What we're seeing in the Allentown market this fall

Question

Curious what other investors and agents around the Lehigh Valley are running into lately, so figured I'd share what we've been seeing on our end.

Things are still moving fast. Median's around $280K, up almost 6% from last year, and a lot of listings are going under contract in about 10 days. Multiple offers are still pretty common on our team.

Rents have kept climbing too. HUD's 2-bed number for the area went from about $1,500 to $1,634 this year. On the investor side, the deals we see people closing lately tend to involve some kind of value-add, small multis, or off-market sellers more than straight MLS single families.

One thing I don't think enough people are talking about: the new zoning code that took effect in January lets buildings on certain mixed-use corridors go from 4.5 to 6.5 stories if at least 20% of the units are affordable, plus some parking reductions. We think it's great. It encourages growth, gives owners a shot at a better return on the building, and helps the lower-income community at the same time. Haven't seen many investors digging into it yet.

A couple other things that keep coming up: people are surprised taxes are still based on the 2012 assessment, and newer investors don't always know Allentown requires rental licensing and a presale inspection.

Anyone looked at the bonus height rules on a project yet? And where are your deals coming from these days, MLS or off-market?

Matthew Morrow · Answer

@Ashish Acharya Great points. Separating repairs from capex early saves a lot of headaches at tax time. On assessments and Allentown's rental licensing and inspections, we build them into underwriting from day one instead of treating them as surprises. The city is also getting more thorough with inspections and permits, which is a good thing in theory. For seasoned investors in the area, it's just a change from the old days lol. Are you seeing investors get caught off guard by that?

Matthew Morrow · Answer

@Vidit S. You're right, the market's compressed a bit, but good deals are still out there. Off market and distressed assets are usually the ones that pencil, though there are some wildcards out there for sure lol. Right now we're about 30-40% off market. Most of it comes from clients and our network bringing us deals before they list, and a lot of buyers prefer it that way. We've got everything from single family up to a 60k sf value add and redevelopment project on the South Side of Bethlehem that's going to be a big one. Overall the market is still strong. What size properties are you targeting now?

Ashish Acharya · Answer

Interesting market observations, Matthew. With value-add and small-multifamily deals making up a lot of what you're seeing, one thing I'd add is that investors should be looking beyond the purchase price when underwriting those projects.

The tax treatment of the improvements can make a meaningful difference too. Keeping repairs, capital improvements, and property-level operating expenses properly separated from the beginning makes it much easier to understand the true after-tax economics of a deal.

I'd also be curious how investors are adjusting their underwriting for the higher property-tax assessments and the additional costs that come with Allentown's rental licensing and inspection requirements.

The deals that look attractive on the surface can look very different once you account for taxes, CapEx, financing, and the actual cost to stabilize the property. Happy to connect!

Vidit S. · Answer

That's nice to hear. Are you doing more off-market or on-market?

we've invested heavily in lehigh valley. We have done mostly Eastern and Bethlehem, though. off-market distressed deals are about the only ones we've been able to make pencil lately, especially on larger properties. i think some sellers are still pretty delusional on price.

a couple years ago we put more effort into improving the portfolio we already owned... and improved how the properties were run. cash flow increased substantially. that's been a good use of our time while acquisitions have been slow. Its been hard to break even a 12% IRR on a 7 year period,

What we're seeing in the Allentown market this fall

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