RE market Analysis

aandc3

SampleStudentMarketAnalysis-1.pdf

Home >Business & Finance homework help >RE market Analysis

AN ANALYSIS OF THE MARKET FOR NEW HIGH-END MULTIFAMILY CONDOMINIUM

DEVELOPMENT IN PHILADELPHIA: A CASE STUDY

500 WALNUT, 500 WALNUT STREET, PHILADELPHIA, PA 19106

SAM HOCKFIELD

TABLE OF CONTENTS

I. ANALYTICAL STATEMENT…………………………………………………………………….……………..…2

II. PROJECT DEFINITION AND RATIONALE………………………………………………….…………….…2

III. AREA DEFINITION………………………………………………………………………………….………………3

IV. PRODUCT OFFERING……………………………………………………………………………….…………….5

The Building…………………………………………………………………………………………..……………5

Developer Quality…………………………………………………………………………………..…………..6

V. TARGET MARKET……………………………………………………………………………………….………….9

Market Potential……………………………………………………………………………………..………….9

VI. AREA ECONOMIC AND DEMOGRAPHIC OVERVIEW…………………………………………..…..11

Center City………………………………………………………………………………………………………..11

Philadelphia………………………………………………………………………………………………….....14

Lower Merion……………………………………………………………………………..…………………….16

Economic Basis…………………………………………………………………………………….…..………18

VII. COMPETITIVE SUPPLY……………………………………………………………………………….…………20

10 Rittenhouse Square……………………………………………………………………………..……….20

One Riverside Park………………………………………………………………………………………...…22

VIII. PUBLIC POLICY…………………………………………………………………………………………………….24

Dispute between Public and Private Sector……………………………………………………………..24

Zoning……………………………………………………………………………………………………………….……26

IX. FINDINGS…………………………………………………………………………….………………………………27

X. MONITORING STRATEGY…………………………………………………………..…………………………29

XI. CONCLUSION…………………………………………………………………………….………………………..30

XII. APPENDIX A…………………………………………………………………………………………………………31

XIII. APPENDIX B…………………………………………………………………………………………………………37

XIV. BIBLIOGRAPHY……………………………………………………………………………….……………………40

I. ANALYTICAL STATEMENT

The following analysis evaluates whether there is sufficient demand for new

luxury multifamily condominium development in Philadelphia by analyzing the

development of 500 Walnut, a 26-story building located at 500 Walnut Street in

Center City Philadelphia, slated to open in May of 2017.

II. PROJECT DEFINITION AND RATIONALE

Over the past five years, “population growth and low cost of living have driven

an unprecedented boom in Philadelphia’s residential real estate market”. 1 New

development dollars have continued to pour into Philadelphia, but many believe

“that both an uptick in population and a low cost of living compared with

neighboring New York City and Washington, D.C., will continue to ensure continued

demand for multifamily housing”. 2

Traditionally, the Philadelphia market has been known for relatively affordable

options compared to its surrounding cities, but new luxury developments are

beginning to test the high-end market. The Architect of 500 Walnut, Cecil Baker, has

“made it known that the type of buyer they’re seeking want New York luxury living”.

1 Stated by Matt Fair, in Law 360. ‘Philly Rides Hot Residential Real Estate Market Into 2016’. [Online]. Available at: http://www.law360.com/articles/743751/philly-rides-hot-residential-real-estate-market-into-2016 2 Stated by Matt Fair, in Law 360. ‘Philly Rides Hot Residential Real Estate Market Into 2016’. [Online]. Available at: http://www.law360.com/articles/743751/philly-rides-hot-residential-real-estate-market-into-2016

3 Going forward, it will be interesting to determine the demand for these luxury

projects and if this trend of luxury living will continue.

The following analysis will seek to determine the demand for luxury multifamily

condominiums in the Philadelphia market, by exploring current supply levels and

estimating the demand going forward.

III. AREA DEFINITION

For the purposes of the current study, the area defined as Center City

Philadelphia is restricted. This restriction is based on local knowledge of the

residential real estate market. For example, people who are attracted to

Independence National Historical Park and the surrounding areas are unlikely to

want to reside south of South Street; thus, the geographic areas from South street

southwards area excluded from the local area. For similar reasons, areas north of

the Vine Street Expressway and west of the Schuylkill Expressway are excluded.

It is probable that the people attracted to the Independence National Historical

Park area will also be attracted to the Rittenhouse Square, Washington Square,

Franklin Square, Logan Square and Fitler Square areas. Thus, all of these areas are

included in the current study’s definition of the Center City Philadelphia. This is an

area covering 1.96 square miles, and all within a walk time of approximately 30

3 Curbed Philadelphia. ‘16 Reasons Why 500 Walnut Is Going to Be Luxuriously Bonkers’. [Online]. Available at http://philly.curbed.com/2014/11/11/10024774/the-fact-sheet-for-500-walnut-is-luxiously-bonkers

minutes from 500 Walnut. Refer to figure 1, which displays the Philadelphia market.

