Real estate development in Philadelphia is expected to slow down this year given the uncertainty in interest rates

With interest rates at the highest in 15 years, developers are putting the brakes on projects in the pipeline.
The announcement came just days before Christmas, punctuating a year that started well for the city's development industry but ended on an uncertain note.
A mega-developer in New York who decided to build in Philadelphia during the pandemic stopped work on a 360-unit building in which it had already invested $42 million of its own money.
"The Durst Organization is halting construction on the mixed-use project at 300 N. Columbus Boulevard," said a statement from the company's Philadelphia spokesman, Anthony Campisi. "This decision is the result of an unexpected increase in construction costs and a challenging financing market."
Interest rates are at their highest level in 15 years, which makes borrowing more expensive. The Federal Reserve is strongly signaling that more interest rate hikes are coming in 2023 because it doesn't think inflation is contained yet.
Some Philadelphia developers put the brakes on projects where construction isn't progressing well, though few do so as dramatically as Durst. More commonly, projects still on the drawing board will remain so, although development industry watchers say more dramatic changes could occur by mid-year.
"There are certainly people I know who have made safe deals, and then when everything has played out in the last nine months, they've decided to put those projects on hold until things calm down," said David Segal, senior vice president at TriState Capital Bank. "They didn't want a roller coaster ride in terms of materials, labor and now, of course, credit costs."

Conservatism all over retail, housing, industry
This new conservatism is evident in every sector: retail, housing, industrial and office (although new construction in the latter sector is seeing no action due to telecommuting). Even storage, which has been such a safe bet in recent years, is seeing some caution as companies like Amazon pull back from their pandemic-era investment peaks.
Some bankers said they hear from developers that the only commercial projects they approach with urgency are those that are pre-leased. Speculative development, for now, is out of fashion.
"Anything that's speculative is a challenge, and by that I mean it's probably not going to happen," said Bernie Shields, regional president of Philadelphia and South Jersey with M&T Bank.
"In normal times, if something is riskier, you can just require more equity to come in," Shields said. "Right now, I don't know that any amount of capital will make a lender interested in a commercial deal that doesn't have a significant contract in advance."
That doesn't mean nothing is being built. The recently closed $93 million cold storage facility for Port Richmond is an example of an industrial project that met these requirements.
Multifamily housing developments in hot market areas are still seen as a safe investment even in 2023. But there is concern that some companies will have to cut their asking rents in the competition for tenants because of the huge amount of construction in recent years.
"There's so much going on in the Northern Liberties, Fishtown, Kensington area that we may see some concessions to fill that inventory," said Susan Sweeney, OceanFirst Bank's regional president. "It's still a strong market, there is still strong demand, but there was a lot of construction."
Regional banks say they don't see big differences in how the interest rate environment affects lending in the region's various submarkets. Philadelphia, its collar counties, Delaware and South Jersey see similar patterns.

A slowdown isn't so painful in the Philly area
They also say the slowdown isn't as painful in the Philadelphia area because the building boom peaks haven't been as extreme as they have been in many metropolitan areas in the South and Southwest. As occurred during the Great Recession, the Philadelphia area's highs aren't spectacular, but its lows aren't devastating either.
There is hope that even if the Federal Reserve continues to raise the cost of borrowing, it will slow the increases. In the end, maybe, it will just keep them at a sustained level.
It's not as bad as it sounds. Part of what scared developers and lenders is that they don't know where the interest rates will go. Once a norm emerges, even if borrowing costs remain high compared to recent decades, development is likely to pick up again.
"There is uncertainty about when interest rate increases will slow or stop," said David Ross, senior vice president at Citizens Bank. "Until there is a clear line of sight on this, the entire funding community is selective in how they deploy their capital. If there is a relationship with an existing customer, we will look into it. But if someone we don't know enters: no."