23rd Cherry Street, Philadelphia Financial Feasibility Analysis
23rd CHERRY STREET PROJECT DEVELOPMENT MEMO Financial Feasibility Analysis To *** Real Estate LLC
Project Quick Facts •
Project Location The parcel is bounded by Cherry St, Arch St, N 23rd St, and Schuylkill River Trail. The size of this parcel is 2 acres.
N 23rd St Cherry St
Schuylkill River Trail
Arch St
John F Kennedy Blvd
•
Design Proposal This is a multi-family rental apartment project. The design proposal is shown in the table below. DESIGN PROPOSAL Parcel Area(S.F.) Apartment Footprint Area(S.F.) Stories Apartment Floor Area(S.F.) Common Area Percentage Common Area(S.F.) Number of Unit Unit Type One-bedroom Two-bedroom Parking Space Required by Zoning Parking Space Actually Provided Total Parking Space Area(S.F.)
Number 260 91
88,850 28,000 13 364,000 20% 72,800 351 Average Unit Size 700 1200 105 160 72,000
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23rd Cherry Street, Philadelphia Financial Feasibility Analysis Parking Garage Stories Parking Garage Footprint Area(S.F.) Total Square Footage(S.F.) FAR Building Density Green Space Ratio
Site Plan
5 14,400 378,400 4.9 48% 30%
Massing in google earth
Why You Should Invest in This Project Considering the ever growing multi-family apartment market in Center City Philadelphia, it is an great opportunity to develop this luxury rental apartment project on 23rd Cherry street, by the Schuylkill River. The project will provide 260 one-bedroom units with an average unit size of 700 S.F. and 91 two-bedroom units with an average unit size of 1,200 S.F.. The total constructed space is 364,000 S.F.. A five-story garage is included which will add 160 parking space. This site is roughly in the middle of Center City and University City and it’s just two blocks from Market street, which makes it very easy to get to Center City and University City by car or by walking. Five bus stations are within two blocks of this site, with 3 bus lines running by it. All of these locational vantages would make this site attractive to a wide range of potential tenants. Students from UPenn and Drexel may want to live here because it’s near campus; people who work in Center City may want to live here because it’s close to their office. This place is a quieter with great view over the Schuylkill River. It will provide a very comfortable living environment for tenants.
The rent will continue to have a positive increase in the future and vacancy rate in Center City remains low. The rent for one-bedroom unit is $1,700/ month and $2,500/ month for two-bedroom unit. There is an positive increase of rent in the future. An reasonable estimate is that the rent will increase by 10% each year.
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23rd Cherry Street, Philadelphia Financial Feasibility Analysis
•
Rent Inflation Factor Although the general annual rent decreases for Philadelphia by 1.9% this year (from Zillow), the rental apartment market of Center City is pretty robust. The average rent in Center City West is $2,133/month, which is much higher than Philadelphia average $1,063 and United States average $1,300. Besides, the rent increased dramatically from $1,693 in 10/2011 to $2,133 in 10/2013. The yearly increasing rate is 12.2%. In this project, an inflation of 10% is assumed reasonably. Area of Center City West
Source: Zillow
•
Vacancy Rate The vacancy rate for the Philadelphia county market is around 9%. For Center City and University City, the rental market is much more positive than the whole county market. For example, in the 2013 market report from the Philadelphia Real Estate Blog, apartment boom continues with high demand for rental units in Center City. There are currently 22 new apartment projects in the works, which will add 4,500 new units by 2015, if completed. And despite the increase in residential inventory, vacancy rate are expected to remain low. This is thanks to a pent up demand to trade up from older units and an improved economy, which is leading more people moving out of parent’s homes and a reduced need for roommates. Besides, in the Apartment Research Market Report from Marcus & Millichap Real Estate Investment Services, performance prospects for the Philadelphia apartment sector remain positive. The metro’s apartment sector arrives at midyear with vacancy in the low-5 percent range despite only modest job growth in the first two quarters. A steady flow of residents moving into apartments is enabling owners to either reduce, or at least maintain, vacancy and improve asset values. In Center City, minor vacancy swings and more frequent concession use will occur as new projects are leased up. And it’s reasonable to predict that the Center City and University City apartment rental market will stay strong for the next several years. Even by looking at the overall rental vacancy rate tendency, there is a stabilizing and decreasing vacancy rate for Philadelphia, which also
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23rd Cherry Street, Philadelphia Financial Feasibility Analysis
demonstrates the positive rental market in the future. Hence, in this project, a 9% vacancy rate is assumed for the first year and 3% for the following years. 2005-2012 rental vacancy rate for Philadelphia, Pennsylvania and US
Source: Department of Numbers
•
Expenses: utilities Utility expenses are estimated using data from bestplaces.net for the zip code 19103. Monthly utilities are quoted at $122. So with 351 units, yearly utilities are estimated at $513,864. For management, it typically runs 5 to 10 percent of the gross monthly rent. This 5-10 percent covers all of the services that the property manager will be providing (advertising, screening tenants, filling evictions, procuring vendors and contractors, enforcing lease agreements, etc.) (Essortment). In this project, 8% of the rent is considered as management expense. The total insurance expense including the flood insurance is set at $150,000. The market study conducted for this project suggests a typical expense inflation factor of 3%. From IREM, dense urban areas typically experience expenses of 37.5% to 43.9% of rents. In this project, expenses takes up38% of the rents.
