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Why Philly's Apartment Market is Killing It Right Now

Philadelphia's rental market is on fire right now and has no signs of slowing down. That's according to a recently published TD Economics report that found that the city's apartment market is the "epicenter" of real estate activity, "with both absorptions and completions running at twice the pace seen over the past 15 years."

"Philadelphia's apartment market is really, out of all of the CRE markets that we looked at, it's the hottest one," says Michael Dolega, TD Bank's senior economist.

Using CoStar data, the report determined that while Philly's homeownership rates declined by 6.1 percentage points between 2007 and 2014, apartment vacancy rates have dropped to historic lows. Dolega says, "The vacancy rates in apartments in Philly area are dropping to a very, very low number. It was basically at 3.7 percent at the end of 2015, which is the lowest vacancy rate since 1988. It's tremendous."

So why is the apartment market so hot? One word: Millennials.

"Millennials want to live, play, and work within walking distance of each together," says Dolega. "They're really driving up demand for apartments, and I don't think developers realized how strong the demand would be."

The report also found that a record number of apartments were delivered last year, and that the supply will remain at least through the end of 2017. That's when vacancy rates may begin to increase to 4.4 percent, though Dolega says that doesn't make for an overbuilding scenario right now. "The pace is at a clip that is very much fundamentally supported," he says. "Philly is not an apartment market that's at high risk. Whatever they build is going to get absorbed."

In other words, the building boom is justified—for now. Millennials' preferences could change, Dolega says, and the demand could start to dwindle by 2020.

But "as far as stability goes, while the pace of the growth is rapid, the foundations of the commercial real estate market are quite sound and that's very, very solid positive for the city."

· TD Economics Report [Official]