By David Langlieb
We’re now into our third full year of lending at the Philadelphia Accelerator Fund, and we’ve developed a kind of mantra for allocating our limited resources: maximum units of housing at the most economically viable affordability. It’s not catchy, admittedly, and it’s aspirational. The truth is that our lending priorities – like all of life’s priorities, really – are to some degree in tension with one another.
For example: we can (and do) provide early-stage predevelopment financing into large, multi-unit, deeply affordable Low Income Housing Tax Credit (LIHTC) projects, but those projects can easily take 36 to 48 months to materialize and assembling the full capital stack needed to get shovels in the ground is always complex. We can (and do) provide loans to rehab vacant triplexes which can close in a matter of weeks; but the projects are smaller than multi-family LIHTC and we typically end up with fewer housing units per dollar of investment. We can (and do) provide subordinate debt into multi-family rental projects, as well as predevelopment and subordinate debt into new homeownership units via Philadelphia Land Bank dispositions – also excellent uses of our loan capital, but not without tradeoffs, as securing the requisite senior debt adds time and uncertainty to the process.
And so, as Executive Director of PAF, the ‘zero-sumness’ of our loan capital is constantly front of mind. We are always looking to secure new investor dollars and we’re doing our best to expand the size of the loan fund so we can say ‘yes’ to more projects. While we may not perfectly optimize the utility of every cent within our loan pool, I take certain solace in the view that every unit we finance is at least a step in the right direction. I say this because the reality is that we have a massive housing supply problem in Philadelphia.
The scale of our undersupply was thoroughly demonstrated in the City’s 2018 Housing Action Plan, and while progress has been made over the last few years, the problem continues to loom. An October 2023 study by housing think tank Up For Growth found that the Philadelphia Metropolitan Statistical Area (MSA) was 79,694 housing units below where it needed to be at its current population (making it the tenth most undersupplied American metro).
Given the near impossibility of upzoning at scale in the suburbs and the tens of thousands of vacant parcels within Philadelphia, any realistic effort at building the housing we need regionally will be made within city limits. And it is here where deed-restricted affordability is critical. As most Philadelphians know all too well, keeping housing costs at or below 30% of income – the standard metric for determining affordability – has become extraordinarily difficult. A pre-pandemic Pew Charitable Trust report noted that 54% of renters within the city spend more than 30% of their income on housing. And 68% of Philadelphia households with incomes under $30,000 are spending more than half of their income on housing.
Perceptions and Practicalities
It can be surprisingly difficult to get people to believe that we don’t have enough housing in Philadelphia. Part of the issue is that the most visible new construction projects currently underway are high end high-rise rental developments that serve a very specific market segment – the 1,111-unit development at Broad and Washington and the recently completed 254-unit Josephine development at 17th and Sansom, for example. Residents and landlords alike see the cranes in the skyline and get nervous. How can the city possibly absorb all these new units while our population has pretty much hovered at 1.5 to 1.6 million people since 1990? On August 6, 2024 a splashy Inquirer piece (“Philly Apartment Glut? Developers Worry as Tenants Snap Up Discounted Rents”) lamented that the upcoming completion of new multi-unit rental properties is compelling landlords to make tenant concessions of up to three months free rent on a two-year lease. The article suggests this could be a problem, though it’s difficult to see how a little bit of tenant leverage (after years of rent increases outpacing inflation) is anything but good news.
Anyway, whether or not the luxury rental market has softened, it is a category error to view the city’s housing supply in terms of this one market segment. It is possible (though far from certain) that developers have built more luxury rental units in recent years than prospective residents are willing to pay for at the developers’ preferred rents. Practically speaking, this means we may see increased vacancy on the higher end, and that the market rate rents on these properties may go down. Consequently, lenders may need to restructure or write down a portion of their debt for these properties to cash flow. This would be bad news for certain individual investors and lenders, but it has very little to do with the city’s housing supply as a general matter.
The Scourge of ‘Parasitic Capital’
What exactly happens when a housing development project is postponed or rejected? Who suffers when an attempt at upzoning is rejected or a Land Bank disposition project dies?
Ostensibly, it’s the developer who suffers. And of course, nobody is going to make any money off a development project that doesn’t happen. But far and away, it is the Philadelphia citizenry – renters, prospective homebuyers, and new residents alike – who suffer when units don’t get built. This is especially true when the units which don’t get built were to be deed-restricted for affordability, but it’s true for market rate units as well. The law of supply and demand is as ironclad as it gets, and externally imposed restrictions (zoning, permitting delays, community opposition, etc.) on the amount of buildable housing drives up prices.
It’s actually worse than that, though, because housing scarcity also impacts who buys property in Philadelphia and what they do with it. The artificial scarcity of housing in Philadelphia has been a windfall for exactly the people we don’t want buying up our housing stock – out-of-state investors and well-capitalized, predatory landlords who are best-positioned to make fast cash offers on properties. These investors typically either speculate and hold vacant properties without building any new housing or they increase rents on cash flowing rental properties while keeping capital improvement investment to a bare minimum. In a 2022 piece for the Philadelphia Citizen, Bruce Katz and Lori Bamberger termed this kind of investment ‘parasitic capital’ and that’s exactly what it is.
It would be one thing if rising real estate prices merely increased property values for existing Philadelphia property owners – this would box out new prospective homebuyers, drive up rents, and increase property taxes (all things which have, of course, happened) but it at least keeps localized whatever new wealth is created. Instead, the trend has increasingly been for parasitic capital to chase down more and more Philadelphia real estate and to treat that real estate as an investment first and as housing second.
There’s only one solution to this problem, which is to build new housing.
Working Towards 30,000
Of course, the housing shortage in Philadelphia is no secret and has been a focus of considerable resource deployment and civic energy over the last several years. Most visibly, Mayor Parker has made the construction of new housing a key focus of her mayoralty, having identified a goal of 30,000 units to be built during her administration. This excellent, ambitious goal is partly informed by the 2018 Housing Action Plan, which concluded that at least these many units will be needed by 2030 to house a city of just over 1.6 million people. Creation of the Accelerator Fund as a housing finance tool was among the recommendations made in the plan, and we are proud of our early efforts towards meeting that goal.
But just as we proactively take an ‘all of the above’ approach to new affordable housing development – for sale, rental, LIHTC, Turn the Key, non-subsidized, ground up, rehab, rowhome, and multi-family – so must the broader city housing strategy pursue new housing construction with an ‘all of the above’ mentality. New financing tools like PAF are one piece; expansion of downpayment subsidies, upzoning, automatic density bonuses, streamlined permitting processes, and faster Land Bank dispositions are just a few others. Our capital may be zero-sum, but our capacity to build the housing we need is limited primarily by the restrictions we as a city impose on ourselves.
The civic and political leadership of Philadelphia needs to hear this from the citizenry. Far too often, the loudest voices in the public square are from a small number of people seeking to preserve the status quo. We need not question the motives of those who oppose affordable housing development projects, but we do need to respond. Mayor Parker’s highly public prioritization of 30,000 new homes is evidence of a growing consensus that more housing is needed. Let us build on this consensus with the kind of practical reforms needed to make these new homes a reality.