The Mid-Atlantic Office Market and Its Key Cities

In this article, you'll learn:

• Washington D.C.’s office market trends, including remote work and sustainability challenges.
• Baltimore's improving office market and generous tenant concessions.
• Dover’s rising office rents and its appeal as a tax-friendly location for businesses.

Today we’re putting the spotlight on the country’s Mid-Atlantic region and its commercial real estate leasing activity.

We’ll look at three cities that characterize different key markets within this region that spans throughout Delaware, Pennsylvania, Southern New Jersey, West Virginia, and much of Maryland and Virginia.

Their activity tells different stories about the ongoing effects of the pandemic on office leases and overall metropolitan growth. Despite being within a singular geographic radius, each of these cities has felt very different realities in the last few years that point to trends that may sustain in the future.

Percentages represent the market averages, comprised of multiple class buildings.

By staying up to date on leasing activity, vacancy rates, rental rates, and other market indicators, corporate tenants can make informed decisions about where to locate their offices, expand their operations, or renegotiate their leases.

Additionally, understanding the nuances of different markets within the Mid-Atlantic region can help tenants identify areas with favorable tax policies, skilled workforces, and other resources that can benefit their businesses. Ultimately, staying informed about Mid-Atlantic office leasing activity can help corporate tenants make smarter, more strategic decisions that support their long-term success.

Washington D.C.

With its rich history, diverse culture and extensive amenities, Washington D.C. is an ideal location for corporate tenants seeking urban vibrancy and convenience.

Traditionally, the Washington D.C. market consists of the city, Virginia, and parts of Maryland. This geography has a large and diverse pool of talent to draw from, with many universities and other institutions offering educational opportunities for students and professionals alike. The area is well-connected via public transportation, with an extensive metro system connecting people to locations around the city and beyond.

But Washington D.C.'s commercial real estate market is in the midst of a downturn due to a lack of demand for office space. And it's no secret really why.

The metro area ranks among the top three cities with the most remote work, according to U.S. Census Bureau data released in September 2022. This means that many of the city's corporate tenants are choosing to work remotely rather than take on long-term leases or investments in office space. This has hurt the office market, creating further pressure on existing vacancy rates.

This has had negative implications on commercial real estate in the area as 2023 marks the fourth consecutive year of negative net absorption. In fact, the situation has gotten so dire that legislature has passed through the house that requires federal workers to return to offices. Since many of the city's major tenants are government contracts, you are subject to a lot of politics as a tenant.

Unfortunately, the leasing behavior of government entities is being intended to set a precedent for what's acceptable for private businesses. Therefore, your leasing activities may be subject to more (and quickly-evolving) restrictions. 

This also comes into play with D.C.’s push towards sustainability. Washington D.C. dominated the rest of the country in LEED certification per capita.

Since new ESG rules placed carbon limits on large buildings, office tenants (especially in multi-tenant metropolitan buildings) are likely to be inordinately affected.

This means that tenants in D.C. should be prepared for the consequences to start next year… and they won’t be cheap. Read more about What Corporate Tenants Should Know about ESG and LEED Standards.

Baltimore, Maryland

Baltimore is an attractive city for corporate tenants looking to rent office space due to its strategic location, competitive costs of living and business, and diverse economic landscape. With its central Mid-Atlantic location, it offers businesses easy access to a variety of regional markets.

The office market in Baltimore is showing signs of improvement, with the end of a period of negative absorption and recent leasing activity resulting in back-to-back quarters of net positive office space moves. Leasing activity has increased year over year as tenants have committed to over to over 6.5 million SF of office space.

However, there still may be more challenges than opportunities in the market. Relocations have been limited in recent years, and there have been more headquarters departures than arrivals since 2020. And this continues to be a running issue for the metro area.

Limited office development has prevented additional vacancy expansion, but with just 1.4 million square feet of new space underway, supply pressure is low. Landlords still lack pricing power, with flat asking rents over the past three years and a likelihood of no change in the near future.

But, to guarantee some longevity, landlords are becoming increasingly likely to offer generous concessions and tenant improvement packages for long-term deals rather than short-term ones. The rise in interest rates has also impacted office deal flow, with the third and fourth quarters of 2022 having the lowest activity since 2020. This trend has continued into the first quarter of 2023, with uncertainty about future occupancy culling office transactions.

Dover, Delaware

Representing the Delaware market, is the state capital, Dover, which is one of several notable cities including Wilmington. Dover is a tertiary, small office market that is still worth noting in the conversation of Mid-Atlantic office leasing. 

Dover's annual sales volume has averaged $16.1 million over the past five years, with the highest 12-month investment volume hitting $40.0 million. In the past 12 months, $21.0 million worth of office assets sold, with deals involving 3 Star office buildings driving sales volume, totaling $11.3 million in transaction volume.

Office rents in Dover are currently rising at a 1.9% annual rate, with an average annual gain of 2.2% over the past three years. While there has been a cumulative inventory expansion of 0.5% over the past three years with 28,000 SF that has delivered, there is currently 17,000 SF underway. As of 2023 Q2, vacancies in the metro were below the 10-year average and have trended down over the past four quarters. Finally, employment in Dover has been increasing at an annual rate.

While Wilmington holds perhaps more significance than Dover as a metro, it’s radius falls under the Philadelphia market. As the ninth largest office market in the country, Philadelphia comprises 324 Million square feet of inventory, but you can read more about its leasing activity in: The Northeast CRE Market and its Key Cities. Wilmington benefits from this association because Philadelphia has among the lowest vacancy rates among the top 15 markets. Office rent rates are slightly higher, averaging $34 per square foot for Class A compared to Dover’s $29 per square foot.

Regardless, Delaware has become sort of a sweet spot for businesses, offering reasonable living costs with low taxes, specifically for corporations. The state has no local or state sales tax, and its property taxes are relatively low compared to neighboring states.

Additionally, Delaware offers many tax incentives and credits to businesses, such as the Delaware Economic Development Office's New Jobs Tax Credit and the State's Strategic Fund. These incentives are designed to attract and retain businesses, encouraging them to invest in the state's economy and create jobs. Delaware's favorable tax environment can lead to significant cost savings for corporate tenants, making it an attractive option for those looking to establish or expand their operations.

To score the best option for your CRE, there's certain factors you need to aware of. Sign up for our free course below, which covers the ways to find the best office space for your company, at the best price and terms! 

Get the Most out of the Mid-Atlantic with a Tenant Rep

The Mid-Atlantic region offers a diverse range of options for corporate tenants seeking office space. While each city presents its own unique set of challenges and opportunities, one thing remains consistent: working with a tenant representative is crucial in navigating the complex world of commercial real estate.

A Tenant Representative can provide unbiased advice, expertise on market conditions, and negotiate the best possible deal for their client, ensuring that their interests are fully represented. Whether it's the competitive costs of living and favorable tax environment in Delaware, the push towards sustainability in Washington DC, or the improving office market in Baltimore, corporate tenants stand to benefit greatly from the expertise of a tenant representative.

By partnering with a True Tenant Rep™ like iOptimize Realty®, tenants can be sure that they are getting the best possible deal and avoiding costly mistakes. In today's ever-changing commercial real estate landscape, it's more important than ever to have a trusted advisor on your side. Get started today!