WILMINGTON – The vacancy rate for northern Delaware’s office market continued to rise in the second quarter, although the pace was much slower compared to the start of the year.
The overall vacancy rate rose 20 basis points to 21.1%, with the Wilmington central business district being hit the hardest, rising 50 basis points to 28.4%, according to a new quarterly report from Newmark, a major commercial real estate brokerage that closely follows the Delaware market. Regional reports from other brokerages like JLL, CBRE and Cushman & Wakefield largely matched the same findings.
The quarter that ended June 30 saw a net loss of 54,613 square feet of leased office space, pushing the year-to-date loss to 286,467 square feet, Newmark reported.
The rising vacancy rate has also pushed down asking rents. Although the average rent rose 4 cents to $25.95 per square foot compared to the prior quarter, it is down 0.7% compared to a year ago – a three-year low.
The most notable lease of the quarter was Carvertise’s new 15,000-square-foot headquarter offices in Wilmington’s Riverfront, but it doesn’t factor into Newmark’s vacancy calculations because it is in a primarily retail location.
Other notable leases included the Delaware Institute for Reproductive Medicine, which leased about 13,500 square feet at 620 Churchmans Road near Newark; Great Gray Trust Company, which acquired Wilmington Trust’s collective investment trust business this year and leased about 5,000 square feet at Chestnut Run Plaza; and Strayer University, which extended a lease for about 3,900 square feet at its King Street location in Wilmington.
Those deals have done little to stem the overall trend of emptying offices following a post-pandemic move to remote working or hybrid schedules that require less space. Credit giant Capital One has left tens of thousands of square feet of offices, while earlier this year student loan servicer Navient moved nearly its entire Delaware workforce to remote work, leaving a full floor of offices in the Star Building in Wilmington’s Riverfront that still carries its rooftop logo.
“During the pandemic and as we exited it, more than 90% of our Delaware employees were working in a remote or hybrid status, so we moved them to full-time remote status. The move has been well received by current and prospective employees. And earlier this year, we significantly reduced our physical office space, retaining a space for a small team to remain onsite,” Paul Hartwick, a spokesman for Navient, told Delaware Business Times.
John Kaczowka, senior vice president of CBRE’s Wilmington office, said that although the local market stats do paint a dire picture, they don’t tell the whole story – particularly that a handful of very large vacant downtown buildings like Bracebridge and Wilmington Plaza inflate the overall rate.
“The properties that can offer parking, amenities, good quality space, good views, and a great layout – they’re doing great,” he told DBT. “Properties that are less than desirable – older, outdated, maybe functionally obsolete – are being converted.”
That demand is one reason why about 240,000 square feet of new office space is under development in the market, primarily at Avenue North in Fairfax and the Walker Mill Building near Chestnut Run. Both are also in the suburbs, where parking may be easier and city wage taxes don’t apply.
The suburbs continue to see stronger leasing, with the combined vacancy rate standing at 15.6%, Newmark reported.
Over the first half of the year, Kaczowka found success in leasing more than 39,000 square feet of the Rockwood Office Park, a three-building complex in Wilmington’s northern suburbs. Among the tenants were solar developer SunnyMac Solar, which leased more than 23,000 square feet; Delaware Department of Insurance, which leased almost 9,000 square feet; and an undisclosed tenant that is “one of the world’s largest industrial companies,” which took almost 7,800 square feet.
Kaczowka said that he’s seen many companies that abandoned offices early in the pandemic begin to rethink their needs and are now investing in upgrades of existing space or seeking new offices that can attract and retain workforces while also fostering a collaborative culture.
“We’re seeing companies say, ‘OK, now I need to do something. I need to start planning for the future,” he said.
That trend could bear fruit over the second half of 2023, as Newmark noted that while the vacancy rate has risen, leasing has outpaced the post-pandemic average. With several major renewals on the docket for the third and fourth quarters, office leasing this year could beat the post-pandemic average of about 445,000 square feet by 14%.
