Pandemic doesn’t spur office vacancies, but remote working might

The pandemic has not spurred an increase in office vacancies in Wilmington, according to local brokerages. | PHOTO COURTESY OF TIM KISER/WIKIPEDIA

WILMINGTON – With more than 125,000 people filing for unemployment in Delaware and the state’s employers sending tens of thousands of workers home to work, it’s understandable to think that the state’s office mecca in New Castle County would see a rising number of closures in the early months of the COVID-19 pandemic.

Leasing reports from the major brokerages that track office space in the county didn’t see that in the second quarter though, despite covering the April to June timeframe that contained the worst of the early pandemic-spurred impact.

Three out of the five major brokerages that track the New Castle County market reported drops in the overall vacancy rate – Colliers International (0.3 percentage points), JLL (0.6), and Newman Knight Frank (0.2). Only CBRE reported an increase of 0.4 percentage points over the first quarter, while Cushman & Wakefield’s local second quarter report has yet to be published.

Although Wilmington’s central business district has also struggled over the past few years with rising vacancies following the exodus of large employers like DuPont and the consolidation of Bank of America’s once-sprawling footprint, it remained largely unchanged through the early pandemic as well. JLL reported a vacancy drop of 2.1 percentage points in the city’s downtown from the first quarter, while Colliers (0.4) and CBRE (0.1) tracked more modest drops. Only NKF reported an increase of 0.8 percentage points.

Brokers at all of the firms noted that the region’s office tenants have not yet gotten to the point of relinquishing their leases due to the pandemic’s impact, with most tenants signing short-term renewals if they were approaching the end of their terms. The agents are also closely watching whether subleasing — when a tenant rents its space to a third party for a portion of its lease term — becomes a growing strategy in the market as it has in larger metro cities.

While early reports amid the pandemic are encouraging, what’s more concerning is whether employers are beginning to consider using remote working even after the pandemic subsides, as some have already announced. That could compound the region’s vacancy issues and lead to a further trickle-down impact on restaurants and retailers that depend upon office workers.

A late June survey conducted by NKF and the Wilmington Alliance, a nonprofit tasked with growing economic opportunity in the city, found that 40% of its 71 respondents did not know when they would return to offices. About half had already commenced bringing workers back, but most started with only 25% of their normal workforces.

Wills Elliman

Further complicating the city’s future was the finding that as many as one in seven downtown Wilmington workers could remain working from home permanently. Many large employers have reported finding that employee’s work quality has not suffered in the move to remote working amid the pandemic, while also raising the potential to lessen real estate and utility costs. Workers may also volunteer to work from home permanently to avoid paying the city’s 1.25% wage tax, which could lead to municipal issues for Wilmington which derives 47% of its budget from the tax.

In the survey, 38% of respondents said they plan to keep some of their workforce remote long-term, with the majority of those respondents saying that would be half or more of their workers. One large employer of 500 to 1,000 workers said it would likely move more than a quarter of its workforce to remote working while another employer of the same size said it would move more than half.

Wills Elliman, senior managing director at NKF’s Wilmington office, said the survey’s results didn’t surprise him, but confirmed much of the anecdotal evidence that he’s been hearing in recent months.

“This really just gave us some hard data on what people were thinking,” he said.

Wilmington Alliance CEO Renata B. Kowalczyk agreed, adding that she was actually reassured by the response that only 40% of respondents didn’t have a specific return date.

“I suspected that would have been a higher percentage, maybe even 60% not knowing, so seeing that it was that it was less than half made me feel better,” she said.

Kowalczyk noted that her organization had raised $150,000 for its Wilmington Strong Fund to support businesses impacted by the loss of downtown foot traffic and is preparing a Wilmington Made campaign to help promote them as well.

“You feel on the streets that is different right now,” she said. “But that’s true of all cities unfortunately.”

While he thinks that as many as 20% of city employers may move some or all workers to remote work, Elliman emphasized that means 80% would remain in the city.

While Wilmington’s Fortune 500 companies that once talked about returning to offices in September are now talking more about January 2021 out of an abundance of caution, many smaller law, accounting and other professional firms have begun sending at least some of their staff back to offices, he said.

“I think people are starting to get Zoomed out and companies are beginning to realize that they’re missing out on their company culture,” Elliman said, noting collaboration is easier when seeing coworkers in person as well.

Despite a lot of prognosticating about the future of workplaces, Elliman said that he doesn’t expect many firms to make decisions about their spaces in 2020.

“There just isn’t enough data yet for people to make an informed decision for the long term,” he said.

By Jacob Owens

jowens@delawarebusinesstimes.com