The submarket of Center City, as defined above, falls within this area and is outlined

in figure 2.

Figure 1: Philadelphia

Source: ESRI Business Analyst Online

Figure 2 Center City Philadelphia

Source: ESRI Business Analyst Online

IV. PRODUCT OFFERING

The Building

500 Walnut is a luxury multifamily condominium development located at 500

Walnut Street, Philadelphia, Pennsylvania. The development, scheduled for

completion in May of 2017, will consist of 37 units across 26 stories all with at least

three bedrooms. The units will range from 2,700 to 4,300 square feet, and will all

have large private balconies. The condominiums will range in price from $2.5 million

all the way to a $17.6 million two-level penthouse that will have exclusive use of the

roof.4 Among the residences, there “will be ten full-floor residences of 4,200 square-

feet, which are fully-customizable”.5 The 4,200 square-foot full floor units will start

at over $5 million and go to $9 million. Additionally, the partial floor units will range

in price from $2.5 million to $4 million and contain roughly 2,500 to 3,100 square

feet.

Each unit will have a vented gas fireplace, 10- to 11-foot ceiling and floor-to-

ceiling windows with views of “Independence Hall, Washington Square Park, the

Delaware River and beyond”.6 Additionally, there are only one or two units per floor

and nonstop elevators, so there is a clear emphasis on privacy.

4 Philadelphia Business Journal. ‘New residential tower rising over Independence Hall’. [Online]. Available at http://www.bizjournals.com/philadelphia/blog/real-estate/2015/03/new-residential-tower-rising-over- independence.html 5 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp-content/uploads/2016/04/2.- Regions-Business-Article.pdf 6 500 Walnut. ‘Views To Inspire’. [Online]. Available at http://500walnut.net/residences/#section3

Included in the building is a copious amount of first-class, full-service amenities.

Residents will be able to enjoy “robotic parking, a 50-foot lap pool, a spacious fitness

center and spa, a billiard room, a 4,000 square foot open-air terrace overlooking

Independence Hall, and a boardroom with a fully equipped catering kitchen”.7 The

robotic parking structure is one of the main selling points, and was a huge point of

emphasis when marketing the property. According to Brandyn Campbell, a

Philadelphia journalist, the system is a “cutting-edge fully automated underground

parking system, that will enable residents to park and retrieve cars in mere seconds

without a parking attendant”.8

The design of both the building and the private residences have kept the target

market in mind, by offering custom unique floorplans and ultra-luxury amenities.

Appendix A provides a selection of exterior and interior images. Additionally,

Appendix B provides a selection of images captured during a tour of the site.

Developer Quality

Tom Scannapieco, the lead developer of the project, has experience building

luxury condominiums in Philadelphia as he has seen tremendous success at 1706

Rittenhouse, a recent development he completed in the downtown area. His success

at 1706 Rittenhouse has allowed him to build a strong reputation with the high net

worth individuals in the Philadelphia region, which has increased excitement for 500

7 500 Walnut. ‘Amenities’. [Online]. Available at http://500walnut.net/amenities/ 8 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp-content/uploads/2016/04/2.- Regions-Business-Article.pdf

Walnut. “Tom Scannapieco has aptly demonstrated an understanding of the desire

for privacy, exclusivity and splendor that comes with being among the Philadelphia

region’s most prosperous individuals”.9 500 Walnut is addressing these issues by

installing state of the art amenities with extravagant features.

In tandem with the architect of the project, Cecil Baker, the building was very

“careful to honor its location among the most important edifices in America”.10

Using his experience from 1706 Rittenhouse, Scannapieco said it is crucial to “study

every detail and make sure that we are maximizing every decision in the process in

order to be confident that we had the right solution and had a marketable

project”.11

Many of the area’s leading entrepreneurs and corporate leaders have lived in the

City’s surrounding neighborhoods for many years. According to Scannapieco, “two-

thirds of our purchasers are moving into the City for the first time. It’s very

meaningful for a city to get people with that kind of discretion and those kinds of

options. They can live anywhere and buy anything they want. To be able to attract

them into the City where they’re active on boards and they become more interested

and committed to the urban issues in Philadelphia, it’s great for the City”.12

9 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp-content/uploads/2016/04/2.- Regions-Business-Article.pdf 10 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 11 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 12 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf

