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Sustaining the City’s Momentum

by Rachel Vigoda

When it comes to the Philadelphia region’s economic outlook for 2017, the key phrase is “cautious optimism.” Business leaders and influencers across sectors are waiting to see what the new administration brings and whether the market’s encouraging reaction to a surprising election can be trusted.

Jeffrey Culp, Philadelphia market president for BB&T, thinks we’ll know more very soon. “Clearly the market has given us an indication that it is bullish on what the prospect for ’17 looks like, and the market has a tendency to be a pretty efficient measure. A lot of it is still uncertain, but I don’t think it’s going to take long. We’ll get indications on the direction it’s going to go in the first and second quarter,” he says. “We’re going to get a feel soon for whether the market’s reaction to change is being read appropriately, or whether it’s too optimistic.”

Overly optimistic or not, Culp is seeing positive trends so far.

“The economic in- dicators clearly seem to be driving to a direction of growth and that plays well for people. People start to think about new projects and about reinvesting in capital expenditures,” Culp says.

Locally, Culp sees manufacturing continuing to be a steady component of Philly’s economy, while within the medical space, with everyone waiting to find out exactly how the new administration will approach health care, uncertainty reigns. But, “I think in general bankers are feeling good about ’17,” he sums up. “We’re thinking that there will continue to be steady, not out-of-line, growth for loan demand—likely a little heavier on the real estate side than on commercial and small business—and that’s a positive.”

Michael Harrington, CFO of Bryn Mawr Trust, is leaning a little more toward the cautious side of that optimism. The country has been in a very long period of economic growth and changes that could potentially continue that expansion would, of course, be a good thing, he says. But right now, we’re play- ing the waiting game.

“We really don’t know how this is going to play out and translate into out- comes that affect our region. Before the election, people were saying the end of the line is maybe coming or, best case, we’re going to continue with a very low GDP growth rate. Now, there’s some hope that there might be a path to a higher long-term growth rate,” Harrington says.

In terms of lend-already increased and people are forecasting additional increases, so there might be some short-term benefit to borrowing now in order to lock in the current rates, he says, but “until people are convinced, there’s going to be some sitting on the sidelines. We’re not sure what the spring market is going to look like in terms of housing.”

Melissa Landay, regional vice president of Wells Fargo Middle Market Banking in Greater Philadelphia, says with interest rates expected to climb higher, “banks will be anxious to lend more money to strong borrowers.” But raised rates could impact M&A lending activity. “In 2016, we saw heavy deal flow in the middle market,” Landay says. “With higher rates, multiples may come down as acquirers will need to incorporate higher interest rates into their models, and may pay less to keep their returns at historic levels.”

Like Culp at BB&T, Landay talks about the health care landscape as a crucial, but unknown, factor. “The changing of the guard in Washington will be of critical importance to Philadelphia. The region’s health care and life sciences [companies] have a lot riding on any changes to the Affordable Care Act and government policy directed toward pharmaceutical companies,” she says. At the same time, Landay continues, “While the Trump presidency raises questions about some of Philadelphia’s major industries and employers, the election itself has provided a boost to business confidence, particularly at small businesses.”

Overall, right after a presidential election and coming off the holidays is a hard time to judge economic activity. “Preelection, everyone had a lot more certainty around what the operating environment would look like in 2017. We thought it would be more of the same,” says Harrington of Bryn Mawr Trust. “But now we have this uncertainty, which could be positive or negative. If you’re an optimistic type of person, you’re probably thinking that trying something is better than nothing.”

Glass half-full or empty, it’s not until next year that we’re really going to see any changes make a difference. “If you think through the timeline of when the things that are up in the air will be decided and will be effective—things that impact banking, that will impact processes and institutions—we’re really looking at 2018,” Harrington says. “So the way we’re viewing it is that it’ll be more of the same in ’17 as we had in ’16: modest GDP growth and solid demand for loans. The big movements are going to be further down the road.”

Any big movements, and their impact, likely won’t be identical across the region. “Philadelphia continues to struggle with economic polarization,” Landay says. “There are parts of Philadelphia that are booming. Office vacancy rates have plummeted as jobs have moved back to Center City, but suburban vacancy rates have remained somewhat elevated. Wage gains have also been concentrated in some of the fastest-growing industries and have risen much less for folks working in other areas.”

Within the real estate arena, it might be easier to point out more tangible trends than in banking, though not everyone agrees on what’s happening next.

When it comes to commercial real estate, going forward Landay expects banks to be more conservative in their real estate lending, especially in new construction due to rising interest rates and concerns that valuations are reaching their peak. “We’ve heard that many of the smaller banks are tightening their credit requirements or not doing construction loans,” she says.

