Housing permitting cratered in 2022 after a surge last year. Here’s what happened.

Philadelphia is on track to see the lowest number of housing units permitted for construction in nearly 10 years by the end of 2022.

That slump notably comes after a banner year, with the equivalent of several decades worth of new construction projects green-lit just in 2021.

So what, exactly, is going on?

The answer is a mix of local policymaking, especially the curtailing of the city’s 10-year property tax abatement at the close of 2021 — triggering a mad dash of developers to rushing to make use of it before last year’s end — and a faltering national economic climate.

Federal Reserve interest rate hikes have hit home builders, even as construction costs remain elevated due to supply chain and workforce woes. This has led some in the development industry to argue that the city weakened the tax abatement at exactly the wrong time, although the incentives’ phaseout was delayed from its initial passage in 2019 until the end of last year as part of a legislative compromise.

But housing experts say it’s hard to disentangle any one factor from the others and note that while permitting is inarguably slower than last year’s boom, it’s still close to pre-pandemic norms.

“This is a more difficult market to build in than it was two years ago,” said Emily Dowdall, policy director at the Reinvestment Fund, a research and financing organization. “The abatement didn’t go away, but it’s less rich than it was. That could mean certain projects are not feasible, but it hasn’t stopped all new development in the city.”

Last year saw a virtually unprecedented increase in building permits, with 25,257 units of new housing approved for construction, according to data compiled by the U.S. Department of Housing and Urban Development’s Office of Policy Development and Research.

That was far and away the most permitting recorded in Philadelphia since HUD began compiling data and five times more units than 2020, the next highest year on record. December 2021 alone saw permits issued for 10,939 units of new housing — amounting to more permitting in one month than during the entirety of the 1990s.

According to Rick Sauer, executive director of the Philadelphia Association of Community Development Corporations, that spike was driven by City Council legislation reducing the value of Philadelphia’s 10-year property tax abatement for new construction.

Developers had good reason to make use of the abatement while it lasted. Those building rental units got to avoid property taxes themselves. The incentive even increased profits for developers building for-sale homes by allowing customers who got the property tax break to afford larger and more expensive houses.

But while the legislation weakening the abatement was voted into law in 2019, the date it took effect was delayed to January 2022. That set off the scramble of developers racing to make it under the wire before the end of December 2021 — securing the higher value even for projects unlikely to ever be constructed, just in case.

“People were rushing to beat that deadline,” Sauer said.

As a likely result of that unprecedented spike, permitting cratered immediately, dropping from a high of nearly 11,000 in December 2021 to a paltry 133 units the next month.

But, even setting aside last year as an outlier, there are other signs of slowing development.

Monthly permitting averages in Philly are off by about a third when compared to 2019 or 2020. They have remained depressed throughout 2022, with total unit count projected to be the lowest since 2013.

This mirrors a trend of cooling home sales, both nationally and locally.

According to data from real estate listing service Redfin for the Philadelphia housing market, the average number of days a home sits on the market were up in October, compared to last year, while total home sales are down by about a quarter. And, while rental costs have risen, developers know fewer people can afford to pay them — meaning fewer apartment building projects are feasible.

This is all taking place in the context of the Federal Reserve aggressively increasing interest rates this year, with the cost of borrowing soaring to almost triple what it was this time last year. That means fewer households can afford to buy homes. And it’s more expensive for developers to take out loans for their projects, which means they charge more money for sale or rent — further shrinking their potential customer pool.

Construction costs also remain elevated, with materials and labor up $30,000 to $40,000 per home over last year, according to a the Building Industry Association (BIA). The building trades, union and unorganized workers alike, are facing labor shortfalls. The situation is expected to get only more dire as federal funding from the infrastructure law and the Inflation Reduction Act increases demand for skilled workers.

But Philadelphia’s development industry argues the local legislative environment hasn’t helped matters, especially highlighting the weakened tax abatement for new construction.

“I’m not surprised that we are at the lowest numbers since 2013, as we have predicted that this would happen,” said Mo Rushdy, vice president of the BIA, which represents residential developers in Philadelphia. “I have been told by lenders that they are increasingly seeing that Philadelphia’s multifamily projects are not penciling out the way they used to.”

Rushdy says the weakened abatement and higher costs will make it harder to build outside of the neighborhoods that can guarantee high rents, like Center City, University City, or Fishtown. The developer says the kind of projects his company, the Riverwards Group, has built in recent years in lower cost neighborhoods like Kensington are no longer viable.

“With increased interest rates coupled with the [weakening of the abatement], we will see little to no starts of new projects that don’t already have financing in Philly’s neighborhoods,” said Rushdy.

Former Councilmember Helen Gym, who last week announced her run for mayor, disagrees with the BIA’s analysis. She says the abatement was supercharging development in areas that would have seen it anyway, with few results in the city’s struggling neighborhoods.

Gym said the drop-off was inevitable after 2021′s flurry of permitting, and this year’s relatively depressed numbers are not far from pre-2020 development levels.

“Last year’s numbers were extremely inflated,” said Gym, a longtime critic of the 10-year abatement for its negative effect on School District revenue. “This year’s numbers are tracking not too far off where we were pre-pandemic. Residential development remains a strong sector for growth.”

It’s true that construction is continuing apace in stable markets like greater Center City, south of Lehigh Avenue in the River Ward neighborhoods, and in the Northeast — where many of the city’s immigrants are moving.

Dowdall says this is similar to what occurred in the aftermath of the Great Recession. Back then, construction ground to a halt in more peripheral areas, like Brewerytown, but in strong market neighborhoods, like Northern Liberties, it seemed as if the foreclosure crisis never even happened.

This time around will see similar winners and losers, she said.

As for the abatement, she agreed it never encouraged development across the city as a whole. Instead, there were hot spots that moved around, usually just one neighborhood up from wherever building was already booming.

The full 10-year property tax abatement is still in place for rehabilitating buildings, incentivizing preservation of historic structures instead of demolition, and there remains a smaller version for new construction. In the past, Council members discussed targeting an abatement to specific geographic areas or capping it for individual residential properties.

“The changes in the abatement had to address School District funding and the fact that the abatement was being over incentivized in areas in which it wasn’t needed,” Gym said. “But we will continue to keep an eye on that and see where it goes.”