North Delaware's Own Multifamily Slowdown Is Here, And It's Mild

Wilmington and its surrounding towns in North Delaware enjoyed a run of success in multifamily since the initial freeze of the pandemic wore off.

That run has only just begun to lose steam.

New construction in Wilmington has slowed appreciably but hasn't ground to a halt the way Philadelphia’s multifamily market has, panelists said at Bisnow’s Delaware Mixed-Use and Multifamily Summit at the Hyatt Place Wilmington Riverfront on Thursday. 

“A bunch of my clients have slowed their roll but haven’t stopped,” Martin Architectural Group principal and partner Drew Romanic said at the event. “They’ve thought, ‘Let’s get our permitting done, maybe wait a month and see what rates are like toward the end of the year.’”

The area has been affected by two national trends: Rising interest rates have combined with high construction and operating costs to make it more challenging to break ground on new apartment buildings. And rent escalation has flattened or gone negative after a brief period of breakneck growth.

In the 12-month period ending with June, Central Wilmington’s multifamily inventory increased by 2.6%, the highest growth rate of any submarket in the Philadelphia area, according to Marcus & Millichap’s third-quarter research report published Monday. In terms of units delivered, though, North Delaware didn’t have the type of pandemic development boom seen in the Sun Belt or even the one-time deluge washing over Philadelphia, thanks to the expiration of a local tax break. 

As a result, the current market correction doesn’t resemble a bust, according to The Galman Group Regional Manager Ed Lucus and Buccini/Pollin Group co-founder and principal Rob Buccini. 

In August, one-bedroom rents were flat year-over-year in Wilmington, but two-bedroom rents rose 16% over the same period, according to monthly data from Zumper. The Galman Group’s renewal rate in New Castle County is about 66%, Lucus said, and Buccini/Pollin’s Wilmington portfolio has a renewal rate of about 68%, Buccini said. 

“It really helps with occupancy and to push rates each year,” Buccini said.

One factor preventing the area’s apartment market from being oversupplied while the capital markets languish is the relative lack of available land for new construction, Buccini said. But the process of obtaining permits and local approval for developing what little land there is has lengthened by six to eight months in the past couple of years, Apennine Development Co. Director of Development Sean Allen said.

The cost to carry undeveloped land has become prohibitive, making it standard industry practice in the area to wait until the entitlement process is complete before closing on land acquisitions and, most crucially, construction financing, panelists said. With so much uncertainty in the lending environment, any delay in closing can be costly.

In the affordable housing sector, the problem of closing delays is compounded because the average capital stack is so complex and multifaceted, Carson Development CEO Danielle Smith said. Having a strong relationship with a land seller can provide a measure of certainty.

“You’d be [better off] if you guys own land or know landowners who want to work with someone,” Pennrose Senior Developer Ryan Bailey said during the event’s affordable housing panel.

Much like in market-rate housing, affordable development is more challenging to finance than it was 18 months ago. Yet again, North Delaware doesn’t have quite the same level of crisis as other cities and states, thanks to Delaware’s aggressive investing of American Rescue Plan funds into affordable housing programs, Bailey said.

Another mitigating factor for the affordable housing pipeline in Delaware is a growing number of organizations taking an interest in the housing crisis, whether in the form of civic entities wading into housing or for-profit developers pursuing more mixed-income projects, panelists said. 

“There are more and more partnerships out there for affordable and workforce housing with healthcare organizations,” Bailey said. “Healthcare organizations have a lot of money, and they want to use it to keep people from hitting the emergency room.”