Vacancy upticks in Philadelphia

Philadelphia has witnessed a surge in multifamily development, introducing nearly 11,400 new apartment rentals in the past year. Impressively, almost 80% of these additions fall within the upscale, four- and five-star-rated property category. However, this influx has led to a 10.7% vacancy rate in the fourth quarter of 2023 for this top-tier market, doubling the vacancy rate seen in three-star and lower-rated units.

While there's been a positive trend in the annual absorption performance of four- and five-star apartments, absorbing 5,600 units in the past year, aligning with pre-pandemic leasing levels, the resurgence in renter demand has only partially offset the supply-driven vacancy increase. Despite absorbing 4.3% more than the all-time low in the first quarter of 2022, the high-end apartment vacancy rates have still risen.

Interestingly, the elevated vacancy rates vary across the Philadelphia region. The city limits, representing nearly 70% of current multifamily development, experienced a higher 11.7% vacancy rate at the start of the fourth quarter. In comparison, luxury apartments in the suburbs, Southern New Jersey, and Northern Delaware have vacancy rates of 8.5%, 8.8%, and 6.7%, respectively.

Analyzing completed projects from 2022 shows a slow approach to stabilization, with 85% of the units in 47 four- and five-star-rated buildings leased by late 2023. However, among the 7,930 units in 62 existing high-end buildings completed in 2023 and actively in the lease-up phase, only 45% have been leased.

With an additional 16,000 high-end and luxury apartments set to be completed in the next 18-24 months, it's anticipated that, despite healthy renter demand, vacancy rates will continue to rise through at least mid-2024, potentially dampening rent growth.