The Returns This project is very profitable even under conservative estimates. When the permanent interest loan rate is 5.5% and the construction loan interest rate is 7.5%. From year 6, the IRR will reach 15% and bring in a positive profit of $1,506,983. The profit keeps increasing until year 30. In year 29, the NPV will grow to $35,703,130. This project has the ability to recover cost quickly which provides great flexibility to decide whether go on maintaining this project or sell it. Your return is based on either on the loan interest or a percentage of the profits. Discounted Cash-flow Summary
For Sale in Year Year 1 Year 2 Year 3
IRR #NUM! -11% 2%
NPV ($26,621,289) ($16,440,184) ($11,184,673)
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23rd Cherry Street, Philadelphia Financial Feasibility Analysis Year 4 Year 5 Year 6 Year 7 Year 9 Year 10 Year 11 Year 12 Year 13 Year 14 Year 15
9% 12% 15% 16% 17% 18% 18% 18% 19% 19% 19%
($6,530,835) ($2,354,228) $1,506,983 $4,989,933 $8,119,157 $10,949,094 $13,512,502 $15,838,427 $17,952,623 $19,877,922 $21,634,574
Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Year 27 Year 28 Year 29 Year 30
19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 16%
$23,240,533 $24,711,725 $26,062,277 $27,304,721 $28,450,180 $29,508,524 $30,488,517 $31,397,943 $32,243,716 $33,031,984 $33,768,211 $34,457,260 $35,103,460 $35,703,130 $11,035,555
The profit mainly comes from rent when you hold this project. A small part of return will come from the parking garage since it provide extra parking space for surrounding residents. When it gets sold, there is a big return from the transaction. The High occupancy will guarantee the continuous inflow of rent and the increasing value of real estate property will guarantee the price when selling the project.
Risks and Risk Mitigations The site is currently used as ground parking lot. It’s flat and in a square shape, both of which make it easy and inexpensive for new construction. The biggest risk of this site is that it’s in the FEMA 100yr flood zone. This may bring some difficulty to get the entitlement. It may require special design measures to deal with the flood issue and may cause extra cost for buying the flood insurance. Other than that, the entitlement process will be smooth because there is little issue call for extra inspections. It’s in urban built-up area, and will not threaten or endanger species habitat. There is no lien on this site. The design of the building will take the flood issue into consideration. Also, the large green space between the river and the building will act as rainwater collection garden that will alleviate the impact of flood to the building.
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23rd Cherry Street, Philadelphia Financial Feasibility Analysis
The Stormwater Management Incentives Program created by the Water Department and the Industrial Development Corporation will encourage good stormwater management projects. This project has a great opportunity to take advantage of the program to get lowinterest funding. This will further improve the flood management ability and guarantee that tenants won’t be affected by flood.
Another risk is the uncertainty of the market. Though there’s strong evidence indicating the ongoing prosperity of the rental market, there will also bring in more competitors. Hence, it is better to complete this project as soon as possible and put it in the market. In this way, less competitors will be in the market and this project can get more tenants. In addition, since it’s difficult to predict the future, how much return can be gained from selling the project is unknown. The cap rate may change, the rental market and selling market may vary. So it will be hard to predict a certain amount of return. However, since this project can get positive NPV from year 6 and the IRR remains higher than the hurdle rate, there is great flexibility to decide when to sell this project to get more profit.
According to market study, good services and maintenance are very important for attracting tenants. Hence, this project needs to keep high-quality maintenance and have high-standard service. This may bring in extra costs, but this will also guarantee strong competitiveness, low vacancy rate and stable rent inflows. In summary, this project is a very desirable project that worth your invest and you will get considerable returns within short period.
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23rd Cherry Street, Philadelphia Market Study and Analysis
MARKET STUDY AND ANALYSIS REPORT OF 23rd CHERRY STREET To Millenium Global Development Partners (MGDP)
Proposed Project Summary
The detailed design proposal is shown in the table below. DESIGN PROPOSAL Parcel Area(S.F.)
88,850
Apartment Footprint Area(S.F.) Stories
29,114
Apartment Floor Area(S.F.)
378,482
13
Common Area Percentage
20%
Number of Units Unit Type
364
Number
Average Unit Size
Studio
150
600
Two-bedroom
50
1200
One-bedroom
Parking Space Required by Zoning
Parking Space Actually Provided
164
750
109 160
Total Parking Space Area(S.F.)
72,000
Ground Floor Area Used as Parking Space(S.F.)
9,680
Parking Garage Stories
5
Parking Garage Footprint Area(S.F.)
12,464
Total Square Footage(S.F.)
440,802
Commercial Space(S.F.) FAR
Building Density
Green Space Ratio
20,106 4.96
47% 20%
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23rd Cherry Street, Philadelphia Market Study and Analysis
Market and Marketability Advantages and Challenges This site enjoys both market and marketability advantages and challenges.
