It’s tough to turn a corner in Philadelphia these days without running into an image of Gritty, the wild-eyed mascot of the Philadelphia Flyers who has been something of a sensation since being introduced two months ago.
Speaking at the Union League building for ULI Philadelphia’s annual Real Estate Forecast event, Lauren Gilchrist, director of research for JLL, said she could even see some of the spirit of Gritty in her crystal ball. The local real estate market in 2019 could be a lot like the mascot, Gilchrist said: chaotic, unpredictable, fun, even slightly terrifying.
An attitude of confidence—in recognition of generally strong economic trends tempered with uncertainty about how long the expansion will last, and where it will falter first—pervaded the meeting. In her presentation on the local real estate forecast, Gilchrist noted that the population of highly educated residents in Philadelphia has grown faster than in any other U.S. city, the downtown population has expanded by a third since 2000, and the market for newly constructed multifamily housing looks to be on track to stabilize at a reasonable vacancy rate in the next few years. Generally, retail continues to trend in the direction of fitness and food and other experiential offerings, which has meant smaller retail footprints with smaller inventory, she said. Office vacancy on South Broad Street could surge to 30 percent, she warned, and the fast-growing tax assessment of commercial property in the city is a cause for concern.
“Feel the chaos,” she told members. “Embrace it.”
Zooming in on retail, Joe Coradino, chairman and CEO of PREIT, noted that despite the negativity of recent years, “Malls are clearly alive and well.” Malls are evolving to include more entertainment and fitness options and less apparel, which was their bread and butter in years past. They’re also densifying. Coradino said his company plans to add apartments and hotel rooms at many of their properties in the coming years, and some of them are even considering offering coworking space. While e-commerce has changed the landscape, it hasn’t killed the mall: 73 percent of shoppers who go to a store to pick up an item they bought online also make an additional purchase, he said.
E-commerce is shaking up the industrial sector as well, said Bill Hankowsky, chairman, president, and CEO of Liberty Property Trust. Online shoppers increasingly expect deliveries to arrive within a day or two, he said, which has created record demands for warehouse space in Philadelphia and other population centers. Liberty acquired $500 million in industrial real estate in 2018 alone, Hankowsky said, and has 30 projects under construction. And he believes that e-commerce is still in the “early innings” of its growth, even as it changes the way warehouse properties are built, demanding larger footprints for employee parking and taller buildings for more efficient storage of goods.
Jay Shah, CEO of Hersha Hospitality Trust, reminded the room that the real estate industry is vulnerable to nature as well as economic trends. Hersha is currently renovating hotel properties in Miami that were damaged during the recent hurricane season, while rebranding them for more of a “European Riviera” experience, Shah said. Meanwhile, corporate profits are surging, he said, and the “shadow supply” of short-term rentals offered through sites like Airbnb is “flattening out” because of regulation and other factors. He believes the hospitality sector has been able to absorb the impacts of competition from those services, and millennials’ and empty nesters’ focus on spending money on experiences rather than objects bodes well for the hotel industry. Philadelphia, for example, recently broke a record for hotel-room occupancy, Shah said.
Toll Brothers has shifted its focus west, said chairman and CEO Doug Yearley. Half of its business is now west of Denver, with 25 percent in California. The developer, which focuses on “move-up” properties for homebuyers looking to upgrade, brought 8,000 homes to market in 2018 at an average price of $900,000, Yearley said. Despite the more rapid growth in urban areas, he said, “The suburbs are still doing well.” And Toll Brothers City Living division is completing its 35th high-rise building in New York, while still working to get approvals for a high-rise on Philadelphia’s historic Jewelers’ Row that Yearley acknowledged has been a challenge. The housing market has experienced a slow recovery since the 2008 financial crisis, and that recovery has “a lot of life left to it,” he said, even though it is currently experiencing what he called “a bit of a pause.” The sector is facing labor challenges too, with the construction workforce aging out faster than it is being replaced, Yearley said.
All the real estate sectors are converging, said Jerry Sweeney, president, CEO, and trustee of Brandywine Realty Trust. The office sector is increasingly affected by demand for flexible and coworking space, which reflects the changing culture of work. (Brandywine has identified around 7,500 individual coworking companies in the United States, Sweeney said.) In the office sector, rents are growing at a rate of between 2 and 5 percent, though “effective rents” are growing more slowly, and increasing regulation could be a challenge for the sector in the future, he said.
Finally, Mitch Roschelle, partner and business development leader for the recently released Emerging Trends in Real Estate® 2019 for the United States and Canada, said that the most common question he gets with respect to the economic expansion is, “What inning are we in?” He noted that the current expansion is closing in on the longest in recent history, which might suggest it’s in the late innings. But, he said, to stretch the metaphor, the longest baseball game on record lasted 25 innings, so there’s no reason to call the expansion over yet. In a survey of industry professionals, more people are reporting that they feel “good” about the economy, with fewer reporting that they feel “excellent,” Roschelle said. And compared with last year, fewer people also reported that they feel “bitter.”
ULI members can view Emerging Trends in Real Estate® 2019 at Knowledge.uli.org.