New Philly penthouse listed for a record $25M. But where are the condos for middle-income buyers?

If there were ever an indication of how much the Philadelphia real estate market has transformed, look no further than the $25 million condo being marketed on Rittenhouse Square.

At the Laurel, the 48-story tower that will soon rise near 19th and Walnut Streets, Southern Land Co. is hoping that the unit’s views from almost 600 feet above ground will be enough to secure the priciest home sale in Philadelphia history. Should the Nashville-based developer get what it’s asking, the Laurel’s penthouse will beat out 500 Walnut’s top floor, which sold for $17.03 million in 2017, and caused such a stir that it was rumored to have been purchased by Beyoncé and Jay-Z.

Southern Land’s development manager, Brian Emmons, contends that the Laurel can beat the previous record because of its location: Rittenhouse Square is often considered “beachfront” property in Philadelphia, and “this is the last opportunity for someone to own a new-construction penthouse” on the park, Emmons said. Plus, he says, one of the tower’s other penthouses — there may be up to four — is under agreement and could end up “pretty close” to Philadelphia’s current $17.03 million record. He declined to provide specifics, citing a confidentiality agreement.

The Laurel’s record-breaking quest comes at a time when Philadelphia is facing challenges on both ends of the condo market. Despite demand for more affordably priced condos, many of the city’s new towers have been designed with high-end Philadelphians in mind.

And while the city’s most recent major projects found huge successes — Tom Scannapieco’s 500 Walnut sold multiple units for more than $8 million and Carl Dranoff’s One Riverside penthouse was claimed for $7 million — ultra-pricey condos elsewhere have lingered on the market. Multiple penthouses at the Residences at The Ritz-Carlton have sat unclaimed since construction finished in 2008, and a penthouse with raw space at 10 Rittenhouse was recently taken off the market to be finished after being listed for $15 million two years ago.

Meanwhile, a 46th-floor condo in Two Liberty Place with a nearly 2,400-square-foot terrace also has struggled to sell. This year, it was relisted for $11.5 million, down 20 percent from 2017.

Real estate analysts say the state of the local condo market underscores just how different Philadelphia is from other cities. Developers in Southern cities such as Raleigh, N.C., have begun building more affordably priced condo units to meet rising demand. And New York City and Miami are now dealing with the fallout of foreign buyers retreating from high-end units in their markets. After the Great Recession, both cities saw a surge of new condo construction, much of which was built to meet growing international demand. Miami condos, for example, have long been considered a safe place for wealthy Latin Americans to park their money. As a result, nearly 20,000 new condos have been built in Miami since 2012, according to ISG World’s Miami Report of 2019.

New condos in Philadelphia, in contrast, have not been as plentiful for either price range — and have failed to capture the interest of foreign buyers thus far. Developers of the city’s high-end condo projects say nearly all purchasers have been rich Philadelphians, or suburbanites who have departed Main Line mansions. The penthouse of 500 Walnut, for example, was purchased by a businessman with ties to New Jersey; a local buyer put one of the Laurel penthouses under agreement, too. As a result, developers of high-end condos often are competing for interest from the same, slow-growing pool of rich residents.

For now, Philadelphia’s most prominent developers are doubling down on high-end condo towers, expecting demand for luxury condos with plentiful amenities to continue. The Laurel has marketed itself as “luxury tower residences from the $2 millions." And Carl Dranoff’s new condo tower, Arthaus, expects to sell units between $2 million and $10 million.

Yet significant demand for new condos exists among low- and middle-income Philadelphians, too. Aging baby boomers, tired of multilevel living, increasingly want to live in one-story homes, but many feel too active for 55-plus and retirement communities. And some first-time home buyers have expressed a desire for amenitized condo living, which allows them to own property without significant maintenance demands.

But new condos affordable to middle-income residents are difficult to find in Philadelphia.

According to data provided by Kevin Gillen, a senior research fellow at the Lindy Institute for Urban Innovation, condo construction in Philadelphia has been slow — in any price range — since the 2000s housing boom. Between 2005 and 2007, more than 2,500 new condos were sold in Philadelphia, as several condo high-rises rushed into Center City. (Many later faced financial problems.)

In comparison, between 2015 and 2017 — amid Philadelphia’s current real estate boom — just 166 new units were sold.

The problem, observers say, is that traditional, multifamily condos are some of the riskiest projects that developers can undertake in Philadelphia. Unlike smaller-scale single-family home projects, condos rely more heavily on major investors, who typically don’t release funds until a project reaches a certain number of agreements of sale. Meanwhile, apartment buildings tend to fill up faster, as tenants are more willing to sign a lease than buy a home. That means that apartment developers can begin using rent checks to pay off lenders, while condo developers are often waiting until sales are finalized.

Some developers say they often don’t make any profit until the final few condos are sold.

“Rentals work in any market. ... For a much bigger pool of people, it’s much easier to come up with a security deposit than it is a 20 percent down payment,” said Eugene Umansky, managing partner at Trinity Realty Co., a Philadelphia developer of multifamily condo buildings and single-family homes. “When you do condos, it takes a while to sell out.”

The challenge is further complicated in Philadelphia, where, developers say, construction costs can be high, once land, labor, materials, permits, and taxes are factored in. “It takes you two years to come out of the ground and two years to build" a condo project, said Allan Domb, a Philadelphia City Council member and a condo broker. “If the economy changes on you, you’re going to have some issues.”

As a result, observers said, many new condos are priced high to mitigate the market’s high risks and costs.

Today, much of the recent new condo construction in Philadelphia has been in nontraditional condo buildings — townhouse developments, for example, or single-family homes with multiple units. In Philadelphia, both types of real estate can be classified as a condo if a homeowners association is established.

Of the 97 new condos sold in Philadelphia between April and June — a high since 2007 — less than half were in traditional, amenity-filled condo towers.

To be sure, townhouse developments and single-family houses with multiple units — properties such as triplexes — are a crucial part of the Philadelphia market, often enabling first-time and low- to middle-income buyers to enter the housing market. The median price of the new condos that sold in the second quarter of 2019 was $360,000. That was slightly higher than the median price for all condos in the city — $306,000, according to Gillen.

“A percentage of buyers don’t want to go into large condominium buildings. ... They have more control over the monthly fees, which are extremely low,” said Mark Adams, whose company, Mark FX Adams Construction, built three condos inside a new single-family home on 15th Street just north of Girard Avenue. All three units sold in the $300,000 range; he estimates monthly HOA fees of $100.

Bigger buildings and higher HOA fees have continued to entice residents, too. At Penn Treaty Residences, a five-story, 30-unit condo building in Fishtown developed by Trinity Realty, all units sold within nine months. The average sale price, according to Umansky, was around $360,000. Many of his buyers were millennials, seeking amenities such as a roof deck, parking, and gym access. (Residents were provided a City Fitness membership across the street.)

“We saw there was nothing in this neighborhood that offered a larger, secure condo building that was new,” Umansky said. “And I do think that is because this is a bit of an underserved market.”