Scannapieco also used his experience in New Hope, Pennsylvania to his

advantage. In New Hope, he “developed a property called Waterview on the banks

of the Delaware River featuring a single-level flat concept, with upper-level floors

combined into large, extravagant penthouses”.13 Similar to 500 Walnut, Waterview

set records for Bucks County for price per square foot and it contained some of the

most expensive suburban condominium properties in the Delaware Valley. When

asked about how the similarities between the two projects Scannapieco stated, “we

had such success with that project that it was clear to us that the idea of providing

large, single-floor residences at the very top of the market was a great concept. We

saw that success and saw we realized we’ve got to find a way to do a project of this

type in Philadelphia”.14

Scannapieco’s local knowledge played a huge in deciding to embark on this

project as well. There are numerous indicators that point to a strengthened

economy in the Philadelphia market. Some of these indicators include “the

population is growing for the first time in decades, and new residents are eager to

be near all of the food, culture and entertainment the City has to offer”.15

13 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 14 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 15 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf

V. Target Market

The high-end luxury condominium developments attract buyers who have a very

high net worth and are looking to live in downtown Philadelphia. “Market research

found that there were about 2,000 people in the Greater Philadelphia area with a

net worth in excess of $10 million, meaning they could afford to live in the ultra-

luxury condos”.16 Potential buyers are going to expect state of the art amenities as

well as hassle-free living. According to Tom Scannapieco, “If you’re going to target

the absolute top of the market, you have to understand that you’re dealing with:

people who have had many homes and are very knowledgeable about every aspect

of a house and are very demanding”.17

Market Potential

Many local experts believe there is significant demand in the high-end luxury

market due to a recent shift in the Philadelphia real estate market. According to

Alon Seltzer, a real estate broker for Berkshire Hathaway, there is a ton of market

potential and developers are just now starting to tap into this market. Later in the

interview Alon went on to say, “The potential in this market is truly remarkable and

if the new projects coming online are as successful as experts are predicting you

16 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 17 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf

could see even more construction in this area”.18 “Real estate agents say the

building will fill a huge demand for new construction among buyers at the market’s

highest end, who are once again shedding large suburban houses and Center City

townhouses as they recover equity lost in the downturn. As the city and its lifestyle

have grown more attractive, instead of small condo in the city and a house in Florida

or the Shore, these buyers want bigger units downtown”19

“Alan Domb, of Allan Domb Real Estate, who has been selling condos in Center

City for more than three decades, tracked square footage of three-bedroom condos

since the first ones appeared in Center City. In the 1960s, he said, a three-bedroom

unit was approximately 1,500 square feet, but by the 1990s the 2,500 mark had

been reached. Today, we see 2,500 to 5,000 square feet. The reason is baby

boomers want bigger spaces as they leave their larger suburban homes”.20 This

trend fits directly into the units at 500 Walnut as they offer extremely spacious,

customizable floor plans.

18 Alon Seltzer, real estate broker for Berkshire Hathaway, as per phone interview conducted July 15, 2016. 19 Starting Wednesday, a First Look at One Riverside’s Luxury Condos. [Online] Available at http://articles.philly.com/2015-03-05/news/59772616_1_10-rittenhouse-carl-dranoff-rittenhouse-square 20 Starting Wednesday, a First Look at One Riverside’s Luxury Condos. [Online] Available at http://articles.philly.com/2015-03-05/news/59772616_1_10-rittenhouse-carl-dranoff-rittenhouse-square

VI. AREA ECONOMIC AND DEMOGRAPHIC OVERVIEW

In this section, both Center City and Philadelphia (as defined) will be thoughtfully

analyzed. This analysis will help in determining the extent of demand for 500

Walnut, and the high-end multifamily condominium product. Moreover, the

economic and demographic overview of Lower Merion, Pennsylvania is analyzed as a

factor in determining demand from outside of the local market. When analyzing the

demand for this product type primary, secondary and tertiary markets listed below

are all considered. The demand in each market is carefully considered in the

analysis.

Center City

Center City is outlined in Figure 2. Center City is a very small market, which

makes it a challenging market to look at independently as a demand driver.

Although the market is relatively small, it is a very important market when

considering the subject of 500 Walnut. Center City Philadelphia is 1.96 square miles,

with a population of 59,809 people and a total of 36,223 households.21 Among the

36,223 households the average household size is 1.54 people with 60.4% of people

living in households consisting of two or more people.22 The local population has

21 ESRI. ‘Executive Summary: Center City’. ESRI Business Analyst Online, 2016: 1. 22 ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

increased by 1.16% between 2010 and 2016 and expected to increase by an

additional .89% by 2021.23

Center City’s population is younger than that of the United States (US) as the

median age in this area is 33.9, compared to the US median age of 38.0.

