Multifamily Is Northern Delaware's Strongest Industry, And Everything Else Is Playing Catch-Up
Whether garden-style apartments in the suburbs or the varied stock in Wilmington, multifamily is Northern Delaware’s strongest sector right now.
Panelists at Bisnow’s North Delaware State of the Market event at the Hilton Wilmington/Christiana May 17 came from every sector of the commercial real estate industry, and misgivings were expressed about every type but multifamily.
Though the industrial market has low vacancy, it doesn’t have the type of buildings to compete with the Lehigh Valley or even some of the bigger New Jersey parks; the hotel market could be overbuilt; the office market is still making its way back from the Great Recession; retail’s success is concentrated in the Christiana Mall and restaurants.
“The office markets in New Castle County, the suburbs and Wilmington’s [central business district] are healthier than they’ve been in 10 years,” JLL Executive Vice President Blaise Fletcher said.
Despite his optimism, Fletcher acknowledged that the area’s 15% vacancy rate is substantially higher than Philadelphia and its suburbs in Pennsylvania and New Jersey.
Among other topics the 200 event attendees heard discussed were an update on the University of Delaware’s ambitious plans for a biopharmaceutical campus from UD President Dennis Assanis and the recently flourishing restaurant scene in Downtown Wilmington. The biggest factor to the success of new restaurants, according to Buccini/Pollin Group co-founder Rob Buccini, is the rising population in the area fueled by multifamily growth.
“[The Wilmington waterfront] has turned into a place where people walk around and fill up restaurants, which was just not the case,” Potter Anderson & Corroon partner Joy Barrist said.
Establishments like Iron Hill and Stitch House breweries on the waterfront have become destinations — Buccini said the waterfront location is the best-performing Iron Hill in the whole chain, and Stitch House has been pulling in an average of $10K for a Sunday brunch. It has been a success of placemaking, which has created something of a positive feedback loop by making the apartment buildings there more appealing.
The vacancy rate for apartments in Northern Delaware sits at 4.1%, and rents are growing 3% to 4% per year, Westover Cos. owner and President Guntram Weissenberger said. Wilmington rents are higher than anywhere in the region outside of Center City, but its suburbs rent for less than towns closer to Philly itself.
“What’s important in Delaware is that the cost structure has remained a little bit lower, which has helped us to keep apartments affordable,” Weissenberger said. “And that’s going to become an issue in the coming years as demand remains strong … The affordability component will really come to the forefront, as rents have risen in PA a little faster than in Delaware.”
Although not many ground-up multifamily buildings have been delivered in Wilmington, apartments have still been opening at a healthy rate due to a large number of office building conversions. Buccini said his company has converted 40 such buildings in the city, with more on the way. Beyond meeting residential demand, the trend is a positive development for the office market as well, because it takes obsolete office buildings off the market and pushes down the vacancy rate.
BPG is also nearing completion of its redevelopment of the former DuPont office building, which Chemours will partially occupy. By the end of the year, the remaining space there will be fully leased, Buccini said — a staggering fact for those who have paid attention to the area for years, as Buccini acknowledged. Chemours’ deal to stay in Delaware was a key victory, and the wave of apartment conversions has possibly begun a turnaround in what still might be the weakest CRE sector in Northern Delaware.
“I think you’ll look back in a few years and say 2017 was really the tipping point for Wilmington,” Buccini said.
Industrial real estate is also anticipating a comeback, and its fundamentals are much stronger in the area than for office buildings. Northern Delaware is too far away from Philadelphia or Washington, D.C., to serve as a target for last-mile facilities, Fletcher said, but doesn't have much supply for larger distribution centers that could perform better, at least for now.
Harvey Hanna & Associates’ tentative plans to redevelop the former General Motors plant in Boxwood into a 3M SF distribution center could be a massive kick in the pants for the industry.
“The [Boxwood] announcement represents the best chance we have to capitalize on the e-commerce trends,” Fletcher said.
In contrast to industrial, the hotel industry in the area is on a concerning precipice of being overbuilt, TKo Hospitality CEO Kostas Kalogeropoulos said.
“I don’t think demand is moving at the same pace as supply,” Kalogeropoulos said. “As long as the banks are willing to keep financing hotels, people are going to build hotels [regardless of whether they are needed].”
Hotel brands have been rapidly diversifying to add new branding to capture the millennial demographic more willing to explore home-sharing options, but in their race to “build a better mousetrap,” those brands are “cannibalizing themselves,” Kalogeropoulos said.
Still, the riverfront is seeing two new hotels under construction in a 122-room Onyx hotel and a BPG-developed, 120-room Homewood Suites. Riverfront Development Corp. of Delaware Executive Director Megan McGlinchey said the new hotels are necessary to adequately put up attendees of events at the popular Chase Center without sending them into overflow hotels too far away.
“We see the demand [for events at the Chase Center] from organizations that want to be in Wilmington, because we’re a lot more affordable than some of the other areas in the region,” McGlinchey said.
The safest bet for hotel building going forward, according to Kalogeropolous, is around the “Eds and Meds” like the University of Delaware and its associated hospitals. With the healthcare industry likely to keep exploding thanks to the huge and aging baby boomer generation, demand for families to stay in hotels near hospitals is likely to rise, Kalogeropoulos said.
All of those industries, as promising as they could be, are playing catch-up to the multifamily sector. But the success apartments have had is encouraging because it comes hand in hand with population growth, Buccini said. He also expressed a belief that the increase in density will make Wilmington more popular with office users.
The Riverfront Development Corp. is ready to keep the multifamily development boom going, especially with the impending completion of the bridge spanning the Christina River. That bridge and the eventual delivery of the Philadelphia 76ers’ new fieldhouse and G-League arena for its Delaware Bluecoats affiliate will hopefully create a new frontier of development on the east side of the river to match the bustling west side, McGlinchey said.
“I think multifamily housing is where we’re going to focus for the next few years, because there are developers from in the state and out of state expressing interest,” McGlinchey said.