CCD Releases 2016 State of Center City Report

Repeat after us: Things continue to get better on the whole in Center City. But the city’s anemic performance on employment growth keeps it from achieving its full potential and contributes to the city’s persistently high poverty rate as well. | Photo by J. Fusco for Visit Philadelphia™

It’s become something of a mantra each spring when the Center City District releases its annual “State of Center City” report at its quarterly meeting at the Union League:

CCD President Paul Levy rattles off a bunch of statistics that show robust growth on a number of fronts all over Center City: Residential construction, hospitality and tourism stats, patronage at arts and culture venues, the strength of the eds-and-meds sector, commercial office space absorption, you name it.

Then he gets to the part about office employment and overall job growth and puts up a huge asterisk.

So it was this year.

Levy led off the panel discussion that accompanied the report’s release by highlighting the report’s bright spots. Here are some of them:

Center City’s residential population continues to grow. As of 2015, the CCD estimates that 63,521 people live inside the traditional Center City core, with another 121,478 living in “extended Center City” north of Vine Street and south of Pine Street. Both figures represent new highs across a 15-year period of growth since 2000. (The CCD defines “Greater Center City” as the area extending from Girard Avenue on the north to Tasker Street on the south between the two rivers.) That resident population, by the way, is the best-educated in the region: 57 percent of those living in Greater Center City, and a whopping 77 percent of those in the core, have at least a bachelor’s degree, compared with 35 percent of the Greater Philadelphia population and 29 percent of the nation as a whole.

Developers are adding new housing to the stock at a pace that keeps up with rising demand. While the pace has cooled off a bit from the torrid level of 2013, a total of 1,538 new housing units were added to the supply last year, with most (984) being apartments for rent. Both rents and house prices rose slightly last year, with rents climbing 3.2 percent and house values rising by 1 percent while days on market fell 5 percent.

Families are making their mark on Center City. Enrollment in Greater Center City’s public schools rose 8 percent from 2010 to 2015, in contrast to a 6 percent decline citywide. Meanwhile, the percentage of children 18 and under attending cultural events in Center City rose 7 percentage points from 2012 to 2014, from 17 percent to 24 percent, also indicating a more family-friendly climate in the urban core.

“Eds and meds” are expanding their presence in Center City. While University City remains the epicenter of healthcare and higher education employment in the city, the institutions responsible for that employment have also expanded into Center City, where they join the resident 800-pound gorilla, Thomas Jefferson University and Hospital, plus a slew of smaller institutions. TJU is also Center City’s largest private employer, but Penn, Drexel and Children’s Hospital of Philadelphia all added jobs in Center City since 2010. To top it all off, the percentage of students graduating from Philadelphia colleges and universities who stick around after graduation has risen to 67 percent, surpassing Boston and Baltimore.

The hospitality and tourism sector is also doing well, with room occupancy rates at their highest levels in a decade and a slew of new hotels in the pipeline.

Then he got to the commercial real estate and office employment part. Levy expressed some hope that an uptick in out-of-market companies taking space in Center City buildings meant that the traditional game of “musical chairs” in the leasing of Center City office space might be coming to an end, and he noted the surge in interest in Center City office properties on the part of out-of-town investors. But he then noted that where office space in the core rented at a premium of 25 percent on average in cities nationwide, and as high as 112 percent in Boston, Philadelphia’s premium was the lowest of all of the 25 biggest cities at a mere 4 percent.

The weak office employment picture was another area of concern Levy highlighted. While employment in the education and health services sectors has risen 50.5 percent since 1990, and hospitality employment rose 51.2 percent, office employment fell 1.2 percent overall, with the financial, real estate and communications sectors plummeting 43.3 percent. These numbers contributed to that weak premium for core office space.

Each of the three panelists who spoke after Levy had their own high and low points to make.

The first panelist, Daniel Moore, managing director of the Washington-based development firm Hines, explained why his company returned to Philadelphia to partner with the Goldenberg Group on the new residential tower at 1213 Walnut St. When a firm invests in a real estate project, he said, “what you’re investing in is a demographic or macroeconomic trend.” And the one he saw here was an encouraging one: Center City’s population had been growing steadily since the early 2000s, and “not only was it getting larger, it was getting younger, smarter and richer.” Moore also noted that universities made excellent economic actors because they remain rooted in their regions—”Harvard isn’t going to come in, buy Penn and move it to Cambridge,” he said—and that the increasing attention University City institutions were paying to Center City was also supportive of its growing population of well-educated residents. But he cautioned that the macroeconomic trends supporting this demographic one were “getting long in the tooth.”

Peter Tyson, managing director of CBRE Hotels, had his own “things are great, but…” tale to tell. The average room occupancy rate for Center City hotels in 2015 was the highest it had been since 1948 and surpassed the previous banner year of 2014. Room rates had also risen smartly, though not by as much as they might have thanks to relatively soft weekday business. But he noted that as a result of these rising statistics, new hotel rooms were being added at a rapid clip, and as a result, the market resembled “the pig being eaten by the python.” The last time the Philadelphia hotel market was in this position, he said, was in 1999-2001, when Mayor Ed Rendell’s push for a national political convention led to a surge in hotel rooms. As those hotels came on line, occupancy rates fell from the low 70s to about 60 percent, and room rates went down with them. It took until 2005 for rates to return to their levels of 1998. Tyson forecast a similar downturn in the years ahead, as the number of hotel rooms is set to rise by 24 percent in the next few years. He did note, however, that the quality of the city’s hotels had improved dramatically since the 1970s, when “dowager hotels” like the Benjamin Franklin and Sylvania gave the city a frumpy reputation. Back then, he said, only one or two national brands were represented locally; by contrast, even many of the popular new boutique hotels are associated with national brands like Kimpton and Starwood today.

Finally, Wayne Fisher of Newmark Grubb Knight Frank, which performed some of the analysis of the Center City office market for the CCD, ran down the good and bad news on the office front. One of the positive developments, he said, was the growing presence of out-of-town investors in the local office real estate market, with one firm in particular standing out for its acquisitions: Shorenstein, the owner of the building that houses our offices. Its purchase of 1818 Market marked its return to the Philadelphia market after a short-lived role at Two Liberty Place in the 1980s. Fisher described 1818 as an “undercapitalized asset” with millions of dollars in deferred maintenance needs, but one where Shorenstein saw “upside rent potential.” The company apparently liked what it saw, for it has since added five other Center City Class A office buildings to its portfolio. Fisher remarked that the musical-chairs game Levy spoke of did appear to be coming to an end, as both 2014 and 2015 saw significant new space leases on the part of out-of-market companies as well as a rise in collaborative office spaces, a sector he said is verging on being overbuilt. Still, he noted, the Center City market needed to be more attractive to larger companies, and as of now, making even an in-region move can cause agita for some executives: the CEO of a firm in Horsham that was considering Center City space, he said, said the decision was “like moving his firm to Dallas, Texas.”

Fisher too emphasized the connection between job growth and rent growth. Right now, he said, Center City building owners were securing higher rents by managing the supply of space, which is to say, converting less desirable office space to other uses. The other way to do this, he said, was to rev up the jobs engine: “Hopefully, when the job growth kicks in, the office market will take off like the restaurant market did.”

Levy noted some progress on his campaign to reform the city’s tax structure in order to encourage that growth. A bill has been introduced in Harrisburg this year that would amend the constitution to allow municipalities to tax commercial property at a higher rate than residential property. The proceeds from these higher commercial taxes would then be used to lower the city’s taxes on wages and business income.

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