Interestingly, 60.4% of the local population is between the ages of 15 and 44, and

the most popular age category, at 34.3% of the total population, is between the ages

of 25 and 34. Moreover, only 34.3% of the population is older than 45 years old.24

In analyzing the population by race and ethnicity it is clear that the large majority

– at 72.3% of the population – is classified as white alone. Next, is Asian alone at a

very distant 15.5% of the total population. The third most common race is Black

alone, at 7.9% of the population. Between 2010 and 2016 the local market has

become more diverse as the diversity index has increased from 46.1 to 50.8.25 Never

married people comprise 57.1% of the population, with 89.7% of people working in

white-collar jobs. Interestingly, an extremely high percentage, 78.5%, of people have

either a Bachelor’s or Graduate/Professional Degree.26

The average home value in the local market is $527,093 and the median is

$445,013.27 In analyzing these numbers, it is clear that 500 Walnut is significantly

more expensive than the average home in the local market.

23 ESRI. ‘Executive Summary: Center City’. ESRI Business Analyst Online, 2016: 1. 24 ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1 25 ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1. 26 ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1. 27 ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

The average household income in the local market is $104,551 annually, and it

expected to increase by 1.94% annually between 2016 and 2021. Interestingly, the

median household income is significantly lower, at $68,610 which makes sense

because the median accounts for potential outliers who have an extremely high

income. The median household income is expected to grow at 2.82% annually

between 2016 and 2021, a higher rate than the average income. The 2016 per capita

income is $64,709 and is expected to grow at 1.88% annually between 2016 and

2021. The average household income is significantly higher in Center City than the

US, where the current average household income is $77,008. There is less of a

margin for the median household income when comparing Center City to the US, as

the US figure is $54,149. The current US per capita income is $29,472, significantly

lower than Center City.28 36.3% of households in Center City earn more than

$100,000, with 11.9% of households earning more than $200,000.29 Figure 3

provides a detailed description of annual household incomes in the Center City

market.

28 ESRI. ‘Executive Summary: Center City’. ESRI Business Analyst Online, 2016: 1. 29 ESRI. ‘Demographic and Income Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

Figure 3: Household Incomes, Center City

Source: ESRI Business Analyst Online

In analyzing the demand for high-end luxury multifamily it is extremely

important to look at net worth figures the Center City market. The accuracy of the

net worth figures is not perfect, as estimating these numbers can be very

challenging. The average household net worth is $363,001 compared to the median

net worth of only $31,619. This large difference is likely due to the fact that 53.1% of

the total population is below 34 years old. The wealthiest age group in terms of net

worth is between the ages 65 and 74, as their average net worth is $1,001,264. 30

Philadelphia

Philadelphia has a total population of 1,572,091, which is expected to increase

by .48% annually to 1,611,413 in 2021. The median age of the people in Philadelphia

30 ESRI. ‘Net Worth Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

is slightly higher than that within Center City, at 34.4 years. The major difference

comes when analyzing the race and ethnicity as only 39.8% of people are classified

as white only. The largest classification is black only at 42.1% of the total

population.31

The median age of 34.4 is very similar to Center City, but the ages are more

evenly distributed amongst the population. The most common age group is between

the ages 15 and 24, with 17.4% of the population falling in that category. Close

behind is ages 25 to 34, with 16.1% of the total population.32

The Average household income is $57,432 in Philadelphia, which is significantly

lower than the Center City region. Only 15.1% of households earn more than

$100,000 per year, with only 2.8% earning more than $200,000 annually.33 Figure 4

provides a detailed description of annual household incomes in the Philadelphia

market.

31 ESRI. ‘Executive Summary: Philadelphia’. ESRI Business Analyst Online, 2016: 1. 32 ESRI. ‘Market Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1. 33 ESRI. ‘Market Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

Figure 4: Household Incomes, Philadelphia

Source: ESRI Business Analyst Online

The average net worth is significantly lower than with Center City. Households

have an average net worth of $247,838, and a median net worth of $22,041.

Households with a net worth greater than $250,000 make up 16.9% of the

population, with 8.6% of households having a net worth of over $500,000. Similarly,

to Center City, the wealthiest age group is between the ages 65 and 74 with an

average net worth of $547,354.34

The average home value in Philadelphia is $193,008, and there is a median home

value of $150,829. Never married makes up 52.4% of the total population, a slightly

smaller percentage than the Center City area. Only 59.9% of the total population has

white-collar jobs, which is a significantly smaller percentage than Center City.35 This

34 ESRI. ‘Net Worth Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1. 35 ESRI. ‘Market Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

can explain the lower household annual income in Philadelphia when compared to

Center City.

