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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)

© 2013 Econsult Solutions, Inc. All rights reserved.


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

Š 2013 Econsult Solutions, Inc. All rights reserved.


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

Š 2013 Econsult Solutions, Inc. All rights reserved.


SUMMARY • Costs in Philadelphia are high, rents are low. • Supply-side improvements can be made. • Successful cost reduction means – Development – Businesses – Jobs

© 2013 Econsult Solutions, Inc. All rights reserved.


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.


Presentation: Analysis of Philadelphia Real Estate Development Costs  

Adapted from Peter Angelides' presentation at the Urban Land Institute's 11th Annual Urban Issues Forum: Inviting Real Estate Growth – The T...

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