Why are rents going up in metro Philadelphia but dropping in the Washington, D.C. area -- when both regions are adding jobs, and presumably creating new households of people who need places to live, at the same modest rate of about 3,000 per month?
That's because big national landlords have overdosed on Washington, building and buying apartments as if government and military-contractor growth was going to last forever -- while ignoring real rental housing demand in places like Philly, which has a reputation for being a tough area to get local-government permission to build.
Indeed, Washington builders have thrown up so many new apartment buildings that units are going vacant, Delta Associates of Alexandria, Va. tells Bloomberg LP here -- while Philadelphia apartment construction is so slow that landlords are more able to name their price, according to a new report from the Conshohocken office of national broker Marcus & Millichap.
Developers around Philadelphia "completed approximately 900 apartments over the past year," including 88 during the first three months of 2013 -- most of which were for elderly or Section 8 tenants, according to Marcus & Millichap. Another 2,000 units are supposed to be added this year, including 240 apartments at Madison at New Britain, Bucks County, and 404 at Bart Blatstein's Tower Place on Spring Garden Street in Philadelphia.
Builders in Washington, by contrast, will deliver 5,000 units in the just last three months of 2013 alone, and have been adding at least 10,000 units a year since 2010.
So prices are moving in opposite directions in the two markets: The "apartment glut" in the Washington area will drive rents down "as much as 2 percent" this year, according to Delta, even as Philadelphia rents "will rise 2.1 percent this year to $1,122 per month" on average, according to Marcus & Millichap. Washington construction is expected to slow after this year; meanwhile big landlords like the Avalon Bay and Home Properties real estate investment trusts (REITs) have been selling big Washington apartment complexes.
Why were builders so blind as to keep adding property in Washington even as the government began cutting back military contractors and laying off its own staff? Blame the proliferation of publicly-traded REITs, whose herd instincts seemed to lead them to keep accumulating property even as the government started slowing down. By contrast, in Philadelphia, most apartments are still privately owned, and many investors would rather run down or fix up existing properties instead of risking new units that could take years to permit and open.
Indeed, office landlords like Brandywine Realty Trust and shopping-mall owners like Pennsylvania REIT are now building apartments in the Philadelphia area, trying to meet market demand that private landlords haven't been soaking up.