Phila. luxury rental market is booming

The city's for-sale housing market is experiencing fits and starts on a seemingly unending road to recovery. The luxury rental market, on the other hand, remains hot.

Yet another illustration of that comes Wednesday with the official opening of Dranoff Properties' Southstar Lofts, an 85-unit, mid-rise rental project at Broad and South Streets that is heavier on one-bedrooms than the company's fully leased 777 South Broad a few blocks away.

Developer Carl Dranoff considers the buildings complementary, and tenants at Southstar will get to use the roof deck at 777 and will share other amenities.

Rents will range from $1,595 to $3,395 a month, he said. About 63 percent of those leasing are singles in their 20s, and 35 percent list their occupation as medicine. Most earn $50,000 to $150,000, and 48 percent are moving from within six blocks.

The $32 million project, which is 40 percent (38 tenants) leased, took just 13 months to complete from the time Dranoff reached agreement with the building's neighbors on height, setback, and other issues.

Although many projects conceived in the housing boom opened during the bust with often-troubling results, the relatively quick turnaround for Southstar was not to catch the luxury-rental wave.

"We wanted to bring it to market in spring, when the rental market is strongest, looking for spring and summer occupancy," said Dranoff, who in the accord with neighbors altered the design to create a seven-story stone building along Broad and a four-story brick structure along South.

He is most excited about "Lightplay," the sculptural element on the façade of Southstar that will cost $750,000: "It will be the ribbon on our jewel box."

Dranoff is one of the better-known developers of high-end multifamily housing in the city, but others have been working the luxury rental market with new offerings or buying buildings with the goal of turning them into spaces young professionals and empty-nesters want to live in:

In June, the $100 million, 34-story 2116 Chestnut opened, with 100 of its 321 units already leased.

In recent months, the Avenue of the Arts Building at 1338-48 Chestnut St. was bought for a reported $33 million, to be renovated for 220 apartments.

The 270-unit Edgewater Apartments complex at 2323 Race St. sold for a reported $113 million to the J.P. Morgan Investment Fund, a deal that included an approved site for 240 more units.

Aquinas Realty Partners has broken ground for AQ Rittenhouse, a 12-story, 110-unit mixed-use building at 20th and Chestnut Streets that will include apartments.

In University City, the Radnor Group is building a 25-story residential tower as part of a $110 million project at 13-19 S. 38th St.

And Treetop Development of Teaneck, N.J., has bought Charter Court at East Falls, a 502-unit high-rise apartment complex, for $47.25 million. It plans $7 million in upgrades.

Interest in the city from outside investors does not surprise Spencer Yablon, vice president and regional manager of the real estate investment services firm Marcus & Millichap's Philadelphia office.

"Capital has options, and it flows to different places for different reasons," Yablon said. "It flows to Philadelphia for yield."

By Philadelphia standards, prices locally are recovering to pre-housing-downturn levels, "but by comparison to other markets, real estate is still cheap," he said.

What you don't see here is the high return of New York, Boston, and Washington, Yablon said, but this market is beginning to show signs of what drives appreciation in other cities, including job growth in places such as University City and the Navy Yard.

For developers, there is access to "an abundance of debt and equity capital looking for multifamily opportunities," he said.

On the debt side, "it depends on who you are," Yablon said. "If you are a developer or investor with a track record, and development makes good sense, the lenders are abundant and aggressive."

Said Dranoff: "It's all about the money spigot being turned on for multifamily rentals based on favorable trend lines for millennials."

But, as Yablon noted, "if this is your first rodeo, you have challenges, because no one wants to make a mistake."

Economist Kevin Gillen, who tracks real estate in the region and whose recent report on first-quarter 2014 city sales confirmed the for-sale market's "fits and starts" quality, said the rental market in and around Center City remained strong, "and that is something we should generally be glad for."

But, he said, "I can't help but have the same feeling about the rental market today that I had about the housing market back in 2005."

The key reason for rentals' resurgence here is "the bursting of the housing bubble," Gillen said, causing a significant shift of the adult population away from owner-occupancy.

Consequently, though average house prices are down 19 percent from their peak of several years ago, rents rose 10 percent during the same period.

Housing faces tight credit, a sluggish economy, and relatively high unemployment among low-income and young households.

"But all of the new rental supply scheduled to come back on to the market this year should give us another shove in that direction," he said.

"I don't know exactly when the market will rebalance itself between renters and owners," Gillen said, "but I do know that if something can't go on indefinitely, it won't."

In addition to the 85 units at Southstar Lofts, other units joining the Phila. apartment market include:

321

Opened in June at 2116 Chestnut St.

240

Planned to be added to the 270 units already at the Edgewater Apartments at 2323 Race St.

220

Planned in

a renovation

at 1338-48 Chestnut St.

110

Planned as part of a mixed-use project at 20th and Chestnut Streets.

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