ANALYSIS OF PHILADELPHIA REAL ESTATE DEVELOPMENT COSTS
Econsult Solutions, Inc.
Urban Land Institute September 19, 2013
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ANALYSIS OF PHILADELPHIA REAL ESTATE DEVELOPMENT COSTS
Philadelphia: high costs, low rents What causes high development costs?
Why is this a problem?
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THE ECONOMICS OF LOWERING DEVELOPMENT COSTS (HOLDING DEMAND CONSTANT)
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WHAT CAUSES HIGH DEVELOPMENT COSTS IN PHILADELPHIA? • • • • • • •
Site acquisition, preparation and construction Financing Materials Labor Entitlement process Regulation Taxes
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ESTIMATED TOTAL COSTS ASSOCIATED WITH RESIDENTIAL AND COMMERCIAL CONSTRUCTION (Indexed to Philadelphia) Comparison Cities
% of Philadelphia Costs
Atlanta
77.6 82.1 103.4 102.6 86.9 83.3 90.7 116.4 89.3 86.4 88.0
Baltimore Boston Chicago Cleveland
Columbus Detroit New York Pittsburgh Washington US Source: RS Means (2012), Econsult Solutions, Inc Š 2013 Econsult Solutions, Inc. All rights reserved.
.
ESTIMATED COST OF MATERIALS
(Indexed to Philadelphia) Comparison Cities Atlanta Baltimore Boston Chicago Cleveland Columbus Detroit New York Pittsburgh Washington US
% of Philadelphia Costs
Source: RS Means (2012), Econsult Solutions, Inc Š 2013 Econsult Solutions, Inc. All rights reserved.
98.1 100.3 102.3 99.2 98.0 97.9 97.5 104.9 99.2 102.5 100.1 .
ESTIMATED LABOR COSTS (Indexed to Philadelphia) Comparison Cities Atlanta Baltimore Boston Chicago Cleveland Columbus Detroit New York Pittsburgh Washington US
% of Philadelphia Costs
Source: RS Means (2012), Econsult Solutions, Inc Š 2013 Econsult Solutions, Inc. All rights reserved.
58.4 64.7 104.5 106.1 76.2 43.5 84.1 127.5 79.9 70.9 76.4 .
ENTITLEMENTS PROCESS
Comparison Cities
Local Political State Political Pressure* Involvement*
Atlanta Baltimore Boston Chicago Cleveland Columbus Detroit New York Philadelphia Pittsburgh Washington
0.38 -0.17 0.87 -0.24 -0.31 3.73 0.17 -0.24 0.32 -0.45 -0.45
0.11 0.32 1.35 -0.93 -1.11 -1.11 0.59 -1.00 0.66 0.66 n/a
Number of Zoning Approvals Needed 2 2 2 2 1 1 2 2 1 1
* - Larger values indicate more local or state involvement
.
Source: Wharton Index, Econsult Solutions, Inc Š 2013 Econsult Solutions, Inc. All rights reserved.
Number of non- Zoninfg Approvals Needed 2 3 2 1 2 1 2 2 1 2 1
WHY IS THIS A PROBLEM? • The tax base is lower, requiring higher tax rates • Fewer construction jobs • Building stock deteriorates and becomes obsolete • Less competitive commercial and residential space • Decline in residential population and employment, further eroding tax.
© 2013 Econsult Solutions, Inc. All rights reserved.
THE ECONOMICS OF LOWERING CONSTRUCTION COSTS (HOLDING DEMAND CONSTANT)
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WHAT KIND OF GAINS ARE POSSIBLE WITH A 20% DROP IN DEVELOPMENT COSTS? Center City / Fairmount/ University City Buildings Over 100,000 Square Feet
Increase
Current Square New Square Feet (000) Feet (000)
Hotel
8%
10,279
848
Industrial
5%
1,940
89
Multifamily
9%
19,233
1,651
Office
8%
52,283
4,226
Retail
7%
9,095
650
TOTAL
8%
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92,830
7,464
WHAT KIND OF GAINS ARE POSSIBLE WITH A 20% DROP IN DEVELOPMENT COSTS? Center City / Fairmount/ University City Buildings Under 100,000 Square Feet
Increase
Current Square Feet (000)
New Square Feet (000)
Hotel
7%
833
59
Industrial
5%
4,278
230
Multifamily
8%
26,429
2,039
Office
6%
4,811
306
Retail
7%
13,681
915
TOTAL
7%
50,032
3,549
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WHAT DOES THIS MEAN FOR PERMANENT JOBS? Percent of New Square Space to New Square feet Employment Feet (000) Workers per worker Increase Hotel
907
50%
1,000
907
Industrial
320
50%
1,000
320
Office
4,532
50%
250
18,126
Retail
1,565
50%
500
3,130
TOTAL
7,324
38%
2,750
22,843
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WHAT DOES THIS MEAN FOR CONSTRUCTION JOBS? New Square Feet (000)
Construction Employment
Hotel
907
1,100
Industrial
320
380
Multifamily
3,690
4,440
Office
4,532
10,145
Retail
1,565
1,750
Total
11,014
17,815
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SUMMARY • Costs in Philadelphia are high, rents are low. • Supply-side improvements can be made. • Successful cost reduction means – Development – Businesses – Jobs
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EPILOGUE • This has focused entirely on supply-side improvements.
• There remain many, many demand-side improvements to make in Philadelphia.
© 2013 Econsult Solutions, Inc. All rights reserved.