A Diversion Is A Delay By Another Name

The Real Estate Espresso Podcast

A Diversion Is A Delay By Another Name

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A Diversion Is A Delay By Another Name: Analyzing Philadelphia’s Real Estate Market

Greetings everyone, I’m Victor Menasce, host of the Real Estate Espresso podcast. Today, we bring our focus to Philadelphia, a city I’ve had the privilege of developing since 2011. Recently a new program was introduced in the city… lets examine the implications for landlords and tenants.

The Early Days and a Rising Demand in Philadelphia

In its early years, Philadelphia saw immense demand for student housing, especially around Temple University, eventually leading to a surge in housing demands when a high-speed rail link connected Philadelphia to Manhattan. This situation attracted New Yorkers who found property in Philadelphia far more affordable than Manhattan’s high prices which ranged from $1500.00 a square foot in Harlem to $6000.00 a square foot in Midtown.

A Boom Phase for New Construction

Demand growth in Philadelphia skyrocketed from 2011 to 2019, ushering in an era of new construction projects. With the city witnessing a period of little to no new construction for close to five years, there was a pent-up demand that my team and I capitalized on. However, the city’s condition started to change from 2018; increasing gang activity and violent crimes led to a drop in the population, ultimately decreasing the demand for housing and resulting in flat rent rates.

Year	Development Trend	Impact
2011-2019	Rise in housing demand	Booming phase for new construction
Post-2018	Increase in crime rate	Population and housing demand decrease

The Diversion Program’s Intention, Impact, and Implications

After the pandemic, to tackle rental delinquencies stemming from the eviction moratorium, cities across the United States experimented with a form of mediation called “diversion”. The city of Philadelphia made it a permanent requirement for landlords to go through out-of-court negotiations with tenants before they could proceed with evictions.

Though the diversion program, which was favored by many landlords, aimed to prevent property owners from suffering losses, it resulted in delays due to the added step in the process. These delays increased the economic burden on landlords who still had to pay for operational expenses.

Many property owners are now risking foreclosure, and it’s the landlords who are in distress, not just the tenants. With price inflation, startling realities are faced by many families. There’s no denying that some tenants are having a difficult time making ends meet, but the struggling property owners who are over-leveraged in the current interest-rate environment aren’t getting the attention they need.

These government programs that impose more constraints on landlords will discourage them from investing further in real estate. If the rent is too high, more supply will be needed to get rents to fall, and if you discourage new supply from entering the market, then rent can only keep rising.

For a successful investment in real estate, clarity on the political environment is key. Having lost control over whether tenants pay rent and losing control over the timeline for remitting the situation, we must all reassess potential investments against these realities. I urge you all to ponder this, and make some great things happen.

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