Wilmington area office space forecast outlines challenges and gains
Pete Davisson, partner of Jackson Cross opened his remarks by reviewing the status of development projects in Wilmington’s central business district and suburbs; major property sales completed during 2016, properties currently available for sale, and projects on the drawing board.
“There was significant sales activity in the Wilmington area office market,” said Davisson. There are also a number of office buildings currently available for sale. In addition, developers have plans in various stages of readiness for new construction. All of that activity should be interpreted as a positive for the Wilmington and Delaware economic outlook.
“The past year has been a challenging one for office real estate in Delaware. With the uncertainties brought on by the pending merger of DuPont and Dow, the spinoff of Chemours, and the continuing retrenchment of AstraZeneca and their resulting job cuts in Delaware, office leasing was slow. The presidential election also added a level of uncertainty. It should be noted that office leasing as we define it is measured by companies moving to new space. It does not include firms who renew in their current location. I believe the overall uncertainty was a factor in 2016 with many firms deciding to sit on the sidelines or “shelter in place” and not upgrade or move to new office locations. The good news is that for the most part rental rates have remained steady and occupancy rates have not decreased significantly. In addition, there was only limited speculative office development. So, we did not add much space to the available inventory.
“Leasing activity in the central business district (CBD) totaled just less than 100,000 square feet. This is well below the 10 year average of 232,000 square feet. Space available in the CBD has not changed materially in the past 10 years. There are currently 13 buildings in the CBD that can accommodate a 50,000 square foot user. The overall vacancy rate in the CBD held its own during 2016 — up slightly in Class A buildings and down two points in Class B buildings. Average rental rates are at the 10 year average in Class A buildings and slightly below the 10 year average in Class B buildings as building owners compete for the limited number of deals for their buildings.
“In Wilmington’s suburban office market leasing activity during 2016 was just less than 200,000 square feet. This level is below both the 10 and 20 year averages. Space available in the suburbs grew substantially during the year with the largest portion of the increase in Class A space. Available office space in Class B buildings actually declined by 17 percent. In the combined 135 buildings in the suburban market only five buildings can accommodate a 50,000 square foot user and there are no blocks of space that could accommodate a 200,000 square foot user. Vacancy rates are higher than at the end of 2015 in both Class A and B space, but are 3.5% below the 10 year average. Rental rates for Class A space is up about $1 and now average $24.63 per square foot. Class B rates are also up approximately $.35 and are now at $21.63 per square foot.
“Overall absorption, the net increase or decrease in occupied space, was negative during 2016. That is never good news, but the declines were minor, just 11,928 square feet in the CBD and 49,315 square feet in the suburbs.
“As we look ahead to 2017 there are a number of challenges. We still have a significant amount of available space and much of that space is in blocks of space of 50,000 square feet or greater. Negative absorption is always a concern since it is the single best measure of the strength of the office market. The CBD still has an image problem, with some people concerned about safety issues, particularly after normal business hours.
“However, there are also a significant number of positive factors. On the positive side let us hope that the stock market, which has moved up significantly since the election, and now stands at an all-time high, is in fact a predictor of the future health of both the business and the general economy. For all of our sakes we should hope that the strength in the stock market it is not what Alan Greenspan once described as irrational exuberance. Time will tell.
“It is also true that it has historically taken the real estate market eight years after a significant recession to completely rebound. In this case, let us hope that holds true, since 2017 will be the ninth year since the last recession. We could use a boost in the office real estate market.
Jackson Cross is a regional commercial real estate firm.
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