November 20, 2017: Philadelphia’s condo market maintained its steady but geographically uneven expansion in Q3. While the local market for single-family homes has been posting its biggest numbers since the last recession, the condo market’s performance has been both more nuanced and uneven.

The average price of a Philadelphia condo rose by 0.9% in Q3 on a quality- and seasonally-adjusted basis. By contrast, the typical Philadelphia home increased in price by 2.9% during the same period. Year-on-year, Philadelphia’s condo prices are up 2.8% from one year ago, while house prices are 10.6% higher than a year ago.

The median condo price in Philadelphia is currently $315,000, which is a 1.9% increase from $309,000 one year ago. The median price per square foot (a somewhat more stable measure than simple median price) of a Philadelphia condo is currently $312, a 2.7% increase from $297 one year ago.

Changes in condo values across neighborhood submarkets were varied, but generally modest in size. From smallest to largest, the average rate of condo price appreciation in Q3 by submarket was: Washington Square (-5.4%), University City (-1.4%), Northwest Philadelphia (-0.9%), Rittenhouse Square (-0.5%), Northern Liberties/Fishtown/Kensington (-0.1%), Avenue of the Arts (+0.9%), West Philadelphia (+1.1%), Art Museum/Fairmount/Brewerytown (+1.3%), Northeast Philadelphia (+1.3%), Other Center City (+1.6%), South Philadelphia (+1.8%), Old City (+3.5%) and North Philadelphia (+4.5%).

Sales of condo units continue to perform stronger than condo prices. There were 642 arms-length transactions of condos in Q3. This is up from 602 in the same period last year, and was also the strongest Q3 for condo sales in Philadelphia since 2007.

Sales of million-dollar units also continue to perform well. There were 32 transactions of condo units at a price of $1m or more in Q3. This is up slightly from 31 such sales just one year ago. At their current pace, sales of +$1m condo units in Philadelphia are likely to pass 120 by the end of 2017. This would surpass last year’s record of 118 such transactions and thus make 2017 the new high water mark for high-priced condo sales.

One possible explanation for the disconnect between the city’s unprecedented house price appreciation but sluggish condo price appreciation could be the different levels of inventories (dwellings listed for sale) in each market. In general, a 5-7 month supply of dwellings is considered a “balanced market”. If supply drops below 5 months, significant upward pressure is placed on prices and the market is now characterized as a “seller’s market”. At their current pace of sales, the total inventory of homes for sale would be depleted within just 3.5 months, which is well below the 5-month threshold. But at their current pace of sales, the inventory of condos listed for sale would have 5.3 months before being fully drawn down, which is above the 5-month threshold; even if only by a slight margin.

A more fundamental explanation for the mixed results in condo price appreciation is location. In general, the more centrally located condo properties have experienced a much stronger price recovery since the recession that followed the housing bust. The following chart shows the condo price indices based upon a three-way geographic segmentation of Philadelphia: Core Center City, Adjacent Center City and Outer Neighborhoods[1].

While price appreciation in all three segments generally tracked each other fairly closely from 1980 to 1997, there has been a significant divergence since then. The more centrally located markets experienced greater price inflation during the 1998-2007 housing boom and have also recovered faster from the bust after hitting bottom. Since the recovery began in 2012, condo prices in the Core Center City submarket have risen by an average of 26%, which exceeds the price appreciation of 22% in the Adjacent Center City submarket, which in turn exceeds the price appreciation of 17% in the Outer Neighborhoods.

This disparity in price performance is likely driven by two separate but related factors. The nationwide trend towards a renewed interest in urban living combined with the improved quality of life in Center City has increased the general desirability of that location. Not only has that driven up the value of existing condos, but it has also spurred significant amounts of new construction—particularly in the luxury segment—that has further inflated the general level of condo prices. As Center City has become pricier, there has been a spillover of demand into its adjacent neighborhoods, where many condo buyers still desire access to Center City (and both its employment opportunities and amenities) but find it too unaffordable. By contrast, the Outer Neighborhoods have generally not experienced either this increase in demand or improved quality of life, and hence the values of their existing condo stock still remain below the levels of their previous pre-recession peak. In the short term, there does not appear any compelling reason to not expect these trends to continue.

Said Allan Domb, owner of Allan Domb Real Estate, “Kevin’s findings are consistent with what we are seeing in our condo sales. Thanks to an improved quality of life in Center City and its surrounding neighborhoods, the urban lifestyle is hot for both millennials and babyboomers alike. More specifically, sales in adjacent Center City neighborhoods are strong due to millennials and $1M+ sales in the core of Center City are strong due to babyboomers who no longer need their large suburban homes. While we are happy to see that the adjacent neighborhoods are doing so well, we also believe that from an investment standpoint, the soundest place to buy always has been and will continue to be core Center City as it historically fares the best through the adjustment periods. Additionally, we believe it is important to note that the reason for so many million-dollar buyers today is due to affordability because interest rates remain so low. In 1982, a home priced at $250,000 had a higher payment than a $1 million home today!”

Email for Kevin Gillen:   Gillen@AllanDomb.com

[1] The segmentation was done by assigning each of the individual submarket to one of the three geographic classifications, and then aggregating sales across all submarkets within their larger geographic assignment. The classification is as follows: Core Center City=Avenue of the Arts+Old City+Other Center City+Rittenhouse Square+Washington Square. Adjacent Center City=Art Museum/Fairmount/Brewerytwon+Northern Liberties/Fishtown/Kensington+South Philadelphia+University City. Outer Neighborhoods=Northeast Philadelphia+Northwest Philadelphia+West Philadelphia.