I had the pleasure of attending this year’s Real Share conference in Philadelphia last week. Real Share is an annual “State of the Market” real estate conference that travels from city to city. The speakers are primarily senior brokers, area lenders and developers as well as major players in the hospitality, education and health care fields who share their views of what happened in the prior year and what to expect in the coming year.
As luck would have it, I happened to be seated next to several out of town institutional investors and lenders. As vacancy is falling, rents are stabilizing or even rising and construction cranes are popping up around the city, it was not surprising that almost every speaker had only glowing things to say about the Philadelphia market. At one point, one of the gentleman sitting next to me shook his head, leaned over to me and said “What Kool-Aid are all these folks drinking? Isn’t there any bad news in this city?”
Well, the wonderful thing about statistics is that you can make them say almost anything you want to if you spin them the right way. Here are a few things that were not discussed or if they were mentioned, no one saw fit to dwell on them:
1. Close to 7 million square feet of office space has been removed from the inventory in Center City and that, single handedly, is what has kept the office market from crashing.
2. While Washington, D.C., Boston and New York City have created booming economies and experienced double digit job growth since 1970, Philadelphia has lost over 25 percent of its jobs since then.
3. Even as Center City has been hemorrhaging jobs, almost all of our neighboring suburbs have gained substantial jobs as companies sought out more hospitable places to establish and grow their businesses.
4. For every worker in Center City Philadelphia, there are 0.7 jobs. For every worker in the suburbs, there are 1.7 jobs. That explains why the reverse commute is getting worse.
5. The unemployment rate in Philadelphia is significantly higher than in Boston, Washington, D.C., and NYC and even higher than in Baltimore.
Yes, on the surface it seems like things are picking up in Center City. Heck, the Democrats even decided to host their next convention here and The New York Times ranked us the third best place to visit in the entire world. However, while more people are choosing to live in the city and more retailers and restaurants are popping up to support these 24/7 inhabitants, fewer people are actually finding jobs and working in the city.
There are many ways you can stabilize or grow office rents in a market. Pricing for this product, like everything else in life, is a balance of supply and demand. By far the best way to grow rents is to create jobs thereby increasing demand. Sustained job growth is the primary indicator of a healthy economy that is here to stay and, therefore, justifies the construction of new office buildings. Unfortunately for Philadelphia, most of our construction cranes are for new apartment buildings, not office buildings.
Another way to stabilize rents is to shrink supply. Make no mistake, that’s essentially what we’ve been doing in Philadelphia for the past 10 years. When you stabilize rents this way, you rarely see new office buildings popping up. Office developers understand that apartment conversions cannot be counted on as a long term strategy for driving up the value of what remains in the inventory of office buildings. Were it not for Comcast and FMC, we would be going on 15 years without a new CBD office building.
I get why the speakers at Real Share are so positive. In the business world, delivering good news makes you more friends than does bad news, especially when you have buildings to sell, projects to develop and money to lend. The problem, however, with viewing the world only through rose colored glasses (or a short term lens) is that it distorts reality and convinces us that everything is fine; that we have truly turned the corner. In this case we have not.
Surely a few companies have opened up shop in Center City in the past few years but they have not brought nearly as many jobs as some would have us believe. Yes we have Comcast who is growing exponentially but they alone cannot fuel the city’s renaissance. If we truly want to have something to hang our hat on, we need to create a business environment in the city that year in and year out is drawing companies here from other markets.
Atlanta was once the hot market, then Phoenix, Austin and Seattle. Boston and San Francisco/Silicon Valley have been hot for years and more recently the energy boom has heated up Houston and Dallas.
If we really want people to believe that Philadelphia is an exciting, dynamic city where they should invest for the long term, we need to find ways to create jobs like our neighbors in Boston, NYC and Washington, D.C. We need to identify our competitive strength and exploit it. New York is the financial center (although it has “pivoted” into a Mecca for tech jobs too in recent years), Boston a technology/startup center and Washington, D.C. the center of the universe for all things government and defense oriented. Houston and Dallas have energy focuses, San Francisco and Austin are technology. What should we be known for?
Once we articulate our focus, we need to change our attitude. Companies won’t come here simply because we have good restaurants, housing and museums. Companies need to see a local government who embraces business and views them as an essential partner in solving urban problems instead of as the exploitive “suits” in a John Grisham novel. We need them. And we need to show them why they need us. We cannot afford to fail. We have too much to offer and too much to lose.
If there is one take away from the Real Share conference, it is that we in Philadelphia are starving for good news. We want to be able to pound our chests and be mentioned in the same breath with our neighbors in New York, Boston and Washington, D.C. We’re tired of being the also ran and at the bottom of the Top 10 List of American Cities.
Sure there are some positive signs here. However, without significant and sustained job creation we will continue our steady decline since 1970. We may have some good years like 2014 along the way but they will be aberrations.
We have fundamental problems with our city and, until we admit to them and face them head on, we will continue to fool ourselves. It’s time that we focus on the fundamentals, roll up our sleeves and start making some changes. There’s work to be done if we really want our out of town guests at Real Share to believe we’ve turned the corner. We’re measuring the wrong things. Next year let’s measure our success by the number of new, well paying jobs we have created instead of the number of apartments we’ve converted or leased.
For more information contact Glenn Blumenfeld