WILMINGTON – The vacancy rate for northern Delaware’s office market broke 20% to start 2023, crossing a threshold it had not seen in years, after a major bank left tens of thousands of square feet in downtown Wilmington amid a move to a work-from-home policy.
The vacancy rate hit 20.9% after netting a loss of 231,854 square feet in the first quarter of 2023, up from 19% at year-end 2022 and 17.3% from a year ago, 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 rising vacancy rate has also pushed down asking rents, with the average falling 16 cents to $25.91 per square foot compared to the prior quarter. It is down about 34 cents compared to a year ago.
The weaker leasing market continues to give bargaining power to tenants during lease negotiations, which is forcing landlords to push aggressive concession packages or invest in new amenities to lease up buildings. Buccini/Pollin Group, the largest office space owner in Wilmington, has announced millions in new project spending to modernize and renovate buildings, while Johnson Commercial Real Estate is investing in its two office towers.
The biggest move to start 2023 was the decision by credit giant Capital One to list about 61,000 square feet of space at the Highmark Building at 800 Delaware Ave. for sublease after moving its workers there remote. The bank did not respond to a request for comment on the move and whether there were any job losses connected to it.
Nearly two years ago, it left 91,000 square feet at the same building, telling Delaware Business Times that it was consolidating its operations to its 802 Delaware Ave. high-rise topped by its logo. The bank had decided to “shift the majority of our retail bank frontline contact center and operations roles into long-term work from home environment.”
In some positive moves, however, City National Bank closed a lease for 31,925 square feet in the Iron Hill Corporate Center at 800 Prides Crossing near Newark and SunnyMac leased 23,054 square feet in the Rockwood Office Park at 505 Carr Road in the Wilmington suburbs. Delaware Hospice inked a lease for 9,700 square feet in the County Commerce Office Park at 630 Churchmans Road in Christiana, while BMI Partners signed for 5,650 square feet at 2961 Centerville Road in Little Falls.
Workforce expansion, and subsequently office expansion, may continue to slow in the short term as companies assess their needs in the face of a potential recession. Rising interest rates and a rollercoaster stock market have already made raising new capital more costly for corporate America, and inflation continues to hit expenses.
“Law firms have definitely been the savior for downtown Wilmington,” said Wills Elliman, senior managing director of Newmark’s Wilmington office, noting that of the 19 deals he’s completed since the pandemic, 16 have been with law firms. “On the corporate side, when you look at Capital One giving that space up, they just don’t appear to ever be coming back.”
With so much office space going unused right now, Elliman said landlords would increasingly begin assessing whether to reposition their buildings, potentially converting them into apartments, hotels or other uses as several buildings downtown already have done. Doing some required significant capital investment, however, and many landlords may not be willing to do that in the current climate.
“If [a landlord is] able to convert something, there’s no reason to wait around for the thought that some big heavy office user is going to come lease their space,” Elliman said.
One of the issues facing northern Delaware’s offices is the aging stock for most of the market – only 13.7%, or 2.17 million square feet of space, has been built in the last 20 years, according to Newmark. Newer buildings are more energy efficient, have better HVAC and filtering equipment, and improved lighting, all of which are important to employers.
Buildings constructed before 2003 had a vacancy rate of about 22% at the end of the first quarter, about 550 basis points higher than four years ago, Newmark reported. Meanwhile, those built in the last 20 years had a vacancy rate of 13.7%, or 250 basis points lower than four years ago.
“The strongest properties will lease, but those that need work will be a heavy lift,” said Elliman, noting that new leases will likely be smaller at 10,000 or 20,000 square feet or less rather than large chunks of offices.
The reality is that the leasing market will see further losses before it gets better though, according to Elliman – Capital One has an expiring lease this month for another 145,000 square feet of offices in Wilmington Plaza on West 11th Street that is already vacant, he said.
