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.
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.
- 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
- 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
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
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.
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).
Important Information: The views and opinions contained herein are those of Schroders' Global Cities Team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or schroders.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London, EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.