WILMINGTON – Vacancy rates continued to rise in the New Castle County office market last quarter, with Class A offices in Wilmington’s central business district surpassing 30% for the first time in recent memory.
The overall vacancy rate rose 10 basis points to an adjusted 21.6%, 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 Sept. 30 saw a net loss of 12,903 square feet of leased office space, pushing the year-to-date loss to 299,370 square feet, Newmark reported. That comes despite 132,914 square feet being leased last quarter.
The rising vacancy rate has also suppressed asking rents. Although the average rent rose 6 cents to $26.01 per square foot compared to the prior quarter, it is still down 0.4% compared to a year ago – a three-year low. For much of the last decade, rents increased at least 1% annually.
The most notable lease of the quarter was payments and business technology company Deluxe Corporation’s lease extension for 61,662 square feet in the White Clay Center near Newark. It was the third largest lease in the entire greater Philadelphia region, according to CBRE.
Other notable leases included the law firm Kimmel, Carter Roman & Peltz lease extension for 14,963 square feet at Plaza 273 in Christiana; the Delaware State Bar Association’s lease of 9,600 square feet at 704 N. King St. in downtown Wilmington, and the law firm Paul, Weiss, Refikind, Wharton & Garrison’s lease of 8,052 square feet at 1313 N. Market St. in Wilmington.
One of the few employers to expand its space last quarter was biotechnology company DeNovix, which added about 5,000 square feet to its lease at The Concord in Wilmington’s Talleyville suburb, pushing its total to 11,415 square feet.
There is an increasing number of leases being completed this year, with 2023 already surpassing last year’s total with a quarter to go. But that activity is offset by the fact that leased spaces have been smaller since the pandemic and some larger users, like Capital One, have vacated big chunks of real estate in a move to remote work.
“In the last five years, there has been no new deal of over 100,000 square feet with the exception of one law firm [Richards, Layton & Finger] that renewed,” said Wills Elliman, senior managing director in Newmark’s Wilmington office. “In that same time, there were eight different blocks of space of at least 80,000 square feet – totaling 1.2 million square feet – that became vacant.”
He noted that he’s worked on 21 different transactions in Wilmington’s central business district, but the largest of them was 23,000 square feet.
That trend leads to a Sisyphean task of not only trying to protect larger office leases, but also trying to fill in increasingly large blocks of vacant offices.
“Well-capitalized landlords that have good amenities will weather the storm, but it’s going to be tough,” Elliman said.
While the city has seen a few successful office conversions to residential or hotel uses, such activity may slow amid the current macroeconomic climate, where commercial lending has been restricted with interest rates now pushing 7%.
“You’ve got this confluence of high construction costs and high interest rates, and that makes it tough,” he said. “It’s going to keep some of those landlords on the sideline of undertaking big projects.”
