University City is one of the hottest markets in all of Philadelphia. The University of Pennsylvania, Drexel University and University of the Sciences are the engines behind the massive redevelopment of the University City section of West Philadelphia. Each of these highly ranked universities have ambitious master plans for their respective institutions. Drexel University alone plans to spend $3.5 billion on their Schuylkill Yards project, which aims to become a world-class innovations hub. And just recently, The University of the Sciences announced plans to construct a new $50 million student housing facility that will serve 400 students.
This project is just the first step in the University’s plan to replace its student housing in the coming years. It seems as though every block in University City has a construction project in process. Development ranges from small to large properties and from the core of University City to its borders. A number of new construction, Class-A residential and mixed-use high rises are going up, including 3737 Chestnut, Vue31 at 3201 Race St. and the FMC Tower, across the street from 30th Street Station. Smaller new construction projects are popping up too, from Lancaster Ave. in the northern part of the neighborhood to Woodland Ave. in the south.
How are developers able to fill all of these new projects?
The truth of the matter is: University City has always had one of the strongest rental markets in Philadelphia, with 1-2 percent vacancy and rental growths of over 3% year after year. An increasing number of students are staying in Philadelphia after they graduate, bolstering the local rental pool, instead of moving to other markets like New York, San Francisco and Washington, DC. According to a survey by non-profit Campus Philly, Philadelphia’s retention of recent graduates has more than doubled since 2004, with a rate of 64% reported in 2014. The local job market continues to grow and recruit from the local applicant pool. Penn Medicine, one of the city’s largest employers, is expanding and adding new jobs, along with other major area employers such as Comcast, Jefferson Health and Independence Blue Cross. All of these factors are driving national investors to look into the University City market. This is driving up per unit pricing and driving down cap rates. Apartments are currently trading at record prices per unit. RRA recently represented a local developer in the sale of a 39 unit building with 112 beds to a group out of Denver for $11,750,000, which was over $300,000 per unit and around a 6% cap rate. Value-add deals are trading at great prices as well.
RRA sold two properties (a 61 unit building and a 77 unit building in the heart of University City) where the buyer plans complete renovations. The cap rate on existing numbers was around 4% when the properties sold to a group out of New York earlier this year. Overall, the current University City market has a healthy number of sellers as well as potential investors eager to get into the market.
Ken Wellar is a managing partner at Rittenhouse Realty Advisors.