

http://www.bankrate.com/images_MRA/news_advice_averages/flat-gold-13x10.gif

3.88%

15 yr fixed mtg

 

3.16%

http://www.bankrate.com/images_MRA/news_advice_averages/arrow-up-gold-13x10.gif

3.15%

5/1 ARM

 

2.75%

http://www.bankrate.com/images_MRA/news_advice_averages/arrow-dwn-gold-13x10.gif

2.83%

Unemployment is the main factor.  In order for us to get back on a normal pace, job growth has to increase in velocity.  The order of recovery is increase in GDP, then jobs to increase, then fundamentals.  2012 looks better, especially for the private sector.  2012 volume is expected to rise 50% over 2011.  Most real estate fundamentals are improving, largely due to low levels of new supply and demographic forces.  Watch out for the sustained increase in gas prices!  A spike in gasoline prices historically tends to slow the amount of economic growth. 

Craig Fernsler, CCIM is Vice President of Investments at KW Commercial and is also a partner in the National Strategic Partners Group of KW Commercial that specializes in 1031 replacement properties of all types, including NNN properties.

Fernsler, a member of the International Council of Shopping Centers (ICSC) and TriState REALTORS® Commercial Alliance, is the 2012 President of the Pennsylvania, New Jersey and Delaware CCIM Chapter.  A CCIM is a recognized expert in the commercial and investment real estate industry and is proficient not only in theory, but also in practice.  CCIM is part of a global commercial real estate network with members across North America and in more than 30 countries.  This professional organization closes thousands of transactions annually, representing a projected $400 billion in value. Of the more than 150,000 commercial real estate professionals in the United States, only an estimated 6 percent hold the prestigious CCIM designation.