The last quarter of 2012 indicated signs of overall market improvement including increased activity in the office sector, according to most New Castle County owners and leasing brokers. Most professionals anticipated a good start to 2013 based on this performance.
Although there are a few bright spots, early reports for 2013 are not yet meeting the expectations that stemmed from the continuing improvement seen last year. It seems most activity so far this year represents smaller deals, which are not resulting in positive absorption. Most tenants are moving to take advantage of the opportunity to upgrade or resize their space.
One favorable aspect of the market has been demand for medical office space. A new four-building medical office project that was started last year at Becks Woods on Route 40 in Bear, Del., is nearly fully leased or sold with the last building coming out of ground a few weeks ago.
Additional medical projects are planned on Churchman’s Road near Christiana Hospital and on Lancaster Pike at Little Falls although groundbreaking has not yet occurred on either site. Christiana Hospital is nearing completion of its new Emergency Center at Route 1 in Middletown, Del., and we expect there will be interest in new medical office space nearby. Springside Plaza, a 350,000-square-foot suburban office and medical office park property in Newark/Glasgow, has completed improvements on two medical office pad sites anticipating continued demand.
Concerning general use office space, high vacancy rates persist in most areas of the county. This is complicated by the growing availability of sublease space in large blocks and vacant or soon-to-be vacant properties being placed on the market for sale. Several buildings are in receivership or have been taken back by the lenders.
Despite these negative trends, some areas of the county continue to do well. For example, occupancy in New Castle Corporate Commons off of Route 41 has remained greater than 95, making it one of the area’s hotspots of activity.
The New Castle County Land Use Department reports only four permits have been issued over the last 12 months for new office buildings. These permits were issued for the aforementioned Becks Woods project. A few new office plan approvals have been issued including a 195,000-square-foot project located between Route 7 and Route 4 near the Christiana Hospital in Stanton, Del.
As mentioned above, tenants are taking advantage of market conditions and upgrading their space, effectively getting Class A space for Class B rents. This has been positive for tenants, and has also worked in favor of the owners of higher quality buildings.
Marginal real estate suffers first and the longest. Owners who recognize this trend are investing in and improving their properties to compete effectively with the many options tenants have today. Springside Plaza is investing in a four-way signalized intersection at U.S. Route 40, in addition to a new entrance and complete redesign of the park signage and landscaping. Hercules Plaza, one of the largest buildings in Wilmington’s CBD, is undergoing a major renovation to upgrade and reposition the property. Both are examples of efforts to make the projects more competitive and a better option for prospects in a challenging market.
— David Morrison, CCIM, partner with NAI Emory Hill