5 Key Economic Trends and the Critical Questions They Raise for Philadelphia

Sources: City of Philadelphia Office of the Director of Finance (revenue figures); US Bureau of Labor Statistics (employment figures)

© 2022 The Pew Charitable Trusts

The city’s new five-year plan assumes that 25% of nonresidents who were working in Philadelphia offices before the pandemic will not return to the office in the foreseeable future.12

In addition, the persistence of remote work is likely to decrease the demand for office space, which will affect leasing rates, thereby leading to lower value assessments for office buildings and thus lower commercial property tax revenues. That is not currently factored into the five-year plan. And, of course, fewer people in offices means lower levels of commercial activity, meaning less in sales, beverage, and parking tax revenues. (These negative impacts could be offset by converting some office space to other uses, such as residential, although the layouts of office buildings — among other factors — can make such conversions difficult and expensive.)

For all these reasons, the long-term level of remote work will affect city finances and the service businesses that rely on people working in office buildings.

One might expect that the challenging labor market situation and the population decline would lead to a softening in Philadelphia’s residential real estate market. That has not been the case.

Housing prices in the city were up 23% from 2019 to 2021, and sales rose 14%.13 Over the same period, home prices nationally went up about 28% as well, and sales rose 15%.14

In addition, rents increased, also at a slower pace than the national average — up 5.5% in Philadelphia for the two years ending in December 2021, compared with 15.9% nationally. (See Figure 2.)

And the city’s housing supply will be increasing. In 2021, Philadelphia issued permits for more than 26,000 housing units; 87% of the permits were for buildings with five or more units. (There is, of course, no guarantee that all of the units will be built.)

To some extent, the surge in permits was motivated by changes in city policy that made it more advantageous for developers to get their permits by the end of 2021. Still, the numbers were impressive; in the prior 20 years combined, permits had been issued for only 50,400 units in total.15

The increase in sales prices and rents — combined with the pending arrival on the market of many higher-priced new units — raises concerns about affordability. A 2020 Pew study found that 40% of Philadelphia households were already cost-burdened when it came to housing, meaning they spent at least 30% of their income on items including rent, mortgage payments, utilities, insurance, and property taxes.16

Even with the recent increases in home prices and rents, median housing costs in Philadelphia remain below those of some other major cities, especially others on the East Coast. Due to remote work, individuals now living in those more expensive markets may find Philadelphia an attractive alternative. From a property tax perspective, residential growth could help offset commercial losses while also attracting businesses, amenities, and jobs.

But an influx could also drive up prices in a way that would make the city less affordable for current residents.

A recent study done for the real estate company Redfin found that in-migrants to the Philadelphia region have, on average, 28% higher maximum budgets for home purchases than do residents of the region. This was the second-largest gap between in-migrants and residents, second only to Nashville, Tennessee.17

The strong housing market and its possible implications, coupled with employment and other factors discussed in this brief, raise questions about Philadelphia’s ability to achieve an equitable recovery.

Gaps in labor participation by education level (with lower participation among high school graduates who never attended college) and in recovery by sector (with the greatest losses in sectors associated with lower wage levels, such as leisure and hospitality) have already disadvantaged Philadelphians with lower incomes, many of whom are people of color. Will a broader share of workers be drawn back into the labor force as conditions normalize and wages rise? Or will the changes driven by a reorganization of work activity deepen these disparities?

As is the case in so much of the COVID-19 economic story, the persistence of remote work in white-collar sectors is a central element on the equity front as well.

Many of the lost jobs that were available to residents lacking in strong educational credentials depended to some degree on having white-collar workers coming to their offices — and then going out to lunch, having drinks or dinner after work, patronizing nearby retail establishments, and so on. The degree to which these job losses persist remains to be seen. Some of the positions may be replaced by jobs in logistics and delivery services or by hospitality and retail jobs in city neighborhoods, with many Philadelphians no longer commuting to Center City either.

For now, at least, many highly educated white-collar workers are benefiting from the increased flexibility of remote work, while some less-educated workers — many of them people of color — are not.

And as noted in a previous brief in this series, having fewer nonresidents commuting into the city on a regular basis means that city residents, including those with lower incomes, will be shouldering an increased share of wage and consumption taxes.18 Philadelphians with annual household incomes of $ 25,000 already pay more in state and local taxes than their counterparts in the largest city in each state.19

Conclusion

Before COVID-19’s arrival, much of Philadelphia had been enjoying relatively good economic times, at least by Philadelphia standards, although that was less true for people of color. For several years, the city had been matching or outperforming the rest of the country in terms of job growth; and, though still high, the poverty rate had been coming down.

The shock of March 2020 brought all of that momentum to a halt, and COVID-19’s ongoing impact has exposed some of the limitations of the city’s economic growth. White-collar workers with higher incomes felt little impact, while service workers with lower incomes got hit hard and have been slow to recover. The focus now is on what happens next.