Lower Merion

Lower Merion Township, highlighted in Figure 5, comprises of 59,064 people,

and expected to increase to 60,131 between 2016 and 2021. The median age is

slightly lower than the US, at 44.3 years old.36 The largest age group is that between

the ages of 45 and 54, comprising of 14.7% of the population. Very close behind is

the age group of 55 to 64, at 14.3% of the total population.37

58.4% of the total households in Lower Merion township have an annual income

over $100,000, with 30.4% earning over $200,000. The average household income is

$182,647 and expected to grow to $196,420 between 2016 and 2021. 38 Figure 6

provides a detailed description of annual household incomes in the Lower Merion

market.

36 ESRI. ‘Executive Summary: Lower Merion’. ESRI Business Analyst Online, 2016: 1. 37 ESRI. ‘Market Profile: Lower Merion’. ESRI Business Analyst Online, 2016: 1. 38 ESRI. ‘Market Profile: Lower Merion’. ESRI Business Analyst Online, 2016: 1.

Figure 5: Lower Merion

Source: ESRI Business Analyst Online

Figure 6: Household Incomes, Lower Merion

Source: ESRI Business Analyst Online

Economic Basis

Local knowledge shows that a good portion of high net worth individuals in the

Philadelphia region come from the Medical profession.39 There are multiple

prominent hospitals in the downtown area including: The University of Pennsylvania,

Jefferson Hospital and the Children’s Hospital of Philadelphia (CHOP). This

hypothesis is backed up by looking at the data from the ESRI Business summary as

15.7% of the total population is employed in the health care and social assistance

industry.40 According to Alon Seltzer, physicians at these hospitals make up a large

portion of the high net worth individuals in the Philadelphia region.41Additionally,

“employers in the Philadelphia metro area will create 44,000 jobs in 2016, and more

than 48,000 positions were added last year behind strong growth in health care and

construction”.42

Most people in Philadelphia, at 45% of the population are employed in the

services sector. In distant second, 15.2% of the population is employed in the retail

sector followed by 7.8% in the Finance, Insurance and Real Estate industries (FIRE).43

White-collar employment accounts for 59.9% of those employed in Philadelphia.

This is significantly lower than the Center City region, where 89.7% of the total

population has white-collar jobs.44

39 Alon Seltzer, real estate broker for Berkshire Hathaway, as per phone interview conducted July 15, 2016. 40 ESRI. Business Summary: Philadelphia’. ESRI Business Analyst Online, 2016: 1. 41 Alon Seltzer, real estate broker for Berkshire Hathaway, as per phone interview conducted July 15, 2016. 42 Economic Trends in Philly area mean solid apartment market, reports say. [Online] Available at http://articles.philly.com/2016-04-21/business/72485233_1_vacancy-rates-apartment-market-housing-starts 43 Business Summary: Philadelphia’. ESRI Business Analyst Online, 2016: 1. 44 ESRI. ‘Market Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

The economic bases of the Center City region will now be discussed. As

mentioned previously, Center City has a much higher wealthier population than

Philadelphia as a whole. There is a total of 11,060 businesses and 222,417

employees in Center City, which equates to a 3.72:1 employee to residential

population ratio.45

48.7% of the population is employed in the services industry, followed by 17.9%

in the Finance, Insurance and Real Estate industries. Of the people employed in the

service industry, 22.7% of the population works in “other services”. More

specifically, 21.3% of the total population is employed in the Professional, Scientific

and Tech Services industries. Close behind is the Finance and Insurance Industries at

13.6% of the population. The third most common industry in Center City is Legal

Services at 11.2% of the population.46

In light of the data above, it is very clear that the Center City market is

dominated by the service and FIRE industries. When analyzing the economic

standing of the people in the service industry, the employees in Legal Services are

most likely to earn enough money to be able to afford the extremely high prices at

500 Walnut.

45 ESRI. ‘Business Summary: Center City’. ESRI Business Analyst Online, 2016: 1. 46 ESRI. ‘Business Summary: Center City’. ESRI Business Analyst Online, 2016: 1.

VII. COMPETITIVE SUPPLY

Competitive properties are luxury condominiums offering similar amenities,

situated within Center City, Philadelphia. There are very comparable buildings, as

developers have only recently started building ultra-luxury projects in the

Philadelphia market. When asked about the recent condominium developments,

Emily Leaman, a reporter for Philadelphia Magazine, stated “our region’s high-end

market is on the brink of a dramatic shift. More properties over $1 million – 181 to

be exact – have sold in Philadelphia in the past year than in any year prior, thanks

largely to the city’s brand-new (and still growing) luxury condo market”.47

10 Rittenhouse Square

Figure 7 displays 10 Rittenhouse Square, one of the main comparable

condominium buildings in the Center City region, in comparison to 500 Walnut. 10

Rittenhouse is marked by the blue arrow on the left side of the map. This property is

located 1.2 miles from the subject, and is approximately a 25-minute walk.

