Delaware’s State of Commercial Real Estate Market - Year-end 2015
Delaware is famously kind to business thanks to benevolent corporate laws and low taxes. In fact there are more businesses registered in Delaware than there are people. More than 50% of all publicly traded firms in America have chosen the state as their legal home. The State of Delaware’s economy is primarily driven by service oriented companies, with 25% of the population employed in finance or business services or a higher proportion than in any other state. Fast forward from the Great Recession to 2015 and the Delaware job market finally returned to pre-recession levels and settled into a pattern of stable growth. The outlook is for growth in the financial/insurance services and professional business industries over the upcoming year. The growth in these sectors has fueled growth in real estate, namely a steadily improving housing market, new commercial development and gains in construction spending. The local housing market consists of a mix of for sale housing developments concentrated south of the C&D Canal and in Sussex County as well as the growth in new rental communities. Delaware’s housing market began its recovery in 2012. The New Castle County MLS reports 6,147 home sales in 2015, up considerably from 5,282 reported in 2014. The 2015 median existing-home price was $217,600, a 6.1% increase over the $205,000 reported the prior year. RealtyTrac reports distressed sales were 17.1% of sales. Kent County’s 2015 residential deed transfers were up 6.5% over 2014 figures with 2,486 sales. The 2015 average sales price was $210,461 up almost 3% from $204,510 in 2014. Of these 27.1% were new construction and 18.6% were distressed (i.e., sheriff or REO sales). Rental housing gains have been bolstered by the lack of new household formations, declines in home ownership, and the psychology of renters by choice. In addition Millennials are foregoing marriages, interested in mobility, and lack equity down payments. So coming out of the recession the multi-family real estate fundamentals tightened first so it’s no surprise that apartment investment demand has been very strong. Locally tracked Delaware apartment cap rates ranged from 6.0 to 9.0% depending upon the location, size, condition, and buyer investment plans. New Castle County’s industrial vacancy rate fluctuated between 13.1 and 14.3% in 2015, ending at 13.6%. This is down from the high of 15.4% reported in 1st quarter 2014, but still elevated above the 6.5% reported in the Philadelphia Suburban industrial market. Asking rents have generally been flat with slight fluctuations, but averaged $4.37 psf, triple net, at yearend 2015. The local New Castle County retail market has operated in a fairly narrow vacancy range of 5.3 to 7.0% over the past seven years. But the yearend 2015 vacancy rate stood at 7.0%, the highest level in the last seven years. This vacancy spike is likely due to retail store closures and the pipeline of new construction coming on-line. But the asking market rents have steadily increased by about 2.5% annually since 2012, standing at $16.41 psf at yearend 2015. The Greater Wilmington office market continues to recover gradually from the impact of recessionary economic conditions that affected the region from 2008 through 2012. Inventory has remained relatively level, with no major additions but removal of about 175,000 s/f from the CBD office inventory over the past 24 months. Employment growth in office using businesses has been positive; however, many of the major financial service employers in this market have re-visited their space requirements and are increasing the number of employees occupying space. This in turn has them “densifying” their space needs, reducing the square foot per employee, and thus reducing net absorption to -93,391 s/f at yearend 2015. The outlook for the state’s commercial real estate market performance looking forward through the rest of 2016 is good with tightening fundamentals baring any external shocks. Its favorable business climate, low cost of doing business and lower taxes all bode well for the market’s future growth and stability. Jay L. White is president of Apex Realty Advisory.