Culp says real estate projects underway have fueled a significant amount of economic growth in Greater Philadelphia, primarily on the construction side. “All you have to do is drive around the marketplace to see the amount of activity, not only in Center City but also in the suburbs and in New Jersey,” he says. “It drives an awful lot of money through the economy, and I think that will continue in 2017.”

He’s referring primarily to commercial construction, citing the Comcast Innovation and Technology Center and activity on the University of Pennsylvania and Drexel University campuses as examples, but also points out multi-family development projects, which are likely spurred at least in part by a growing millennial population in Philly. That increasing population in turn drives the local service industry catering to it.

“Over the last two years, the Huffington Post, the New York Times and Forbes have all recognized Philadelphia’s growing vitality and ability to balance its historic past with a new and world-class future,” says Dan Killinger, managing director of development at National Real Estate Development. The company is working on the highly anticipated mixed-use East Market project, which will span Market to Chestnut streets from 11th to 12th.new and world-class future,” says Dan Killinger, managing director of development at National Real Estate Development. The company is working on the highly anticipated mixed-use East Market project, which will span Market to Chestnut streets from 11th to 12th.

“The Pew Charitable Trust has reflected this momentum through reports of the city’s continued population growth, being led primarily by millennials and baby boomers,” Killinger adds. “In fact, no other major American city has seen an influx of millennials as large as Philadelphia. This has also been accompanied by an increase in new Center City jobs.”

Both public and private investment have spurred that growth, Killinger says, noting how East Market and other residential, office and retail projects are re- shaping Center City. “There have also been significant investments in parks, playgrounds, restaurants by renowned chefs and new entertainment venues. These have created new neighborhoods, strengthened old ones and cultivated interaction among city residents and tourists,” he says. “They have enabled Philadelphia to host global events: Pope Francis in 2015, the Democratic National Convention in 2016 and the upcoming 2017 NFL Draft in April.”

Garrett Miller, managing principal and founder at Washington Square Realty Capital, mentions East Market while dis- cussing the city’s real estate scene. His firm has had a hand in high-profile residential and commercial projects through- out the region, including in Atlantic City and Delaware. In Philly, the Divine Lorraine, the Marine Club and Mural Arts Lofts are a few of the company’s notable multi-family developments.

“Our job is to go out and raise capital for real estate projects. And one of the biggest changes we’re seeing in regards to Philadelphia, something that’s been evolving over a number of years, is a change in perception,” says Miller. “Within Philadelphia, people are willing to push the boundaries a little further and to believe that the growth path the city is on is truly sustainable.”

Miller says the city is in the process of “filling in the holes,” citing projects like East Market; the proposed office tower at 13th and Market from Oliver Tyrone Pulver Corp.; and Parkway Corp.’s proposed mixed-use project at Broad and Spring Garden streets. “The fact that it’s even possible to propose projects like that and it’s not laughed off is a huge change,” he says. “And that will be one of the biggest drivers. We can now start to get some real legs under job growth and I think that is what will really transform Philadelphia—that you actually have true, organic growth happening. We’re not just shuffling the cards around, we’re actually adding to the deck.”

Going back to those multi-family developments serving the millennials, Killinger and Culp suggest the apartment boom over the past 10 years has led to a need to upgrade the offices where all those people moving into the new multi-family properties are going to work. The city has a few new items on the office product menu, like the FMC Tower and the two Comcast buildings, but everything else is at least 30 years old and needs to be upgraded, Miller says. “That will really help spur job growth,” he predicts, “because office users today have far different requirements than what it was 20, 30 years ago.”

Philadelphia also still has undeveloped land, even in Center City. Compare that to Manhattan, where in order to build you need to first tear down. “We’re not at that stage,” says Miller.

Looking at both the Center City area and the neighborhoods beyond it, he compares development in Philly to building a sand castle (in a good way). “You start out with a small, concentrated sand castle, but you keep pouring more sand and it keeps spreading out. The peak of the sand castle is Rittenhouse Square—it’s the most expensive, vibrant, dynamic part of the Philadelphia real estate market, and it moves out from there,” Miller says.

Expect continued activity in all directions: moving south, through Pennsport, Point Breeze and Gray’s Ferry; in University City, which will continue to push both farther westward and south, into Gray’s Ferry; and going north, where Brewerytown “looks great” and a lot is happening on the north side of Girard Avenue, he says.

But the biggest buzz, Miller says, is on North Broad Street, all the way up to Temple University. “That’s a huge story for Philadelphia’s real estate market,” Miller explains. “In terms of smaller growth, the sand is spreading out everywhere, but in terms of larger, more concentrated growth, it’s North Broad. Every day, there’s another project announced. One project by itself can struggle, but taken all together, you start creating a sense of place.”

Published (and copyrighted) in Philly Biz, Volume 2, Issue 1 (January, 2017).
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