The main difference between 10 Rittenhouse and the subject, is the size of the

development as 10 Rittenhouse consists of 134 condominiums compared to only 37

for the subject. Moreover, 10 Rittenhouse offers various apartment sizes with entry

level studios starting at $375,000. Additionally, they also offer one-bedroom

47 Philadelphia Real Estate Boom. [Online] Available at http://www.phillymag.com/articles/philadelphia-real- estate-boom/

apartments starting at $565,000.48 The subject as previously mentioned, only offer

apartments starting at 3-bedrooms with an entry level price of $2.5 million.

Although, 10 Rittenhouse has a much lower barrier to entry, the building also offers

extremely expensive units, that compare to the high-end units at 500 Walnut. The

most expensive unit at the property is 9,011 square-feet and was sold for $15

million. Some of the comparable amenities offered at 10 Rittenhouse are a “24-hour

concierge or doormen, fitness center, yoga studio, boardroom with video

conferencing, business center, indoor saline lap pool, music salon, gathering salon,

wine storage, library, yoga study, party room, catering kitchen and garden

courtyard”.49

48 First Look at 10 Rittenhouse’s Studios and One-Bedrooms. [Online] Available at http://philly.curbed.com/2012/2/24/10393682/first-look-at-10-rittenhouses-studios-and-onebedrooms 49 The Most Expensive Listing: $15M for 10 Rittenhouse Square. [Online] Available at http://philly.curbed.com/2014/9/16/10046820/the-most-expensive-listing-is-10-rittenhouse-square-for-15m

Figure 7: 10 Rittenhouse Square

Source: ESRI Business Analyst Online

One Riverside Park

Figure 8 displays One Riverside Park, another one of the main comparable

condominium buildings in the Center City region, in comparison to 500 Walnut. One

Riverside is marked by the blue arrow on the left side of the map. This property is

located 1.7 miles from the subject, and is approximately a 36-minute walk.

One Riverside is slated to open at the end of 2016, a couple of months prior to

500 Walnut. The building offer significantly more units, as there are 82 luxury

condominiums across 22 stories. “Prices will range from $685,000 for a one-

bedroom unit to $6 million for the 4,200-square foot bi-level penthouse with

elevator”.50 Interestingly, this property and 10 Rittenhouse share the same

developer, Carl Dranoff. This could provide a significant competitive advantage as

“Dranoff said he already has a list of 200 prospects for his condos”.51 One Riverside

offers very similar amenities to 500 Walnut, including: “an on-site underground valet

parking garage, a state-of-the-art fitness center with locker rooms, showers, saunas

and steam rooms, a 60’ indoor lap pool, and a private garden”.52

Figure 8: One Riverside Park

Source: ESRI Business Analyst Online

50 Starting Wednesday, a First Look at One Riverside’s Luxury Condos. [Online] Available at http://articles.philly.com/2015-03-05/news/59772616_1_10-rittenhouse-carl-dranoff-rittenhouse-square 51 Starting Wednesday, a First Look at One Riverside’s Luxury Condos. [Online] Available at http://articles.philly.com/2015-03-05/news/59772616_1_10-rittenhouse-carl-dranoff-rittenhouse-square 52 One Riverside [Online] Available at http://www.oneriversidecondos.com/the-building/overview/

500 Walnut differs from these two main competing properties in various ways.

First, the subject has a significantly higher barrier to entry as the property is much

smaller than the other buildings. This allows the subject to offer extreme privacy for

its buyers as the units have private non-stop elevators. Second, the location is very

different as it is located in the historic Independence Hall area of Center City.

VIII. PUBLIC POLICY

Dispute between Public and Private Sector

Due to the historic location of 500 Walnut (the property is located within the

Society Hill Historic District), the property had to go through a strict approval

process by the Philadelphia Historical Commission. Many members of the Historical

Commission believed this ultra-luxury high rise would take away from the quaint,

historical feel of the neighborhood.

In 2014, The Scannapieco Development Corporation and architect Cecil Baker,

went through a very stringent and long review process to get this building approved

by the district. “The review, which followed intensive scrutiny by the commission’s

Architectural Committee as well as the Philadelphia Art Commission, consisted of a

brief walk through by Baker of improvements made to the design as well as a panel

that demonstrated how exterior construction materials come together to form the

context of the building as a whole”.53 The main reason these for these changes was

due to a previous interaction between the buildings design team and various

commission members, the Society Hill neighbors, and the National Park Service.

