Pia Varma and Steven Nebel were so confident that Philadelphia officials would approve their high-minded plan for a 51-unit, environmentally correct, architect-designed condo project in a tattered pocket of North Philadelphia that they sent out printed invitations urging friends to witness the granting of their variances by the Zoning Board of Adjustment.

But the happy event never came to pass. Their Jan. 8 hearing was the final day of operations for Mayor Street's zoning board, and members were in no mood for young visionaries. Perhaps if the architect-entrepreneurs hadn't just set up shop in Philadelphia, they wouldn't have been blindsided by what happened next.

In quick order, Varma and Nebel were told they had 10 minutes to describe their development, called High Street. Officials from the Commerce and Planning Departments took the stage to denounce their construction project. The zoning board finished things off by announcing it wouldn't issue a ruling. The pair left the room more shaken than the day they heard about the triple homicide a block from their two kitty-corner sites, at the intersection of Germantown and Cecil B. Moore Avenues.

Given the beleaguered state of the neighborhood, you'd expect the city to welcome the pair's proposal for new housing with rousing cheers. The neighborhood group has sung its praises. But instead, the city told the young developers it was committed to preserving their junk-strewn, half-acre lots in the event an industrial user came along.

"You get the feeling," Nebel later grumbled to me, "that cities are the worst redliners."

The surprise here isn't that Philadelphia believes it should set aside land for industry. Even though we're deep into the post-manufacturing age, every city needs places where fabricators, warehouses, truck depots, junkyards and other messy enterprises can feel at ease.

But this enclave claimed by the Kensington South Neighborhood Advisory Council is a place that abounds with vacant tracts. You can hardly walk a couple of blocks without bumping into one of the great redbrick relics of Philadelphia's industrial heyday, like the Rieger & Gretz brewery on Germantown Avenue. With so much available land, why keep those tiny parcels in the deep freeze?

One possible reason is that over the last decade, the city has tried to recast Kensington South as an exclusively industrial park. The federal government poured millions into the North American Street empowerment zone to lure new industry, with only modest results.

Meanwhile, officials failed to detect other trends bubbling below the surface. While old industries vanished, the residents remained, even as their dense blocks of rowhouses became islands in an archipelago of postindustrial blight.

The good news is that the surrounding residential areas - in Fishtown and Northern Liberties and around Temple University - are picking up fast. The key intersection of Germantown and Cecil B. Moore is benefiting as old manufacturers bequeath their specialties to name new lofts like the Sewing Factory, the Lamp Factory and the Sponge Factory.

Kensington South is still one of those gritty Philadelphia places you have to learn how to read. It may look as if the neighborhood has fallen as far as a neighborhood can. But signs of vibrancy soon come into focus: a new supermarket; a brightly hued mosque; pristine clusters of government-sponsored twin homes. The growth is residential, not industrial.

It's clear the Nutter administration needs to review the city's industrial policy. Should Germantown Avenue, located four long blocks from the American Street corridor, really be off-limits to new housing? The same question should be asked about the Delaware riverfront, recently targeted for residential growth in the PennPraxis study, as well as other strategic locations.

Last week, Nutter reconstituted the planning and zoning boards. The appointees have professional qualifications from a mix of fields, including - for a change - a few from planning and architecture. Together with the Zoning Code Commission, which is revamping the city's patchwork zoning, they'll need to make informed choices about unconventional housing proposals, like the one from Varma and Nebel. The developers are supposed to get another chance to argue their case before the ZBA. Their southern triangle already has residential zoning, and needs only permits.

Their company, Home(scale), is one of several new firms founded here by young, aggressive architect-entrepreneurs. They offer fresh ideas about design and urban living that deserve the city's embrace. Varma and Nebel characterize their High Street project as Ikea for architecture - super-stylish but affordable.

It also has the virtues of including space for artisans and high green standards. Local entrepreneurs like David Gleeson, whose Crane Building on American Street is a beehive of artists, artisans and design firms, believe Kensington South's best hope for new jobs lies with small fabricators. Fringe neighborhoods have always been revived by the creative class.

As Philadelphia examines its industrial policy, it's sure to encounter competing interests. The Commerce Department's objections to High Street largely had to do with the proximity of Honor Foods, a distribution business that needs to move tractor-trailers in and out all day. It's reasonable to worry that High Street's affluent residents might complain.

But that fear isn't enough reason to leave the sites derelict. The city could easily require High Street to tell prospective buyers up front about nearby industry in its sales information.

Longtime resident Lisa Maiello, who serves on the board of the Kensington South group, yearns for more projects like High Street. "The neighbors here have to deal with a lot of blight and crime, for which the solution is more neighbors," she reasoned.

Besides, she added, Kensington South was never an industrial monoculture. So why should it be forced to become one now?

Contact architecture critic Inga Saffron at 215-854-2213 or isaffron@phillynews.com.