Advantages: the site is flat, in a square shape, and with no geological constraints for residential development. These makes it easy to be developed. The site is currently used as surface parking. The development cost will be low since you just need to remove the surface and do some pipeline laying work. It is in an urban built-up area, so you don’t need to worry about environmental impacts to endangered animals. You don’t need to request zoning change or variance since the building requirements for this site is relatively loose and your project can satisfy the zoning requirements easily without undermining the design of the project.
It’s pretty accessible to a lot of city amenities, like the Schuylkill River, Fairmount Park, Logan Square, Rittenhouse Square, which would be an locational advantage for marketability. It has convenient public transit options which will be an attraction to those who rely on public transit.
The site is in a residential district which has a good neighborhood foundation to develop new residential projects. There won’t be negative impact on surrounding neighborhood. Challenges: the site is in the 100-year flood zone which means you need to pay more attention to the potential flood that may happen in the future that would cause damage to your project and to your tenants. You must go through the encroachment review and get the encroachment certification before you can get the building permit. You need to hire an engineer to do this, which would cost extra money and time. In addition, before you can get the local permit, you must get the permit from federal and state’s agencies, which would also increase the time you need to launch this project.
There are not many daily-service stores around this site, like grocery store, coffee shop, restaurant, drug store etc. So people have to go a long way to fulfill their needs. How to repair this disadvantage is a big challenge to develop this site.
Demand Analysis
Household formation is an important source of demand for new housing unit, so I forecast the 2015 household of Philadelphia County used the following two methods. The first one is by looking at the household change between 2000 and 2010 by owners and renters separately without considering the difference between age cohorts. The second method looks at the household formation rate of different age cohorts by owners and renters depending on 2010 data. In the first method, the 2015 forecasted population of Philadelphia County is from DVRPC’s population forecast (2010-2040) in March, 2013. In the second method, the latest available population forecast by age cohort is from DVRPC’s 2025 population forecasts report, which was finished in April, 2000. Since its population base of 2010 is also forecasted, which is less than the actual 2010 population, I calculated an ratio between the actual 2010 population and the forecasted population and multiply it to each cohort population, to make 2015 forecast more accurate. The detailed data are shown in the following three tables. An explanation of these data is followed.
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23rd Cherry Street, Philadelphia Market Study and Analysis
Philadelphia County 2015 Housing Unit Demand Projection (HH Method) Baseline Data Baseline Population
Baseline Households
Baseline Housing Units Baseline Owners
Baseline Renters
Vacant Units, Total
Vacant Units, Owners Vacant Rental Units
Normal Vacancy Rate-Owners
Normal Vacancy Rate-Renters Calculated Rates Avg. HH Size
Ownership Rate
Owner Vacancy Rate Rental Vacancy Rate
Projections (from DVRPC) 2015F Population
2000 Census
1,517,550 590,071 661,958 349,633 240,438 71,887 10,489
2010 Census
1,526,006 599,736 670,171 324,536 275,200 70,435 9,736
13,224
15,136
5.5%
5.5%
3.0%
2.57
3.0%
2.54
59.3%
54.1%
7.0%
8.9%
1.9%
2.1%
1,536,124
1,536,124
1.Calculate 2015F HHs
597,293
603,712
3.Calculate 2015F Renters
243,381
277,025
Steps
2.Calculate 2015F Owners
4.Excess Vacancies: Owner 5.Excess Vacancies:Renter
6.Increase in Ownership Demand 7.Increase in Rental Demand
353,912 -3,961 3,805
33,338
-35,624
326,688 -3,008 9,871 5,160
-8,047
Sources: US Census; DVRPC; Department of Numbers; Find the Data
3
23rd Cherry Street, Philadelphia Market Study and Analysis
4
Philadelphia County 2015 Housing Unit Demand Projection (Cohort Method) 2010 Data and Rates Age Cohort
Population
Household Formation Rate
HHs by Age of Head
Owners by Age
Renters by Age
Ownership Rate
Renter Rate
0-9
191,880
0
0.00
0
0
0
0
15-24
265,014
29,199
0.11
2,884
26,315
0.10
0.90
35-44
188,323
56,521
48,525
0.54
0.46
10-14 25-34 45-54 55-64 65-74 75+
Total
Source Table:2010 Census
90,640
0
246,062
112,179
197,970
114,288
105,046
160,808
0.58
71,292
0
0.33
42,996
0.62
28,152
43,226
0.70
17,777
42,344
0.71
17,770
317,755
0.70
256,733
Census 2010 Table B25007
HHs/Population
0
75,198
64,507
0.66
574,488 Owners+Renters
36,981
0.64
60,114
1,526,006
0.46
0.58
61,003
90,545
0
0.56
92,659
94,764
Census 2010 Table DP-1
0.00
0.55
Census 2010 Table B25007
0
0.67 0.38 0.30 0.29 0.30 0.45
Owners/HHs
1-OwnRate
Change Owners: 20152010
Change Renters: 2015-2010
2015 Forecasts
Age Cohort
2015F Population
2010 HH Form Rate
2015F Household
2010 Ownership Rate
2015F Owners
2015F Renters
0-9
225,909
0.00
0
0
0
0
0
0
15-24
211,858
0.11
23,342
0.10
2,306
21,037
-578
-5,278
0.56
105,834
0.54
56,945
48,889
0.58
103,767
10-14 25-34 35-44 45-54 55-64 65-74 75+
115,743 199,954 189,735 195,253 180,086 115,038 112,514
0.00 0.46 0.58 0.64 0.66
0
91,158
112,719 74,054 74,700
0
0
0.33
30,051
0.62
70,313
0.70 0.71 0.70
72,240 52,474 52,618
0
0
0
61,107
-6,930
-14,091
42,406
-979
-590
424
364
31,527
7,733
3,375
22,082
10,274
4,312
21,580
9,248
3,803
23rd Cherry Street, Philadelphia Market Study and Analysis Total
Source Table:2010 Census
1,546,090
DVRPC 2025 forecasts
585,575
From above
2015F Pop*2010 HHF
336,947
From above
2015F HH*2010 OwnRate
248,627
2015F HHs2015F Owners
19,192
2015 Owners2010 Owners
5
-8,106
2015 Renters2010 Renters