Following these changes, “Historical Commission members felt that the tower

will be differentiated from yet compatible with its context within the Society Hill

District”.54 The review process also went into detail regarding the building materials

as this was very important to the commission. “The proposed building materials are

greenish glass and metal curtain walls, with areas of stone cladding at the base. The

upper floors include a mix of metal-frame windows and multi-story window walls”.55

Furthermore, Cecil Baker went into great detail regarding the architectural style of

the project. In describing the style, Baker stated that the building would contain

“punched-hole architectural style”.56

The National Park Service was very focused on preserving the historic views

offered in the Society Hill region of Philadelphia. Therefore, “at the request of the

National Park Service, Baker chamfered the building to preserve the views from the

Liberty Bell to blue sky behind the Independence Hall tower”.57 Additionally, in order

53 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 54 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 55 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 56 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 57 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval

to make the property fit in with the surrounding neighborhood Baker showed how

“the front of the building relates to the scale and proportions of the neighboring

Egyptian Revival remnant at the Penn Mutual building”.58

Following the meetings between the development team and the city,

Commission member, David Schaaf stated that the project is “an extraordinary

contribution to the city. A very handsome building an ornament to Society Hill, even

though it stands in contrast to historic materials from the 18th and 19th century. It

does its job beautifully”.59 Much to the delight of the development team, the

commissioners unanimously approved the recommendation.

Zoning

This project did not go without opposition, as one City Councilman, Wilson

Goode Jr., said the building “favors wealthy developers and home buyers at the

expense of the public school system”.60 When the dispute went to the courts to

determine if the project could move forward, the development team was victorious

as “the litigation was a successful appeal by Abington Bank of a Common Pleas Court

58 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 59 Plan Philly. [Online] Available at http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500- walnut-design-approval 60 New Luxury High-Rise Planned for Historic Area [Online] Available at http://articles.philly.com/2014-03- 12/news/48122666_1_abington-bank-tom-scannapieco-difficult-site

decision overturning 2005 Zoning Board of Appeals variances to make building

possible at what was considered a difficult site”.61

Following the court case, the site was granted the ability to build as many as 84

units in the 18,555 square-foot site. Although the building was permitted 84 units,

Scannapieco only chose to build 37 units. In addition to the receiving the zoning

approval, another main factor for this project was Philadelphia’s 10-year tax-

abatement program. In an interview Scannapieco stated that “he would take

advantage of this very valuable incentive”.62 The zoning approval paired with the

generous tax abatement program allowed the development team to move forward

with the project.

IX. FINDINGS

After analyzing the potential demand from both the primary and secondary

markets, it is very clear that luxury condominium development in Center City,

Philadelphia have will low capture rates. According to market research there are

approximately 2,000 people in the Philadelphia area with a net worth in excess of

61 New Luxury High-Rise Planned for Historic Area [Online] Available at http://articles.philly.com/2014-03- 12/news/48122666_1_abington-bank-tom-scannapieco-difficult-site 62 New Luxury High-Rise Planned for Historic Area [Online] Available at http://articles.philly.com/2014-03- 12/news/48122666_1_abington-bank-tom-scannapieco-difficult-site

$10 million.63 In order to qualify as a potential buyer of a condominium at 500

Walnut, this $10 million net worth was used as a benchmark.

Therefore, the capture rate for the subject site is only 1.85%; meaning only

1.85% of all income qualified households in the Philadelphia market are required to

reach full occupancy of the building. The capture rates for the two comparable

projects discussed earlier are 6.7% and 4.1% for 10 Rittenhouse Square and One

Riverside Park respectively.

The absorption rate for the subject site is very difficult to calculate, although it

will most likely be very low as expressed in months. The absorption rates for

condominium properties within the Philadelphia market in first half of 2016 is down

13.9% year over year, at 6.2 months.64 However, this number includes all

condominium developments, some of which do not target the high-end luxury

market. Therefore, it is sensible to conclude that the absorption rate for luxury

condominium developments in the region is lower.

63 Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp- content/uploads/2016/04/2.-Regions-Business-Article.pdf 64 Market History, Philadelphia County, PA Condo [Online] Available at http://www.trendmls.com/Media/Statistics/MarketHistory/Market_History_Philadelphia_Condo.pdf

X. MONITORING STRATEGY

The high-end luxury condominium market is a relatively new trend in the

Philadelphia market. Therefore, careful monitoring of the local economy must take

place in order to ensure success in this segment.

First, the overall health of the US economy is extremely important to the success

of the luxury condominium market. Developers must be aware of the strength of the

economy moving forward as this will greatly affect the amount of demand for their

projects. Additionally, developers must monitor monetary policies by the Federal

Reserve as this could have a large impact on these developments. It is generally

accepted that interest rates will increase in the near future, which will to increase

the cost of capital for projects. This could potentially change the demand for these

types of projects moving forward.

Next, it is very important to monitor the construction pipeline in the Philadelphia

area. Increased development in the luxury market will cause more competition,

which will make it harder for each project to improve their capture rate. Moreover,

new construction will increase the supply in this segment, which will in turn reduced

the untapped demand for high-end luxury product in the market.

