Philadelphia is on track to have the fewest number of residential units approved for construction by the end of 2022 in almost a decade.
The slump comes after decades of new construction projects in 2021 alone.
So what exactly is going on?
The answer is a local policy decision, specifically a reduction in the city’s 10-year property tax cut at the end of 2021. Developers are rushing to have it available by the end of last year — and worsening economic conditions in the country.
Federal Reserve Rate Hike attacked a homebuilder Construction costs continue to rise This is due to supply chain and labor issues. This has led some in the development industry to argue that the city weakened the tax cuts at precisely the wrong time, despite being delayed in phasing out incentives since their first passage in 2019. until the end of last year as part of a legislative compromise.
But housing experts say It’s hard to separate one factor from the other, and while it’s arguably slower to tolerate than last year’s boom, it’s still close to pre-pandemic norms.
“This is a harder market to build than it was two years ago,” said Emily Dowdal, policy director at the Reinvestment Fund, a research and fundraising organization. “The decline hasn’t gone away, but it’s not as rich as it used to be. This could mean that certain projects are not viable, but that doesn’t mean all new development in the city has come to a halt. .”
Last year saw a virtually unprecedented increase in building permits, with 25,257 new homes approved for construction. according to the data Compiled by the U.S. Department of Housing and Urban Development’s Office of Policy, Development and Research.
It was the most allowed record ever recorded in Philadelphia since HUD began collecting data, five times the number of units in 2020 and the next highest year on record. In December 2021 alone, 10,939 new housing permits were issued. That’s more permits in one month than in the entire 1990s.
According to Rick Sauer, executive director of the Philadelphia Community Development Companies Association, the surge was caused by a city council law that reduced the value of a 10-year property tax break for new construction in the city of Philadelphia.
The developers had good reason to take advantage of it while the cuts continued. The rental units in those buildings had to avoid property taxes themselves. This incentive further increased profits for developers building homes for sale by allowing customers with property tax incentives to buy larger, more expensive homes.
However, a law undermining mitigation was voted into law in 2019, but the effective date has been postponed to January 2022. This has set off a race for developers to make it happen by the end of December 2021, securing a higher value. Even for projects that are unlikely to ever be built, just in case.
“People were rushing to meet that deadline,” says Sauer.
As a likely result of that unprecedented spike, the permit quickly cratered, dropping from a high of about 11,000 units in December 2021 to just 133 units the following month.
But even setting aside last year as an outlier, there are other signs of slowing development.
Philadelphia’s monthly permit average is off by about a third when compared to 2019 or 2020. It remains sluggish throughout 2022, with total unit count projected to be his lowest since 2013.
this is, air conditioning salesboth nationally and locally.
Data from Redfin, a real estate listing service for the Philadelphia housing market, showed that the average number of days homes were on the market in October increased compared to last year, but total home sales fell by about a quarter. did. And while rents are rising, developers know fewer people can afford it. That means fewer apartment construction projects are feasible.
This is all being done in the context of the Federal Reserve Aggressively raise interest rates this yearwith soaring borrowing costs That’s almost triple what it was this time last year.in short few households can afford to buy a house. It’s also more expensive for developers to take out loans for their projects. This means developers will charge more money to sell or rent, further shrinking the potential customer pool.
construction costs stay uplifted$30,000 to $40,000 per house increase in material and labor costs over last year, According to the Building Contractors Association (Bia). The construction industry, unions and unorganized workers alike facing a labor shortageFederal funding from the Infrastructure Act and Inflation control law Demand for skilled workers will increase.
But Philadelphia’s development industry The legislative environment has not solved the problem, highlighting weakening tax breaks, especially for new construction.
Mo Rushdy, vice president of BIA, which represents home developers in Philadelphia, said: “We’re hearing more and more from lenders that they’re finding that multifamily projects in Philadelphia aren’t planning out the way they used to.”
Rushdy said weakening mitigation measures and rising costs will make it more difficult to build outside of areas like Center City, University City and Fishtown where high rents can be guaranteed. The developer says the kind of projects his company Riverwards Group has built in recent years in low-cost neighborhoods like Kensington are no longer viable.
“Coupled with rising interest rates, [weakening of the abatement]we’re seeing little to no new project starts in our neighborhoods in Philadelphia that haven’t yet been funded,” Rushdie said.
Former Councilor Helen Jim, who announced his candidacy for mayor last week, I disagree with BIA’s analysis. She says the mitigation has overheated development in areas where it would have been seen anyway, with little result in struggling areas of the city.
Jim said a decline was inevitable after a flood of permits in 2021, with this year’s relatively depressed numbers not far from pre-2020 development levels.
“Last year’s numbers were greatly exaggerated,” said Jim, who has long criticized the negative impact of the decade’s cuts. About school district income“This year’s numbers are not far from pre-pandemic conditions. Residential development remains a strong area of growth.”
Indeed, construction is well underway in stable markets such as the metropolitan center, south of Lehigh Avenue in the River Ward area, and the Northeast, where much of the city’s immigrants are moving.
Dowdall says this is similar to what happened in the aftermath of the Great Recession. At the time, construction was halting in frontier areas like Brewerytown, but in areas with strong markets such as Northern He Liberties, it seemed as if the foreclosure crisis never even happened.
She said we’ll see similar winners and losers this time around.
As for the cuts, she agreed it would never encourage development across the city. Instead, there were moving hot spots. Usually just one neighbor. From where the building was already booming.
A 10-year full property tax exemption is still in effect for building restoration, encouraging the preservation of historic buildings instead of demolition. In the past, Deliberated Council Members Target reductions to specific geographic areas or cap individual residential properties.
“Changes to the cuts had to deal with school district funding and the fact that cuts were being over-encouraged in areas where they weren’t needed,” Jim said. We’ll keep doing it and see where it goes.”