The forecasted 2015 housing unit demand by Household Method and Cohort Method result in similar outcome for rental housing market. There will be about 8,000 less rental demand in 2015. For owner-occupied housing market, there will be 19,000 more demands using the Cohort Method while 5,000 more demands using Household Method. These result are reasonable since they count the whole Philadelphia county data. Considering that there is an aging trend in most American cities, there will be less young people (15-34) in the future. This partly explains why the both future owners and renters will decrease. In contrast, there will be more older people in the future who typically have higher household formation rate, so both owners and renters for people 55 years old or older will increase. 2005-2012 rental vacancy rate for Philadelphia (blue), Pennsylvania (darker grey) and US (light grey)
Source: Department of Numbers
However, you must pay attention that the there are differences for sub-markets in Philadelphia county. Actually, for Center City and University City, the rental market is much more positive than the whole county market. For example, in the 2013 market report from the Philadelphia Real Estate Blog, apartment boom continues with high demand for rental units in Center City. There are currently 22 new apartment projects in the works, which will add 4,500 new units by 2015, if completed. And despite the increase in residential inventory, vacancy rate are expected to remain low. This is thanks to a pent up demand to trade up from older units and an improved economy, which is leading more people moving out of parent’s homes and a reduced need for roommates. Besides, in the Apartment Research Market Report from Marcus & Millichap Real Estate Investment Services, performance prospects for the Philadelphia apartment sector remain positive. The metro’s apartment sector arrives at midyear with vacancy in the low-5 percent range despite only modest job growth in the first two quarters. A steady flow of residents moving into apartments is enabling owners to either reduce, or at least maintain, vacancy and improve asset values. In Center City, minor vacancy swings and more frequent concession use will occur as new
23rd Cherry Street, Philadelphia Market Study and Analysis
projects are leased up. And it’s reasonable to predict that the Center City and University City apartment rental market will stay strong for the next several years.
Even by looking at the overall rental vacancy rate tendency (from the graph above), there is a stabilizing and decreasing vacancy rate for Philadelphia, which also demonstrates the positive rental market in the future.
Market/Supply-Demand Analysis
In order to better understand the market supply and demand, I did the Historical Absorption Analysis to see if the vacancy is structural vacancy or frictional vacancy. As shown in the table below, the 10-year absorption of owner-occupied dwellings actually decreased by 25,616, however, the median home value is increased by 78% during the ten years (considered the inflation factor) . There is a distinct disconnection between the demand and supply that less people own houses while housing price kept going up. This indicates that the owner-occupied residential market is much like a speculative market. Its vacancy rate, even very low (4.57%) doesn’t reflect the real vacancy condition of market. There is already sufficient or even surplus supply in the market. So it is not a good idea to build this kind of housing.
In contrast, the rental market is much healthier. During 2000 and 2010, there are 34,762 more occupied rental units. The average absorption of multi-family rental dwelling is 815 each year with a median rent increase of 13%. The occupied multi-family rental units is increased by 5.2% during the ten years. Compared with the rent increase (13%), the rental market is relatively positive. The vacancy data reflects a much real market condition. However, you need to pay attention that even though the yearly absorption is satisfactory, the vacant unit grows by 69% and the vacancy rate grows from 7% to 10%. This shows that there might be an over-supply in the rental market that the absorption rate is not fast enough to absorb all new supplies. This shows a disadvantage to build more rental units. However, it’s also possible that people move to new rental units while leaving the oldest, most unattractive units vacant. This might be a positive signal for building new multi-family apartment. If this is the case, the only thing you need to do is figuring out potential tenants’ preference and provide them with new rental units that perfectly meet their qualitative requirements and tastes (this part of analysis will be shown in the Competitiveness/Marketability Analysis). Historical Absorption Analysis of Philadelphia County Housing Market Philadelphia County Tenure and Structure Type Population Percent change
Households
Percent change
2000
2010
1,517,550
1,526,006
590,071
599,736
349,633
324,536
Owner-occupied Dwellings Occupied Owner-occupied
0.56% 1.64%
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23rd Cherry Street, Philadelphia Market Study and Analysis Vacant Units
Vacancy Rate
Percent Single-family Occupied SF&Owned
10-Year Absorption
14,400
15,524
0.93
0.92
3.96%
325,279
Average Absorption per year Median Home-Value
Median Home Value (2010$)
Renter-occupied Dwellings Occupied Rental Units Vacant Units
Vacancy Rate
Percent Multi-family
Occupied MF&Rented 10-Year Absorption
Median Rent(2010$)
299,663 -25,616
-2,562 $59,700
$135,200
240,438
275,200
7.00%
10.00%
156,842
164,992
$75,819
18,101 0.65
Average Absorption per Year Median Rent
4.57%
$135,200
30,584 0.60
8,150 815
$569 $723
Sources: US Census; US Inflation Calculator
$819 $819
It is also important to find out the Pipeline Supply, including similar projects that have been scheduled, under construction or recently completed, since they are the supply that would compete with your project when your project gets finished. Hence, through License to Inspect, I picked out the zoning permits issued for new residential construction during the past year (11/01/2010-11/18/2013). There are 48 permits in total. I looked at them one by one, and selected those for or including multi-family rental housing constructions, which is shown in the table below. There are 12 similar projects in total. Three of them have been completed which added 497 units to the market and rest will be completed in the next 3 years, which will add another 1,186 units to the market supply.
