Philadelphia has the cultural offerings of a big metropolitan area, but it feels like a small town at its core. The city is home to a number of historic landmarks as well as iconic pop culture sites. It was once an industrial hub, and it remains the center of Pennsylvania’s business and commerce that has since evolved into a knowledge economy.
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Overview of the Philadelphia Economy
Philadelphia has developed a broad economic base even as it shifted gears to keep pace with socioeconomic changes. The city recorded a gross domestic product of approximately $445 billion with the following sectors accounting for most of the activity.1
• higher education
• oil refining
• food processing
• health care and biotechnology
• manufacturing
• telecommunications
• financial services
• tourism
The city hosts the corporate headquarters or regional offices of several Fortune 500 companies, which includes: telecommunications giant Comcast Communications; insurance companies Cigna, Colonial Penn and Lincoln Financial Group; pharmaceutical firms GlaxoSmithKline and Wyeth; chemical manufacturer Rohm and Haas; aeronautical firms Boeing and Lockheed Martin and auto parts retail chain Pep Boys.
Philadelphia is also home to 80 colleges, universities, trade, and specialty schools with its student population ranking third largest among East Coast cities. Led by the University of Pennsylvania, the list of academic institutions includes Drexel, Temple and LaSalle universities. The city has a number of research institutions, medical colleges and law schools.
The Real Estate Sector in Philadelphia
Nationwide, real estate continued to perform well above expectations although momentum appeared to be slowing down especially in some of the most overheated markets. However, Philadelphia’s housing sector is performing better on several metrics. Median home prices continue to rise, increasing by as much as 12 percent year-over-year. Inventory of available units dropped by about 22 percent based on June 2018 to 2017 numbers. Analysts estimate that the Philadelphia market had a 2.8 months supply of houses for sale, which was a clear indicator of additional pressure on home prices going forward. A balanced housing market would have a six-month supply of available houses in general. The DOM or days-on-the-market dropped below 40 days, which has not happened since 2005. In Philadelphia, DOM was 38 days in the third quarter of 2018.2
Even as prices continue to rise, Philadelphia real estate will remain at affordable levels compared to other metro areas. A family or individual buyer needs an annual income of $53,000 to purchase a home in Philadelphia, which is about par with the national average but much lower than the required income levels for Chicago or Baltimore. The price growth in Philadelphia has been remarkable even compared to other hot markets such as Miami, Houston, Boston and most of the West Coast, reaching 31 percent growth in the last two years. However, unlike these other metro areas, Philadelphia has not topped out, suggesting that there is room to grow.3
Reasons to Buy Investment Property in Philadelphia
Philadelphia is a real estate investor’s dream destination. Buying investment property in Philadelphia is a sound business decision given the captive market for short-term and long-term residents. Here are some more reasons to invest in the ‘City of Brotherly Love.’
1. Strong and diverse economy
The numbers cited above indicate that Philadelphia’s economy is growing at a steady clip. The growth chart may not track that of cities like San Francisco or even Boston, but this means that investors have a viable entry point because real estate is still affordable.
2. Stable job market
The jobs growth rate in Philadelphia is in line with the national and it is important to note that unemployment numbers have been declining much faster than the rest of the country, suggesting economic stability and strong growth potential.
3. Population growth and changing demographics
Philly has experienced population increases over the past few years as the economy shifted from labor-intensive activity to knowledge-based jobs. This change has attracted a younger crowd with better skills, higher educational attainment and greater wealth.
4. Growth in construction and new developments
Analysts expected a boom in new construction projects and an increase in construction permits. At least 8 million square feet of newly constructed properties will be added. New housing permits are expected to exceed 1,800 in 2018, a clear indication of the rising demand for housing in this area.4
5. Best city for millennials
The city attracts millennials because of the presence of college campuses, the job market, housing affordability and amenities catering to the tastes and preferences of millennials. The 28 to 33 age group favors places like Philadelphia where they can be among their peer group. A report based on rigorous review by Niche.com ranks Philadelphia as follows:
- #37 in Most Diverse Cities
- #45 in Best Cities for Millennials
- #61 in Best Cities for Outdoor Activities
- #117 in Healthiest Cities in America
Investment Strategies for Philadelphia
Buying investment property in Philadelphia poses many opportunities for investors. Is your portfolio better served by buying Philadelphia real estate after which you have to maintain and market the property as a rental or by buying a property to fix and flip quickly?
Buy and Hold Strategy
Millennials have been buying property at a lower rate than the generation before them and Philadelphia is no exception. This demographic is upwardly mobile especially as they build up their skills and credentials. They prefer rentals to support their mobile lifestyles. While some of these residents may decide to put down roots in Philadelphia, others will move on, explaining the reluctance to buying a property of their own.
According to Mashvisor.com, traditional monthly rental for housing in Philadelphia should be about $1,570 for a return of 3.1 percent and a cap rate of 3.1 percent. If the property is suitable and you have the operational capacity, marketing is as an Airbnb rental should bring in $2,350 for a 5.8 return and a cap rate of 9.2 based on a property value of $342,000. Experts advise that when choosing properties intended as rentals, choose the one that is as close to turnkey condition as possible to avoid too many non-income months.5
Fix and Flip
The second strategy is to find property that needs some improvement. The price should reflect the condition and the amount of improvement needed to bring it up to inspection-ready status. Choose properties that require cosmetic repairs and improvements even if a major cleanup is required. Make sure that the property meets code regulations for the area. When the house is ready, market it as a newly refurbished property, and move on to the next fix and flip.
Where to Buy Property in Philadelphia
Philly is a city of diverse neighborhoods with each one having its own flavor and appeal. These are some of the best places to consider to buy property in Philadelphia:
• Chestnut Hill
This area ranks second-best neighborhood with median household incomes higher by 145 percent than the city numbers. It is where executives choose to live so expect prices to be at a premium.6
• Logan Square
Median home values in this community are higher by 173 percent than the median for the city. Expect higher rents as well at $1,830 monthly.7
• Fishtown
This neighborhood is the hipster hub, attracting students, artists and younger groups. Median rent is about $1,690 per month but the median home value is about 50 percent lower than Chestnut Hill, which is why the houses sell more quickly in Fishtown.8
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Sources:
1 Total Gross Domestic Product For Philadelphia-camden-wilmington, Pa-nj-de-md (msa)
https://fred.stlouisfed.org/series/NGMP37980
2,3 Philadelphia Home Sales Are Bucking The National Trend – But Not Prices
http://www.digitaljournal.com/pr/3935257
4 Report: Philly Will See 8m Square Feet Of Construction Deliver in 2018
Melissa Romero – https://philly.curbed.com/2017/11/30/16715170/philadelphia-new-construction-analysis-2018
5 Why You Should Be Investing in Philadelphia Real Estate | Mashvisor
https://www.mashvisor.com/blog/investing-philadelphia-real-estate/
6,7,8 5 Neighborhoods Of Philadelphia To Give Landlords the Biggest Roi
https://landlordtips.com/philadelphia-investment-opportunities
