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How Philadelphia’s diverse economy is helping revive the East Coast underdog

Fallen manufacturing giant Philadelphia, ranked 25th in the Schroders Global Cities Index, is fighting back thanks to technological innovation, its location and world-class educational facilities.

26/10/2017

Ben Forster

Ben Forster

Equity Analyst, Global Real Estate

In 1976 gritty Philadelphian boxer Rocky Balboa scaled the 72 limestone steps in front of the Philadelphia Museum of Art. The scene reflected the city’s struggle to regenerate its economy in the 20th century after the decline of manufacturing.

However, boosted by technological innovation, East Coast connectivity and an Ivy League university, the city is experiencing an economic transformation.

We recently visited Philidelphia to assess whether the hospitality industry will benefit from its latest revival.

Strengths

  • World class university and healthcare sector
  • Excellent connectivity to New York, Washington DC and Boston
  • Unique dining scene - Philly Cheesesteaks are just the start!
  • One of the largest malls in the world and no sales tax

Weaknesses

  • Decline of manufacturing resulted in population loss
  • Median incomes below the national average
  • 26% of the population lives below the poverty line (US average is 15%)

Statue of Rocky Balboa in front of the Philadelphia Museum of Art

From Founding Fathers to population decline

History buffs are drawn to this UNESCO World Heritage City by landmarks such as the Liberty Bell and Independence Hall. Here, the Declaration of Independence was signed by the Founding Fathers of the United States, including Philadelphia’s original statesman, Benjamin Franklin.

By the time the ink had dried in 1776, the city had become second only to London in both the volume and the value of the goods passing through its port. After later losing trade to New York, Philadelphia turned to specialist manufacturing, becoming known as the “Workshop of the World”. 

But this industrial-might also waned, as consumer preferences shifted and manufacturing declined across the American rust belt in the 1950’s. Philadelphia’s population peaked at 2 million around this time and then declined until the early 2000s. 

 

Source: FiveThirtyEight, US Census Bureau. Excluding New York City, Los Angeles and Chicago

‘Eds & Meds’ lead a revival

Unlike other fallen manufacturing giants such as Cleveland, Philadelphia is bouncing back. Its central location within the ‘North-East Megalopolis’ makes the city a well-connected but lower cost business location, versus rivals New York and Boston. 

The North-East Megalopolis by night

 

Source: ArchDaily

A diverse employment base has filled the manufacturing void, most notably in the education and medical sectors, which now employ around 30% of the workforce. The seeds of this success were planted in 1749, when Franklin founded the University of Pennsylvania, followed two years later by the nation’s first public hospital. The Ivy League university is now ranked 10th in The Times Higher Education World University Rankings. 

Its focus on innovation and community investment has helped make the city safer and more prosperous. Initiatives include affordable housing and  'Pennovation Works', a formerly formerly derelict chemicals factory, rejuvenated as a start-up incubator.

The city recently launched the Philadelphia Delivers website to pitch for Amazon’s second headquarters.“The location is central on the Northeast corridor, the talent pool is vast, and Philadelphia has all of the amenities Amazon's employees want, at a lower cost than comparable big cities,” is how the website summarises its attractions.

Source: Data USA, US Census Bureau

Downtown leisure scene improves

Another of Philadelphia’s largest employers is also investing in innovation. Media giant Comcast is expected to open its 1,121 ft tall Innovation & Technology Centre in April 2018, adding 2,800 jobs. More jobs - and therefore taxes - are allowing the city to improve its parks, attract new hotels and host major events.

Comcast’s tower will include a 217-room luxury Four Seasons hotel, around 10% of the current hotel pipeline, which will grow existing supply by around 3% per annum until 2021. This adds to the wave of openings prior to visits from the Pope in 2015 and the Democratic National Convention in 2016.

These unique ‘compression events’ helped local hotels to outperform the national average, but have created tough growth benchmarks. Revenue in the third-quarter of 2017 is down 17% year-on-year due to lower occupancy and rates. 

Source: Smith Travel Research

One hotelier looking beyond this market lull is Hersha Hospitality Trust, which owns 660 rooms in the city (10% of their portfolio). It recently acquired the Westin Philadelphia for $135 million, a 7.8% income yield, from competitor LaSalle Hotel Properties. Hersha is optimistic about the city’s future, with added scale also bringing efficiencies at its other holdings in the city. These include the luxury Rittenhouse Hotel, ranked first on Tripadvisor and Hampton Inn, which serves visitors to the recently expanded convention centre. Hersha is using the downtime to improve operating margins; renovating rooms and improving its food & beverage offering. An example is the Library Bar which it recently created from disused space and is now considered one of the best bars in the city. 

The Library Bar at the Rittenhouse Hotel

The Verdict

Education and innovation have helped Philadelphia shake off a manufacturing-led decline, bringing new jobs and an improving downtown leisure scene.

While the increase in new hotels is challenging for existing landlords, the outlook is brighter. 20 major city events are scheduled for 2019, including the Biotechnology Industry Organization’s International Convention, which could fill more than 27,000 room nights.

We believe that this East Coast under-dog offers interesting opportunities for Global City investors willing to go the distance.

The index

Our Global Cities team has an index which ranks cities in order of their attractiveness from a real estate investment perspective.

Philadelphia ranks 25th in the Global City Index and you can find a breakdown of its scores below, covering (insert the categories here).

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