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23rd Cherry Street, Philadelphia Market Study and Analysis
Pipeline Stock of Rental Units in Philadelphia County (11/01/2012-11/18/2013) Address
Project Description
Residential Unit
Issued Date
Status
Expected Completion Date
1900 Arch St
14-story mixed use residential apartment
248
03/21/2013
Active
2014
1612 South St
4-story mixed use
14
03/05/2013
Active
2014
2116 Chestnut St 1600 South St
2930 Chestnut St 3836 Spring Garden St
601 N 02nd St
1233 Bainbridge St 2000 Kimball St
2420 Grays Ferry
34-story residential 4-story mixed use 36-story student apartment
321 5
850
11/02/2011 03/15/2013 01/14/2013
Completed Active Active
na
2013
Fall 2014
3-story mixed use
18
09/25/2013
Active
2014
4-story residential
14
09/02/2011
Active
unknown
3-story mixed use
3-story residential
multi-story residential
14 13 56
08/22/2012 11/27/2012 05/02/2011
Active Active
Completed
unknown unknown na
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23rd Cherry Street, Philadelphia Market Study and Analysis Ave
1826 W Norris St 1900 N 09th St Total
3-story duplex
5-story student housing
10
120
1,683
06/03/2013 01/04/2012
Active
Completed
unknown na
Source: License to Inspect
However, this is only looking at the supply increase from the past year. If you want to develop your project, you need at least 2 years from getting permit to fully complete it. Hence, you also need to consider the permits that might be issued this year and next year and consider them as potential future supplies. For example, the Rodin Square, a large apartment complex in Fairmount will begin construction soon. This project has no records from License to Inspect, but it has already received zoning adjustment approval in October, 2013. The 9-story mixed-use building will add 293 luxury apartment units in the supply market, hopefully, in 2014 or early 2015. So considering these potential supplies, I would assume that there will be a similar amount of permits issued this year and next year, which will result in about 3,500 new rental units to the Philadelphia County market.
Rodin Square. Source: Philadelphiaheights
Besides these new constructions, you also need to look at some renovation projects that is happening or will happen in the following a couple of years. Philadelphia has a lot of vacant buildings will could be transformed to new apartment building. For example, The Pyramid Electric Supply Company warehouse, a long vacant and derelict warehouse building in North Philadelphia’s Brewerytown neighborhood, is about to be renovated into apartments. When completed, the apartment will add 46 rental units to the supply market (from Philadelphiaheights). The Croydon, the large, conspicuous vacant structure in the middle of the Walnut Hill neighborhood of West Philadelphia, is being renovated into apartments by Orens Brothers Real Estate. It is an eight-story apartment building, with 127 upscale one, two, and three bedroom units available hopefully in 2014 (from Philadelphiaheights). I browsed the internet to try to find how many renovation projects are going on in Philadelphia and how many rental units will be in market in the near future. I would assume that there would be 1,600 renovated multi-family units available in the next two years.
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23rd Cherry Street, Philadelphia Market Study and Analysis
Rendering of the Croydon when complete. Source: Philadelphiaheights
Based on the analysis and research above, a total of about 6,800 units will be added to the supply pipeline. Considering the mild population growth and household formation rate, it’s reasonable to assume the future average absorption amount of rental units remain stable. So subtract the total pipeline by three-years’ absorption (851*3), you can get the residue after the three years, about 4,300. Part of it are vacant units in new residential buildings, but most of them might be the oldest and most unattractive units that people moved out from. Pipeline Analysis
Units Added
Permits issued last year
1,683
Renovation projects
1,600
Permits might be issued this year and next year
3,500
Yearly Absorption
Units Residue
815
4,338
About future rent level, if you assume the annual rent increase rate remains the same as from 2000 to 2010, the median rent after two years will be $870 in 2010’s dollar (1,100 in 2015’s dollar). This would be an reasonable projection since there might already be an over-supply in the multi-family rental market and more units will be added to the market, which will bring in more competition of rents. On the other hand, considering the new facilities you would provide, the rent can get increased. So it would be appropriate to assume this rent level.
