Developers fear a Philly apartment glut as tenants cash in discounted rents

Juan Serrat knows he has to leave his South Philadelphia apartment building.

The 37-year-old moved into the Olo, a four-story 30-unit building, last November. The one-bedroom unit he snagged is about 600 square feet, with central air, outdoor space, and a washer-dryer.

It also fell right in his price range — about $1,500 a month — because the owner offered two months of free rent as an incentive.

He doesn’t want to leave. But without that deal, which Serrat took as rent reductions throughout his lease, he can’t stay.

“If I want to renew, that two months off will be gone, and my rent goes up 5% annually, and I cannot do that,” Serrat said.

Next year, his rent will jump to almost $2,000 — more than he can afford on his state government salary. He’s already looking for a new place, specifically for another building that also offers a move-in deal.

Serrat is one of an increasing number of “concession surfers” — renters looking to repeatedly cash in on incentives offered by landlords, especially in hypercompetitive environments such as Northern Liberties and nearby neighborhoods on the Delaware River, where thousands of new apartments have recently come online.

“There is a little bit of a market inefficiency that is advantageous” for renters, Serrat said. “I’m going to have to kind of ride that wave to find the next building.”

The surge in multifamily construction means Philadelphia developers and landlords are reckoning with a rental glut for the first time in decades. Rent increases have slowed and, at the high end of the market, reversed as concessions mask the fact that tenants are harder to attract at asking prices.

“I fall in the category of never having given a concession before this year in my life,” said Gary Jonas, founder of the HOW Group, which develops and owns rental buildings across the city.

Now his company is offering, in some cases, two months of free rent for the first year’s lease.

“In areas where we are in the lease-up phase and where there’s a tremendous amount of new construction — pretty much just that Northern Liberties, Fishtown, Kensington area — all the new construction buildings are really competing against each other,” Jonas said.

During the pandemic, Philadelphia saw levels of apartment construction that were unprecedented in modern times, with thousands of new units breaking ground amid spiking housing costs and historically low interest rates. A rush of building permit applications also accompanied the sunsetting of a 10-year property tax abatement in 2021.

According to data from commercial real estate analytics firm CoStar Analytics, the citywide vacancy rate passed 10% this year — up from 5.7% in 2021 and more than 2 percentage points higher than the current national average.

But certain neighborhoods are seeing much, much higher vacancy rates.

In the 19123 zip code, spanning Northern Liberties and some nearby neighborhoods, a third of apartments built since 2021 are still vacant, according to CoStar data. That’s led many building owners to offer renters such as Serrat multiple months of free rent or other amenities to compensate.

Developers such as Jonas and other experts say the rent war won’t last.

Brenda Nguyen, an associate director at CoStar, said that while Philadelphia is seeing vacancy rates increase, they come on the heels of decades of sluggish housing construction.

“Philly has been seriously underbuilt compared to other U.S. metros,” she said. “So all this housing that’s coming online right now is very much needed.”

Although thousands more units are under construction, new building permits plummeted last year after interest rates spiked. And Philadelphia has continued to see thousands of new tenants move in every year: Out of 9,600 units built since 2021, 8,600 have already been occupied.

To Nguyen, that all means the high number of empty units — and cushy concession offerings — are unlikely to last beyond 2025.

“People are moving into these apartments,” she said. “The demand is absolutely there. But even very impressive demand has not been able to keep pace with new inventory hitting the market.”

While cities in the Sun Belt flooded relatively small markets with speculative housing, new development in Philly flowed into a handful of neighborhoods that already had high rental demand — Fishtown, Northern Liberties, Center City, University City, and Northwest Philly. Absorption rates — a measure of how quickly apartments are leased up — this year were the strongest since 2021.

While demand for apartments in Philadelphia’s suburbs is also high, most of the city’s collar counties have allowed relatively few multifamily projects to be built. That left more of the regional appetite to be satisfied by new development in the city.

Nguyen predicted that most of the increased supply would be absorbed organically within a few years, but some new developments that pegged their financing to steadily increasing rents could be in trouble.

