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ANALYSIS: Center City residential market prospers, but at what price?

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There is no doubt that Center City is going through growing pains again as it looks to add well over 1,000 residential units in high-rise towers over the short term.  Much of these have thus far been in new construction buildings in the Market West sub-neighborhood of Center City.  But more recently, rehabs have become economically viable, resulting in 2040 Market Street and 1616 Walnut Street being transformed from Class B and C office space into high-end apartments.  

And who doesn’t appreciate a great re-use – it is certainly more economically, physically, and environmentally sustainable than tearing down an old structure and simply starting over.  But as more and more high-end residential uses flood Center City, often replacing older office uses in its wake, is diversity being squashed to make way for an increasingly homogenous neighborhood that only caters to high-end users?

Most of what is happening is simple economics: in a mixed-use urban environment, some uses become especially successful and land values and rents go up.  As demand increases, competition increases and values continue to rise.  As this continues unfettered, the most successful use dominates the market and homogeneity wins out.  

While there is no immediate cause for concern, it seems Philly is showing definitive signs of this phenomena occurring.  Judging by the low rental vacancies (hovering around 4%), its clear Center City is a popular place to live.  Unfortunately, the office market has not followed suit, leading to relatively high vacancies in Class B and C office space.  As demonstrated at 2040 Market and 1616 Walnut, successful residential uses are taking over older, lower rent offices, leaving only Class A space.  Left unabated, this trend could hinder use diversity, leaving only high-end users with the ability to succeed.
 
And on a long-term scale, this would be bad news for Center City and Philly as a whole.  Thriving urban centers require diversity to inject vitality and sustain itself.  Whether you’re talking about diverse users, uses, or building ages, diversity is the keystone in unlocking vital urban neighborhoods and ensuring they have sustainable futures for generations to come.  For now, all rehabilitation projects are more than welcome.  But Philly needs to keep an eye on economic diversity and reinforce this principle so that when times and desires change, the City is able to easily adapt and not get stuck with eggs in the wrong basket.  
  
Writer: Greg Meckstroth
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