Considering your project is targeting people mainly in Core Center City (zip code 19103, 19102, 19107, 19106), Extended Center City (zip code 19146, 19147, 19130, 19123) and University City, it’s good to look at the sub-market trends (Center City District). Within Greater Center City (core center city + extended center city), new construction and renovation has continued at a steady pace. In the first three quarters of 2012, 463 units of housing of all types were completed, with another 2,574 units under way. An additional 1,876 units are currently under construction, primarily in the core of downtown, which has experienced a 26% increase in population over the last two decades. The extended neighborhoods are experiencing sustained, in-fill, single-family development, as vacant lots or former industrial sites are converted to housing, providing more affordable opportunities for many first-time home buyers and renters. According to Center City
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23rd Cherry Street, Philadelphia Market Study and Analysis
District Housing Report, Greater Center City has 46,079 occupied rental units, so this new inventory under construction would add only 3% to the supply of rental, occupied housing units. Still, given the significant jump in volume of new apartment construction under way, it is probably appropriate to raise a yellow caution flag for any proposed new rental developments no already in pipeline. From the graph below, you can also see that even though there is an stable recovery from 2007, the demand in the rental market won’t experience big jump. So developing new apartment needs to be careful. And it’s important to figure out what kind of apartment are most favored by tenants. Core & Extended Center City Residential Units Completed
Source: Center City District
Competitiveness/Marketability Analysis The table below shows the competitors of your project. They are in similar locations, provide the similar multi-family rental units and targets the similar tenants. They were built in different time periods, which would become an indicator to see how the age of one building would affect the rent and occupancy of it. Since it’s difficult to get the vacancy rate data for each apartment, I use the “rating score” as an parameter to evaluate the occupancy status of each apartment. Even though it couldn’t reflect accurately how many tenants are living in the apartment, it could tell the information that what kind of apartment, amenities, services that tenants appreciate most. These could show guidance to your project development. Competitors Summary Table
Project
Built Year
Studios & 1bedroom
Rating Rent
The RiverLoft Apartments
1910
2-bedroom
$2,850
Average Unit S.F.
1,100
Rent
$3,879
Pros
Cons
Average Unit S.F.
2,041
3.5
convenient location to university and center city, quiet, good staff services, good management
high rent
11
23rd Cherry Street, Philadelphia Market Study and Analysis
2121 Market Street
The Lofts at 1835 Arch
Rittenhouse Claridge Park Towne Place Apartments
1915
1924
1950
1959
$1,255
717
$2,336
1,025
$1,605
537
$1,316
588
$1,887
1,059
$3,845
1,548
$2,882
1,200
$1,921
997
1.7
low rent
4.2
Good management, national registered historic place, walkable
2.7
location, professional staff service
2.0
location, luxury facilities, quiet
The Sterling Apartments
1961
$1,962
715
$2,612
1,310
2.0
walkable, location, large studio space
Edgewater Apartments
2006
$1,957
826
$2,552
1,388
4.1
location, good management and staff service
2040 Market Apartments
2012
Evo: Cira Center South
under constr uction
$1,785
$1,380
807
na
$2,575
$1,550
1,080
na
1.5
na
Source: hotpads, zillow, apartment ratings
new, location, spacious, neiborhood amenities
new, close to university and river, good design and facilities
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poor facilities, like the gym, leaking window, lack of hot water, bad management, lack of security and trash collection service old noise, unpleasant smell, old facilites, not actually dog friendly
poor management, mice, impolite staff
no utilities are included in the rent, noise, hidden cost, bad service security not top-level amenities railway running through the building, parking
In the graph below, you can see that the average rent for studio and one-bedroom unit ranges from $1,255 to $2,850, with an average rent of $1,827 per month. The two-bedroom rent ranges from $1,550 to $3,879, with an average rent of $2,634 per month. As you can see, there is a pretty wide scope of rent levels in the market that it might be hard to find a niche for your project. The average unit size is 700 sqft for studio and one-bedroom unit
23rd Cherry Street, Philadelphia Market Study and Analysis
and 1,180 sqft for two-bedroom unit. Your project is primarily studio and one-bedroom unit with some two-bedroom units. Though they are most popular unit types in the market, it also means that you will be facing more competitors. Hence, one important strategy is to figure out what kinds of amenities and facilities you need to provide to attract more tenants and beat other competitors.
When looking at the rating score and Pros and Cons from tenants’ feedback, you can see that low rent with poor service is definitely not a good strategy to attract tenants. Even when people are attracted to move in at first, they would soon leave the apartment and give negative comments on website. Gradually , less people will choose to move in. You can also find out that it doesn’t matter a lot that when the building was built as long as you keep good maintenance of the building or do really good renovations to make the apartment look clean, new and attractive, and all facilities, like water, electricity, gas, heating systems are all in good condition. You need to provide various amenities to tenants, even though they don’t need to be top-level amenities, which will increase your development cost and increase the rent. But a fitting center, good laundry, convenient parking are important factors in your project. In addition, you need to pay particular attention to the management team of your project because the service level of staff will affect your tenants a lot. They need to be professional, react timely to tenants’ problems, polite and honest. These are not hardware of your project, but they are significant software of your project that will ensure the success of your project. Rent Comparisons
Summary Based on the market study above, it is a good idea to develop a 13-story multi-family rental apartment on this site. There is not much constraints to develop it. The only thing you need to pay more attention is the 100-year flood zone. You might need to improve your design to mitigate the potential impacts from flood. You also need to buy the flood insurance as a guarantee.
