Philadelphia’s Condo Market Holds Steady in Q2

Prices flatten out as sales decelerate from their all-time peak.

October 7, 2019: Prices are stable. Sales remain strong, but have dropped from their recent high. Here are the latest numbers, courtesy of Allan Domb Real Estate:

  • The average price of Philadelphia’s condos increased by 0.4% on a quality- and seasonally-adjusted basis in Q2. This continues the condo market’s recent trend of flattening price appreciation. Quarterly changes in Philadelphia’s condo price index have averaged -0.1% over the last year. By contrast, the price index for single-family houses has averaged a quarterly growth rate of 2.1% over the same period.
  • But, price changes showed some—albeit mostly unexceptional—variation across submarkets. From smallest to largest, the average change in condo prices in Q2 by submarket was: Northwest Philadelphia (-4.8%), Avenue of the Arts (-0.8%), Rittenhouse Square (-0.8%), Other Center City (- 0.2%), South Philadelphia (-0.1%), Northern Liberties/Fishtown/Kensington (+0.3%), North Philadelphia (+1.7%), Washington Square (+1.9%), Art Museum/Fairmount/Brewerytown (+2.0%), Northeast Philadelphia (+3.2%), Old City (+3.3%), University City (+3.3%) and West Philadelphia (+3.7%).
  • The Year-on-Year (YoY) change in the level of condo prices is negative, but only slightly so. The citywide condo price index is currently down 0.6% from where it was one year ago. The YoY change in the condo price index has been negative for the past four quarters, after following consistently positive appreciation since the current expansionary cycle began in 2012.
  • Median condo prices have also been dropping. The past five quarters have exhibited YoY price declines. Currently, the median condo price in Philadelphia in Q2 is $306,000; down 9.6% from $338,500 one year ago1.
  • Philadelphia’s condo price appreciation has been consistently outpaced by that of its single- family homes during the current cycle. House prices have grown at an average rate of 5.3% per year since 2012, compared to an average of 3.0% per year for condos. Over time, the compounding effect of this differential rate of appreciation has been meaningful: house prices are currently 46% above their previous trough, while condo prices are just 22% above their previous trough, both of which occurred in early 2012.
  • But, the recent flattening of condo price growth is also occurring in other large U.S. cities. From 2012 to 2018, condo prices appreciated at a combined average annual rate of 7.9% in the five cities of New York, Boston, Chicago, San Francisco and Los Angeles. However, this rate has dropped to just 0.9% over the past year2.
  • Centrality of location remains the key driver of both condo prices and condo price appreciation. Condos located in or very near to Center City not only have the highest prices, but have also experienced the greatest price appreciation (and, to date, the least price depreciation) during the current cycle. Currently, the submarket indices with the highest values are: Rittenhouse Square, Washington Square and the Avenue of the Arts. Conversely, the submarket indices with the lowest values are West Philadelphia, North Philadelphia and Northwest Philadelphia.
  • Sales activity also showed a significant Year-on-Year decline in Q2. 633 condo units changed hands in Q2, down 23.2% from 844 transactions in the same quarter one year ago3. Sales had declined 8.9% YoY in the previous quarter, which marks two consecutive quarters of declines in condo sales activity in Philadelphia. Moreover, this quarter’s decline of 23.2% is the largest Q2 decline in sales that has occurred during the current post-2012 cycle.
  • After several quarters of declines, million-dollar condo sales actually increased (somewhat) in Q2. There were 34 sales of condo units at a price of $1m or more in Q2, up nearly 10% from 31 such sales in Q2 of last year. While this level of volume is still above Philadelphia’s historic average of such sales, it is still down from its all-time peak of 51 sales in early 2017.

The recent numbers continue to point towards what previous quarter’s numbers suggest: namely, a leveling off—but not serious decline—in Philadelphia’s overall condo market. Although condos have not experienced the same level of price appreciation as either houses in Philadelphia or condos in other comparably large cities, this has the benefit of implying that they are likely to exhibit less price deflation in the event of an impending market downturn. Indeed, they may even experience further price appreciation (even if only modestly), since real estate investment capital may switch its flow from housing and other forms of real estate to the relatively underpriced condo sector of the market.

This quarter’s numbers provide some evidence that this is already starting to happen. The following map shows sales in recently completed (i.e. either newly constructed or converted) condo units in Philadelphia:

Each dot represents at least one sale in a condo property that was completed or converted in the past year (although most sales were in Q2 of this year). Most are located in the neighborhoods adjacent to Center City, with a few located in core Center City. They are overwhelmingly low-to-mid-rise townhome or garden apartment-styled units that are fairly modest in size; e.g. 4-8 units. However, two things are especially notable about these sales:

1) This is the largest increase in new condo sales in approximately ten years.
2) Many of the projects were originally designed and advertised as rental apartments, not as
owner-occupied condo units.

The magnitude of this recent surge, combined with the suggestion that many developers and investors are turning to the condo market in response to softening in the apartment and housing market, could portend a renewed interest in Philadelphia’s condo market by industry professionals and institutional capital. Whether this data point turns into an actual trend is something this report will continue to monitor.

Said Allan Domb, principal of Allan Domb Real Estate: “The numbers in this report accurately reflect what I have been seeing in the field. There has been a slight softening in Center City condo values under $700,000, in large part due to renewed interest by millennials in neighborhoods outside of the Center City core. Meanwhile, there is still strong demand for Center City condominiums over $700,000, mostly by baby boomers coming from the suburbs. With that said, condos in and closest to Center City, what I like to call the bullseye of Philadelphia’s real estate market—namely Rittenhouse Square, Washington Square and
the Avenue of the Arts—continue to experience the greatest appreciation. This only confirms that the number one driver of real estate value is still location, location and location.”

Email for Kevin Gillen:

1. Because real estate prices are highly seasonal, it’s common industry practice to compare current prices to the same period from one year ago rather than to a month or quarter ago. However, the regression that computes the condo price index controls for seasonally-driven fluctuations. So, it is acceptable to compare the current quarterly value of the index to recent quarters.

2. Source: S&P CoreLogic Case-Shiller

3. Since property transactions in this region tend to be highly seasonal, it is more commonplace to compare transactions volume in a given period to the same period one year ago (when the same seasonal conditions prevailed) rather to the immediately preceding period.

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