Several key indicators for major cities, especially in the Northeast and Midwest, are less than promising. But Philadelphia’s economic future is not preordained. Crucial questions, many of which have been discussed in this brief, remain to be answered.

To some degree, how the emerging trends play out may be largely beyond the control of local decision-makers in the public and private sectors. Even so, local leaders’ decisions about employment, housing, and taxes, among other considerations, will play a decisive role in Philadelphia’s ability to become a more equitable city.

About this brief

This brief was written by Larry Eichel, senior adviser to The Pew Charitable Trusts’ Philadelphia research and policy initiative, based on research performed for Pew by a team at Econsult Solutions Inc., led by Ethan Conner-Ross. Pew senior officer Sandra Shea edited the brief, along with Erika Compart, senior manager, editorial.

Acknowledgments

This brief is funded in part by The Pew Charitable Trusts with additional support from the William Penn Foundation. The brief benefited from the comments of two independent reviewers: Sylvie Gallier Howard, founder and CEO, Equitable Cities Consulting; and Sharon Ward, former director of the Pennsylvania governor’s budget office under Tom Wolf and currently a principal in a Philadelphia-based consulting practice with a focus on state policy. This analysis does not necessarily reflect the opinions of these reviewers or their institutions.

Endnotes

  1. The Pew Charitable Trusts, “Philadelphia 2021: The State of the City” (2021), 71, https://www.pewtrusts.org/-/media/assets/2021/04/philadelphia-2021-state-of-the -city.pdf.
  2. SJ Cho, JY Lee, and JV Winters, “Employment Impacts of the COVID-19 Pandemic Across Metropolitan Status and Size,” Growth and Change: A Journal of Urban and Regional Policy 52, no. 4 (2021): 1958-96, https://onlinelibrary.wiley.com/doi/10.1111/grow.12540.
  3. US Bureau of Labor Statistics, Labor Force Statistics From the Current Population Survey, https://www.bls.gov/cps; US Bureau of Labor Statistics, Local Area Unemployment Statistics, 2021, https://www.bls.gov/lau/.
  4. US Census Bureau, American Community Survey, 2019 One-Year Estimates, https://data.census.gov/cedsci/.
  5. Among the 10 major cities tracked in The Pew Charitable Trusts’ annual “State of the City” reports, workforce participation has invariably been highest in lower-poverty cities such as Washington and Boston, and lowest in higher-poverty cities such as Philadelphia, Cleveland , and Detroit.
  6. US Census Bureau, American Community Survey, 2019 One-Year Estimates.
  7. Ibid.
  8. Kastle Systems, “Kastle Back to Work Barometer,” https://www.kastle.com/safety-wellness/getting-america-back-to-work/.
  9. Center City District, “Remote or In-Office Work: How Downtown Firms Are Thinking About the Future,” Feb. 1, 2022, https://www.centercityphila.org/research-reports/remote-or-in-office-work-january-2022-survey-results.
  10. L. Althoff et al., “The Geography of Remote Work” (National Bureau of Economic Research, 2022), https://www.nber.org/papers/w29181.
  11. City of Philadelphia, “Five-Year Financial and Strategic Plan for Fiscal Years 2023-2027” (2022), 43, https://phlcouncil.com/budget2023. The document gives two numbers for the percentage raised by the nonresident wage tax: “more than 13%” on page 43 and “more than 14%” on page 46.
  12. Ibid.
  13. Center City District, “The Center Holds: Residential Resiliency 2022” (2022), https://www.centercityphila.org/research-reports/report-the-center-holds-residential-resiliency-2022.
  14. National Association of Realtors, “Existing Home Sales” (2022), https://cdn.nar.realtor/sites/default/files/documents/ehs-02-2022-overview-2022-03-18.pdf.
  15. US Department of Housing and Urban Development, State of the Cities Data Systems: Building Permits Database, accessed April 15, 2022, https://socds.huduser.gov/permits.
  16. The Pew Charitable Trusts, “The State of Housing Affordability in Philadelphia: Who’s Cost-Burdened — and Why” (2020), https://www.pewtrusts.org/en/research-and-analysis/reports/2020/09/ the-state-of-housing-affordability-in-philadelphia.
  17. D. Anderson, “Out-of-Town Buyers Have Nearly 30% More to Spend on Homes Than Locals in Migration Hotspots Like Nashville, Atlanta, and Miami,” Redfin, Feb. 15, 2022, https://www.redfin.com/news/migrant-local-budget-difference-homebuyer.
  18. The Pew Charitable Trusts, “How Future Employment Patterns Could Put Philadelphia’s Operating Budget at Risk” (2022), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2022/05/how- future-employment-patterns-could-put-philadelphias-operating-budget-at-risk.
  19. Government of the District of Columbia, Office of the Chief Financial Officer, “Tax Rates and Tax Burdens in the District of Columbia — a Nationwide Comparison” (2021), https://cfo.dc.gov/sites/default/files/ dc / sites / ocfo / publication / attachments / 2019% 2051City% 20Study_Final.pdf.

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