You project is in a good location, with convenient access to University City and Center City, which would attract tenants from both sides. It has convenient public transit options. It is close to schools and other city facilities, which would attract young parents with children. From your apartment, tenants can enjoy the beautiful scenery of Schuylkill River, they are
13
23rd Cherry Street, Philadelphia Market Study and Analysis
also within walking distance to Fairmount Park, Logan Square and Rittenhouse Square, which would be big attraction.
According to the market analysis and competitiveness analysis, the multi-family rental market will keep growing in the next a couple of years. The absorption analysis shows a positive absorption rate. And even though the there will be many new constructions or renovation projects, the market will keep absorbing the most desirable units, while leave the most unattractive units. So you just need to provide the competitive units, which includes good facilities, amenities and high-quality management and maintenance without worrying a lot about the actual increase of units in the market.
It’s a good idea to have studio and one-bedroom units as your main type of units since they are most popular ones. Also, considering its location, university students and young professionals (with or without children) working in Center City would be the most potential tenants of your apartment. You can also provide some two-bedroom units as an supplement. You can provide more varieties of unit size and design to fulfill the needs of different tenants. Also, considering the mixed composition of tenants, you may want to provide a wider range of rent for different tenants. For example, for university students, the unit size might be smaller with a lower rent, for young professionals, they might want spacious room, so their unit size will be larger, with a higher rent. The suggested rent level for studio and one-bedroom apartment will be $900 to $2,000, with a unit size from 550 S.F. to 1,000 S.F.. The rent for two-bedroom unit will be $2,200 to $3,200, with unit size ranges from 1,100 S.F. to 1,500 S.F..
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34th & Market Street, Philadelphia Land Appraisal
LAND APPRAISAL OF 34th & MARKET STREET Location and lot size
Market St 34th St
Ludlow St This parcel is bounded by Market St, Ludlow St and 34th St. The size is 21,730 S.F..
Zoning considerations
This parcel is zoned as CMX-4(Center City Commercial Mixed-Use). It is allowed for residential, office , retail uses. The maximum occupied area is 90% when buildings are less or equal 5 stories with 1 one more dwelling units, and 100% in other circumstances. The maximum FAR is 5.0. The required parking space is 3/10 units for multi-family building; for office and retail uses, there is no mandatory requirement.
Development concepts •
A five-story apartment
A five-story apartment similar to Domus has a total square footage about 100,000. Based on the data of Domus, and what I studied for the Pencil-Out Model, one-bedroom apartment with an average unit size of 1,000 S.F. is very popular in the market. So I set the average unit size as 1,000 S.F. and there are 82 units in total which resulted in 25 parking space. The parking garage has four stories. The FAR will be 4.7, which is very close to the maximum value, 5.0. The residential building occupies 83% of the parcel area, the parking garage occupies 12% of the parking area. •
A two-story urban target retail
It is a good place for a retail building because it has a large potential customer group from university students, staffs and employees nearby and residents. So I want to build as much as floor area I can to provide more goods and services to attract customers. The proposed two-story retail building will occupy 96% of the parcel area, with a total leasable area of
1
34th & Market Street, Philadelphia Land Appraisal
2
40,000 S.F. when the common area takes up 5% of total square footage. With these assumptions, the final FAR will be 1.94. •
A five-story office building
The 5-story office building has an total leasable area of 80,000 S.F., which will occupy 77% of the parcel area. 30 parking space will be provided in a three-storey garage. The FAR will be 4.49, and the total building footprint will take up 98% of the parcel area. Land Appraisal Table Land Appraisal
Market & 34 th
Residential
Retail
PROJECT OUTLINE
Office
Market & 34 th
INPUTS
PROJECT OUTLINE
Parcel Size(SQFT)
21,730
21,730
21,730
Average Unit Size
1,000
1
1
Stories
Residential Units Efficiency Factor
Parking Spaces - Structure
DEVELOPMENT COST STRUCTURE Land Cost/SQFT
Soft Costs(as % of hard costs) Construction Cost/SQFT
Parking Cost/Space
OPERATING COST STRUCTURE Avg. Vacancy Rate Expense Ratio(%)
Capitalization Rate MARKET RENT(month/unit) DEVELOPMENT COSTS Total Square Footage(excl. parking Construction Cost(excl.parking) Soft Costs Parking Costs Total Development Cost(ex.land)
5
82
90% 24.6
2
40,000 95% 0
5
80,000 90% 30
◆
◆
◆
35%
35%
35%
$200
$150
$180
$29,250
$29,250
$29,250
5%
0%
10%
20%
15% 7%
7.00%
$3,000
$45
$20
42,105
88,889
5%
91,111
CALCULATIONS
15%
$18,222,222
$6,315,789
