In 2007, it was hard for Wilmington office developers to see how a building permit moratorium could be just the medicine they would need to prevent a sickness they didn’t know they were about to have.

But almost three years later, Wilmington has seen some office space prices fall and developers agree that if the state hadn’t stepped in to avoid an environmental catastrophe, there would most certainly be an office space catastrophe.

“It most definitely was a blessing in disguise,” said Steve Anderson, whose Howe Creek development is nearly full on Military Cutoff Road.

“At the time, it wasn’t so much market-driven,” he said. “There was a ‘build-it-and-they-will-come’ mentality. (My company) didn’t have this mentality, but in general the developers … were saying ‘the banks are lending, let’s ride this train as long as we can.’”

Anderson said that if the state had not interceded to keep the sewer lines from flooding, the market would be flooded with as much as 100,000 more square feet of first generation office space.

“It would have been a total disaster,” said Cape Fear Commercial Partner Brian Eckel. He said his company could see that there might be some office space issues on the horizon, but he’s glad the moratorium put the rest of the office development community on the side lines for a while before the financial market collapsed.

“Without question, the moratorium held back additional speculative commercial developments,” said Bryan Green, Cape Fear Commercial’s senior director of brokerage and development.

But the development community did manage to get a few projects through right before the moratorium was finalized.

One of the last projects to get approved as the state started cracking down on sewer permits was the first of two buildings at the new Government Center Drive complex. That building was occupied last summer by the Cape Fear Public Utility Authority – an entity that grew, in part, from the city’s sewer debacle in the middle part of the decade.

Prices falling anyway

Jason McLeod at Maus, Warwick, Mathews & Co. said, “The moratorium definitely kept some space off the market. But the recession has kept the prices down.”

McLeod said he has seen a unique camaraderie between landlords and tenants in the past year. “Landlords in second-generation space are forming unique partnerships (with tenants) so we can sorta all get through this together,” he said. “Everyone is in survival mode.”

He said he has seen more instances of landlords being willing to tear up contracts mid-term and write new deals for less space in situations where tenants were filling less space than they used to fill.

The upside for this cooperation is that a diversified tenant base spreads the risk. “But it is more work,” McLeod said.

Teresa Huffmon, a broker at Coldwell Banker Commercial Sun Coast Partners, said that while there has been a slight drop in office rates in some submarkets, other sectors like medical are holding firm.

She is helping Steve Anderson market a new 36,000-square-foot office building in Mayfaire. The target market for that building may end up being medical, she said.

But in other parts of town, some buildings are sitting vacant. “Some of the large office buildings near other large office space areas are seeing a decline in rates,” she said.

One case of this type of office lease rate battling is on Third Street in downtown Wilmington between Grace and Walnut Streets where Cape Fear Commercial has advertised a slight drop in their office lease rates in the Third and Grace building to stay competitive with the new Bank of America Building on Third and Walnut streets.

Robert Graves, development manager at Tri-Coast Properties, said leasing has been a challenge at the new Bank of America Building. The first two floors of the building were pre-leased to the bank.

The top three floors are all still available – a total of 33,000 square feet of brand-new space.

Numbers tell the story

Graves said that as the building has approached completion, it is starting to draw more attention from possible tenants. “A lot of times, people don’t get excited about a project until they can see it as complete,” he said. Tri-Coast has already made a $2 concession on rates from $27.50 a square foot to $25.50.

Across the street, there is about 10,000 square feet of office space for lease in the Third and Grace building. Lease prices there dropped a couple of dollars a square foot this summer, too, Eckel said. Those prices are between $19.50 a square foot and $23 a square foot.

Data provided by Cape Fear Commercial shows that vacancy rates and rental rates in the Landfall office submarket have been steadily going in opposite directions this year.

According to Cape Fear Commercial’s data, vacancy rates have shot from about 11 percent in the fourth quarter of 2008 to about 19 percent in the third quarter this year. On the other end, the company’s data shows average rental rates falling by about 25 cents a square foot in the same period.

At the beginning of 2008, those rates were about $24 a square foot. Those rates today average about $21.75, according to the report.