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Annual Real Estate Forecast Event Recap: Keynote Presentation with Calvin Gladney
Calvin Gladney, CEO and President of Smart Growth America, kicked off this year’s ULI Philadelphia Annual Real Estate Forecast 2021.
As part of this year’s ULI Philadelphia Annual Real Estate Forecast, attendees who purchased the full day package joined concurrent lunch sessions of small group discussions on market trends. Our expert speakers briefly presented on current trends and themes in their asset classes and then opened it up for a facilitated discussion with attendees. Speakers included:
Below are recaps of some of those conversations contributed by Stewart Scott and Eboni Senai Hawkins.
OFFICE with Brandywine Realty Trust
In the Office CRE Conversation, Steve Rush, Vice President of Brandywine Realty Trust, led a conversation on current office trends in Philadelphia’s budding Life Science sector. Rush spoke at length about how the sector has shaped his own work at Brandywine, specifically around Schuylkill Yards, a partnership between Brandywine and Drexel University which will transform the rail yards north of 30th street station into a high-tech, high-rise urban office park that will also act as a hub in the region’s Life Science ecosystem.
Elaborating on Schuylkill Yards, Rush spoke on how Brandywine broke into the life science space. The firm originally specialized on midrise suburban office park development in the Philadelphia and Richmond metro regions. The development of Cira Center, later accompanied by Center South, was the firms first foray into the Philadelphia market and Life Science office development. Fifteen years later, Brandywine is a key player in Philadelphia’s real estate scene. Schuylkill Yards’ development is in full swing, with the renovated Bulletin Building approaching completion and several other buildings currently in the pipeline.
Locally and nationally, the Life Science sector is red hot. In Philadelphia specifically, vacancy rates for Life Science office buildings (University City and Navy Yard) are 0% (and has been for the past five years) and asking rents are $50 per square foot with triple-net leases. This makes it a much more competitive market than Philadelphia’s central business district market, which has a 9.8% vacancy rate and asking rents that go for $24 per square foot with triple net leases. Rush credits the success of the Life Science sector as a function of demand in the sector’s ecosystem, which is heavily bolstered by the Philadelphia’s prominent ‘Eds and Meds sector’.
Life Science’s emergence is made possible by heavy-hitter research institutions like CHOP, University of Pennsylvania, Drexel University, and Temple University. Philadelphia’s Ed’s and Med’s cluster has facilitated partnerships between local institutions and pharmaceutical start-ups in commercializing their products and bringing them to market. So far, Philadelphia’s Life Science sector has brought in $42B in National Institutes of Health (NIH) funding and $17B in venture capital financing. Currently, with global drivers such as a focus on industry supply chains resulting from the COVID-19 pandemic, more on-shoring of bio-manufacturing to the US, and longer lifespans leading to more demand for therapies, and more public investment in the sector, the Life Science industry shows no signs of slowing down.
During the Q&A portion of the panel, an audience member asked Rush about the top three challenges of taking space in an existing building and converting it to lab space. Rush answered by stating ceiling space is crucial in lab space conversions, which are ideally 15 feet to the underside of the of the structure. Floor loading is another important consideration in lab space conversion; if a floor is unable to hold lab equipment that will sit on it, it will need to be reinforced with steel. Finally, HVAC and utilities must have enough capacity to sufficiently ventilate the space and meet the needs the lab workers, equipment, and lab specimen.
Another audience member asked where he thinks Philadelphia stands in comparison to the ‘big 3’ (Boston, San Diego, San Francisco), to which he affirmed that Philadelphia stands strong. While he did address some weaknesses to the Philadelphia business climate, most notably the city’s high wage tax, the region boasts many more strengths than weaknesses: affordability, a strong heritage of pharmaceutical companies that have been in the region for decades, and great institutions and talent to support the organic growth the sector has enjoyed.
Contributed by Stewart Scott, Master’s of City Planning candidate at the University of Pennsylvania and ULI Philadelphia intern.
MULTIFAMILY & HOSPITALITY with Korman Communities / AKA
The Hospitality and Multifamily discussion with Bradley J. Korman, Co-Chief Executive Officer of Korman Communities/AKA and AVE was moderated by Shari Reams Henofer, SVP and Market Manager of PNC Real Estate. This session focused on the ups and downs of the hospitality and multifamily asset classes in light of the COVID-19 pandemic and overall demographic trends.
The COVID-19 pandemic has accelerated some patterns in Hospitality and Multifamily and completely halted others. Korman, as a leader in both spaces, was uniquely positioned to speak across sectors and geographies, categorizing observations at the onset of the pandemic as “shut down and confusion” and “disruption.”