Third, it is very important to monitor the commercial market in the Philadelphia

region. Over the past 5 years, there has been a significant uptake in the commercial

real estate market, which has strengthened the Philadelphia market in general. In

order for the market to continue to excel, developers must monitor all aspects of

the real estate market not just condominiums.

XI. Conclusion

The Philadelphia market is well positioned for new high-end luxury multifamily

condominium development. After completing this analysis it is clear that market has

strong fundamentals, and growing primary market. Additionally, there is a limited

supply in this market which will help the subject site.

However, the success in the Philadelphia market must be monitored closely as it

is relatively new phenomena. If the economy begins to weaken, and the demand for

high-end products falls then developers should become wary of building new

projects in this market. Developers should analyze the strategies laid out in Section

X, before developing any new products in this segment. If the economy continues to

recover, and the Philadelphia market continues its recent success, these projects will

have a high chance of success.

XII. APPENDIX A: Exterior and interior images, 500 Walnut65

Exterior – Penthouse balcony

Exterior – 3-bedroom balcony

65 Source of selected images:

Exterior – View of Independence Hall

Interior – Dining Room

Interior – Seating Area

Interior – Living Room

Interior – Kitchen

Interior – Alternate View of Kitchen

Interior – Bedroom

Interior – Bathroom

XIII. APPENDIX B: Images captured during site tour

Construction Sign

Exterior of Building

Signage

XIV. BIBLIOGRAPHY

Alon Seltzer, real estate broker for Berkshire Hathaway, as per phone interview

conducted July 15, 2016.

Beating The Odds on Luxury Condos. [Online] Available at http://500walnut.net/wp-

content/uploads/2016/04/2.-Regions-Business-Article.pdf

Curbed Philadelphia. ‘16 Reasons Why 500 Walnut Is Going to Be Luxuriously

Bonkers’. [Online]. Available at http://philly.curbed.com/2014/11/11/10024774/the-

fact-sheet-for-500-walnut-is-luxiously-bonkers

ESRI. ‘Business Summary: Center City’. ESRI Business Analyst Online, 2016: 1.

ESRI. Business Summary: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Demographic and Income Profile: Center City’. ESRI Business Analyst Online,

2016: 1.

ESRI. ‘Executive Summary: Center City’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Executive Summary: Lower Merion’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Executive Summary: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Market Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Market Profile: Lower Merion’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Market Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Net Worth Profile: Center City’. ESRI Business Analyst Online, 2016: 1.

ESRI. ‘Net Worth Profile: Philadelphia’. ESRI Business Analyst Online, 2016: 1.

First Look at 10 Rittenhouse’s Studios and One-Bedrooms. [Online] Available at

http://philly.curbed.com/2012/2/24/10393682/first-look-at-10-rittenhouses-

studios-and-onebedrooms

Market History, Philadelphia County, PA Condo [Online] Available at

http://www.trendmls.com/Media/Statistics/MarketHistory/Market_History_Philade

lphia_Condo.pdf

New Luxury High-Rise Planned for Historic Area [Online] Available at

http://articles.philly.com/2014-03-12/news/48122666_1_abington-bank-tom-

scannapieco-difficult-site

One Riverside [Online] Available at http://www.oneriversidecondos.com/the-

building/overview/

Philadelphia Business Journal. ‘New residential tower rising over Independence Hall’.

[Online]. Available at http://www.bizjournals.com/philadelphia/blog/real-

estate/2015/03/new-residential-tower-rising-over-independence.html

Philadelphia Real Estate Boom. [Online] Available at

http://www.phillymag.com/articles/philadelphia-real-estate-boom/

Plan Philly. [Online] Available at

http://planphilly.com/articles/2014/11/14/historical-commission-calls-for-500-

walnut-design-approval

Starting Wednesday, a First Look at One Riverside’s Luxury Condos. [Online]

Available at http://articles.philly.com/2015-03-05/news/59772616_1_10-

rittenhouse-carl-dranoff-rittenhouse-square

Stated by Matt Fair, in Law 360. ‘Philly Rides Hot Residential Real Estate Market Into

2016’. [Online]. Available at: http://www.law360.com/articles/743751/philly-rides-

hot-residential-real-estate-market-into-2016

The Most Expensive Listing: $15M for 10 Rittenhouse Square. [Online] Available at

http://philly.curbed.com/2014/9/16/10046820/the-most-expensive-listing-is-10-

rittenhouse-square-for-15m

500 Walnut. ‘Amenities’. [Online]. Available at http://500walnut.net/amenities

500 Walnut. ‘Views To Inspire’. [Online]. Available at

http://500walnut.net/residences/#section3