$16,000,000
$719,550
$0
$877,500
$6,377,778
$25,319,550
$2,210,526 $8,526,316
$5,600,000
$22,477,500
Parcel Size(SQFT) Stories
Leasable Area
Common Square Footage
Parking Spaces - Structure
DEVELOPMENT COST STRUCTURE Land Cost/SQFT
Soft Costs(as % of hard costs) Construction Cost/SQFT
Parking Cost/Space
OPERATING COST STRUCTURE Avg. Vacancy Rate Expense Ratio(%)
Capitalization Rate
MARKET RENT(per SQFT/year) DEVELOPMENT COSTS Total Square Footage(excl. parking Construction Cost(excl.parking) Soft Costs Parking Costs Total Development Cost(ex.land)
34th & Market Street, Philadelphia Land Appraisal
VALUE CALCULATIONS
VALUE CALCULATIONS
Gross Scheduled Rent -Vacancies
$2,952,000
$1,800,000
$1,600,000
$590,400
$270,000
$240,000
$147,600
-Expected Expenses
Net Operating Income Estimated Value(NOI/Cap Rate) -Total Development Cost
$2,214,000
$1,530,000
$160,000
$1,200,000
$21,857,143
$17,142,857
$18,960,450
$13,330,827
-$5,334,643
$18,960,450
$13,330,827
$25,319,550 $873
LAND VALUE
$0
$44,280,000
Residual Land Value
Land Value per SQFT
$8,526,316 $613
$22,477,500 -$245
-$5,334,643
Gross Scheduled Rent -Vacancies
-Expected Expenses
Net Operating Income Estimated Value(NOI/Cap Rate) -Total Development Cost Residual Land Value
Land Value per SQFT
LAND VALUE
The design The site plan of three different types of project on this parcel is shown below. Apartment
Retail
Office
The sources, calculation assumptions and explanations •
Construction cost
Construction cost is based on similar projects from RS Means. The construction cost for 5story apartment building will be $200/S.F., for a 2-story retail building, the construction cost is $150/S.F., and for a 5-story office building, the construction cost is $180/S.F.. •
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Rent
Rent level is based on market comparison from Zillow. Domus apartment at 34th Chestnut is a good analogue for the apartment building. The one-bedroom unit with 793 S.F. is leased
34th & Market Street, Philadelphia Land Appraisal
for $2,277 to 2,457 per month. Considering the project provides larger space for tenants(1,000 S.F. per unit) and when the apartment gets finished, the Domus apartment will be not as new as it is today, I assume the monthly rent for the project is $3,000 per month.
For retail rent, I referred to data from LoopNet. For example, the Chestnut Square at Drexel University which is now under construction asks for $65/S.F./Year(which is very high compared to the market average rent), the 2-story retail on 3601 Sansom Street is $30/S.F./Year, which is very resemble to this project. The 2-story retail on 3731 Walnut St is $40/S.F./Year. Based on these similar retail buildings and the market condition of Philadelphia average rent level, I assume the rent of this project is $45/S.F./Year, which shows a moderately optimistic prediction for the rental retail market in University City. For office rent, I also used the data from LoopNet. For example, the 2.0 University Place on 30N 41th St which was built in 2013 is $34/S.F./Year, the 3-story building on 3700 Market St is $20/S.F./Year, the 3-story building on 4212 Chestnut St is $15/S.F./Year, the 2-story office on 3901 Market St is $20/S.F./Year, and the Eight Penn Center on 1628 John F Kennedy Blvd, built in 1981 is $22.75/S.F./Year. In addition, the rent of a lot of office buildings in center city is less than $15/S.F./Year. Based the research and the asking rent for office buildings in Philadelphia(the chart below), I assume the rent for office building is $20/S.F./Year, which is in a moderate level. •
Cap rate
Cap rates of different uses are based on CBRE Cap Rate Survey. This survey is done by CBRE in February 2012 which indicates the cap rate for class A office, multi-family housing, retail, industrial, hotels for major US cities. The cap rate of Philadelphia’s office market is 6.5%-7.0% in February 2012 and there’s a trend to keep this rate in the next 6 months. Considering the average performance of office market in Philadelphia, I used the higher cap rate, 7.0% in this land appraisal calculation. Similarly, the cap rate for Class A multi-family housing is 5.0%-5.25%, with a tendency of staying stable in the future. Considering the relatively prosperity of rental apartment in Philadelphia, I assumed the cap rate is 5%. For rental retail, the cap rate ranged from 7.0% to 7.5%, with a tendency of staying stable. I assumed the cap rate for the retail market is 7%. •
Efficiency ratio:
Efficiency ratio/common square footage is based on studies. I referred to the book Building Economics for Architects, which was written by Thorbjoern Mann in 1992 and a more recent study done by UK Higher Education Space Management Project: Promoting space efficiency in building design in 2006. In the former book, office buildings usually are expected to achieve an efficiency ratio of 0.75 to 0.8, apartments from 0.67 to 0.8. The standards must be used judiciously. For example, the NGR(net-to-gross ratio) for an office building that features mainly many small offices for single occupants will be lower than that for a building with large open office landscape type spaces, as the latter can be much deeper than
4