Hospitality
Korman described some of the considerations as protocols across the portfolio adapted to heightened needs for health and safety. Deliveries for packages and food were adjusted. Management considered whether team members had children at home and whether they felt safe at work. Housekeeping was instructed to place a time stamp and seal on doors once a room had been cleaned. Across the U.S. and the world there was a “no travel mentality” and hotels were shut down in New York City and the Northeast which spread to other regions where Korman operates. Even though most hotels trade rates for occupancy, in Spring 2020, it didn’t matter how low your rate was, your occupancy was 10-20%. As of Fall 2020, occupancy rates in Korman properties are back up to 60% but nowhere where they need to be in their business model but doing better compared to properties in New York which relied heavily on international visitors.
Korman highlighted an emerging trend in the hospitality space of longer stays and fewer trips, “no more LA for the day.” Larger suites are thriving as visitors desire fewer people around them and more room to stretch out. Overall, the industry is seeing less supply – there is less activity in the home-sharing market, hotels are closing, and there is less new construction. Korman noted that cities may need to adjust zoning restrictions for short-term stay operators to maintain a stable supply of options for travelers.
Multifamily
In the multifamily space, Korman described the sector as “strong” with a “flight to quality” where trust in a well-managed, well-located property is paramount not only for a resident but also for investors. Korman also addressed the story of the “cities and the suburbs.” In cities, there has been more concern surrounding the impact of COVID-19 plus civil unrest and safety protocols are heightened at properties within urban cores. While Korman properties are doing well overall, it has been difficult to collect revenue from service workers and April 1st was a scary day for many operators as leaders at the local and state levels encouraged residents not to pay their rent. Korman went on to detail the “cities pain as the suburbs gain”, describing how the pandemic accelerated the trend of people to the suburbs. More of a surprise has been empty nesters who may have considered selling their homes and moving to cities, deciding to either stay in place or choose a higher end rental in a suburb (usually in first floor rentals). Korman described increased activity in key properties in King of Prussia, New Malvern Square, and a brand-new property in Bluebell which found itself with a long line of people when it opened in May.
Korman characterized trends in the multifamily space as the importance of lease term flexibility, service/amenities, prime locations, and live/work communities. In just 8 months, Korman properties have seen the shift in residents desire to have a long-term lease for an apartment they would have to furnish to furnished apartments with terms that can be customized to their evolving work assignments. He cited that amenities should move beyond gyms and owner/operators need to think creatively about how to adapt to resident needs. Prime locations in the suburbs take time to develop (approvals and municipal support in Bluebell took approximately 6 years) but those prime locations will all have value as they incorporate the feel of a town center and accessible transit. Partly because of the pandemic, the ability to live and work at home is no longer a luxury but a necessity. If your office is not in your apartment, it will need to be in your amenity space. Residents will need to be able to get work done in the confines of their buildings.
Overall, Korman anticipated that the larger rebound for both hospitality and multifamily will happen in 2022, for New York 2024. He emphasized that homeownership is not dead but there are tailwinds for multifamily to continue to shine if they incorporate optionality and flexibility.
In the question and answer period after Korman’s brief, inquiries ranged from hotels and capital markets to growth in multifamily. In response to ideas on tax abatement changes, Korman asserted that Philadelphia was “under-apartmented” compared to other cities and that “abatement is hugely important to Philadelphia and the growth we need.” As a follow-up, Reams and Korman discussed Philadelphia’s CBD as exactly where they’d expect it to be – not as precarious as NYC however, not as well as DC (activity in light of a leadership transition) or California (both Northern and Southern). Looking at when activity may come back online, Korman placed his trust in the concentrated presence of life sciences and biotech in the area and the city’s well-established and high-performing medical institutions. For capital markets, hotel trading will be delayed as lenders continue to evaluate individual properties, in the multi-family space, all the agencies are “swamped” and a potential project may need to approach a bridge lender to move things along with acquisitions. Debt funding is becoming tighter and if a deal is set up to use moderate leverage, there are still plenty of deals out there.
Drawing upon his expertise in multifamily, Korman fielded a number of questions about the evolution of multifamily housing and housing preferences. Renters are looking for great amenities, the ability to work outside and socially distance. Zoning isn’t usually in place for multi-family in the suburbs but “it takes time, education.” Korman has marketed themselves to townships as more of a home for empty nesters and millennials versus long-held ideas of multifamily households that may burden school systems. The single family rental market has amassed a lot of capital and is complementary to multifamily – a completely different product. In places like Orlando where entire subdivisions are dedicated to multifamily, schools and townships are just looking for consistency in their school population.
On Philadelphia, Korman shared that “Philadelphia still has great markets that we love in suburbs and Center City.” He spoke to the growth of the city through its universities and life-sciences and expressed concern for its restaurants. Finally, he reflected, “we have to invest in our schools. As a community we’re failing our citizens. We have to invest in making our city feel safe. And working on our streets and sanitation.”
Contributed by Eboni Senai Hawkins, Master’s of City Planning candidate at the University of Pennsylvania.
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