A divergence has emerged in Philadelphia’s multifamily development scene: While low rise apartment projects continue to break ground in greater numbers, the volume of high rise construction projects has been declining since mid-2016.
The reduction in high rise construction is partly due to submarket trends. Submarkets such as Center City and University City were the initial hotspots for Philadelphia’s apartment development during 2013 through 2015. As more of these projects have delivered in recent years, competition for tenants has intensified in and around Philadelphia’s urban core.
In response, developers are increasingly moving out to suburban submarkets where there are fewer recently delivered apartment communities to compete with. And in these new locations, zoning typically only allows for low rise construction.
However, specialized labor costs are also playing a significant role in the recent decline in high rise construction.
Per the Bureau of Labor Statistics, average annual wages for workers in the overall residential building construction sector -- which is dominated by less specialized construction workers focused on single family and low rise projects -- were about $50,000 in Philadelphia County during 2017. This figure was below the U.S. average and well below construction industry wages of over $80,000 reported in places such as New York, San Francisco and Northern Virginia. In other words, labor needed for low rise construction isn’t prohibitively expensive in Philadelphia and as a result, low rise construction projects continue to break ground in larger numbers.
The situation for specialized labor needed in high rise construction is very different. Due to building codes and engineering concerns, most new buildings over five stories require steel and/or precast concrete framing. According to BLS data, Philadelphia County has the highest annual wages -- at about $109,000 in 2017 -- for steel and precast concrete contractors of any major metropolitan area in the U.S. outside of New York City.
This puts Philadelphia’s labor costs for steel and precast concrete contractors more than 30 percent higher than those in San Francisco, Boston, or Los Angeles. Specialized contractors earn high wages for the highly skilled, demanding and often dangerous work. The dilemma is that Philadelphia’s per square foot rents for new, high rise apartment construction -- at about $3 per square foot on average -- are more than 40 percent lower than rents for comparable developments in many other major coastal U.S. markets.
Higher specialized labor costs combined with lower potential rents are making high rise construction more difficult to financially engineer in Philadelphia. Over the long-term, these dynamics will likely mean more challenges for downtown developers but could benefit owners of existing high rises by limiting the number of future projects that their buildings will have to compete with.
CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets. |