“Say your financial assumptions were based on 5% rent growth. Instead, you’re seeing 1% rent growth,” she said. “It’s not widespread, but I’ve heard about it happening. People who weren’t more diligent with their financing.”

Because lowering asking rents can also negatively impact financing arrangements, many landlords have turned to increasingly generous — but temporary — concession deals to lure in tenants without rankling lenders.

The sheer number of new buildings opening along Spring Garden Street, the Delaware riverfront, and Northern Liberties is driving especially fierce competition.

The Carson, for example, has been leasing units ranging from $1,900 a month to more than $4,600 at Fifth and Spring Garden Street since last summer.

Currently, the building offers end-of-summer “move-in specials,” including a three-month maximum rent concession for a two-year lease, $300 off list rent prices, plus a $1,000 “look & lease” credit for renters who sign within 48 hours.

Victor Rodin, principal and cofounder at RREI, which developed the Carson, said the 373-unit building is 80% leased. He said all its peer buildings in the neighborhood were similarly striving to attract upmarket renters who know they have abundant alternatives.

“The new construction concessions being offered in projects along Spring Garden and Delaware Avenue are not that different compared to concessions throughout the city,” he said. “It’s the density of new construction in this neighborhood that makes it notable.”

Another nearby complex, the Noble, which is close to completion, is offering similar concessions, plus a $500 credit toward such amenities as a rooftop pool and a gym membership. The huge new Post Brothers project Piazza Alta is also offering two months’ free rent.

Jonas, of HOW Properties, says many of his buildings outside the Northern Liberties-adjacent area are offering only one month of free rent and older buildings are not offering concessions at all.

“There’s short-term pain in most submarkets, and in one or two, we’ll have disruption for a bit longer,” said Erin Miller, an executive managing director with Newmark, a commercial real estate services firm. “But after another 12 to 15 months, we’re going to start to be on the other side of it.”

The new wave of apartments is catering largely to the same demographics that have always been attracted to Philadelphia, according to leasing agents and developers. Narratives about an invasion of New Yorkers have not been borne out, nor has there been a huge number of remote-capable workers looking for a more affordable urban experience.

As always, Comcast and the big hospitals and universities continue to attract some workers from other parts of the country. And Philadelphia still acts as a magnet for young people across a vast metro region.

“The universities and the hospital systems and the pharmaceutical companies are still the big recruiters,” said Boots Levinson, a longtime leasing agent in the city and partner at RentPhilly. “But I don’t see a huge influx of new renters who have never rented in Philadelphia or the surrounding areas.”

That isn’t to say that nothing has changed since the pandemic. Some rental agents say they are seeing more students from Philadelphia colleges stay in the city after graduation, and some remote workers have trickled in.

Retirees became a less reliable demographic during the pandemic, when homicides in Philadelphia hit record highs and rising homelessness and public unrest rocked Center City. Mike Pestronk, cofounder of apartment developer Post Brothers, say retirees have yet to return in large numbers, even with crime rates now precipitously falling.

“The empty nesters have never come back,” he said.

Pestronk says young families with children, on the other hand, are now staying in rental apartments longer as prices for single-family homes remain elevated. Post Brothers recently began renting out One Thousand One, a huge project at Washington Avenue and Broad Street that will be almost 1,500 units when completed — including a number of three-bedroom units aimed at families.

Even before the pandemic, Pestronk said his Atlantic building, off of South Broad Street, was attracting young families with its spacious three-bedroom apartments. Although it struggled with vacancies post-2020, the large units began renting briskly again last year — this time almost exclusively to young families.

One Thousand One, meanwhile, is studded with features to attract families with young children, such as a playground with a rubber track where they can learn how to ride a bike. It is built to play to the fact that the average renter is no longer a young adult, but increasingly people with higher incomes, and more frequently families with small children.

Pestronk predicts that one reason Philadelphia’s apartment glut won’t last, even with the shortage of empty nesters, is the lack of competition from other types of housing.

“Even if the population is static, you still have new household formation,” Pestronk said. But “there’s no new single-family for sale, there is very little townhouse for sale, there’s no condos. … The reason for all these apartments is because there’s no new other types of housing.”