38 Studios leaves big space to fill

TENANT WANTED: One Empire Plaza in Providence was home to 38 Studios LLC for just over a year. The company’s sudden bankruptcy filing earlier this month has left 104,000 square feet of vacant office space. / PBN PHOTO/DAVID LEVESQUE
TENANT WANTED: One Empire Plaza in Providence was home to 38 Studios LLC for just over a year. The company’s sudden bankruptcy filing earlier this month has left 104,000 square feet of vacant office space. / PBN PHOTO/DAVID LEVESQUE

When Blue Cross & Blue Shield of Rhode Island left One Empire Plaza in Providence for its new Capital Center headquarters in 2009, it only took a year for the building’s owner to find a new tenant, Curt Schilling’s 38 Studios LLC.
Replacing 38 Studios, which vacated the building before filing for bankruptcy this month, might not be so easy.
The video game startup was lured to Providence with a $75 million state-backed loan that required rapid hiring of in-demand, highly skilled workers who needed a large, modern building in a desirable part of town.
Similar deals are unlikely to reappear anytime soon and the kind of companies that are looking for space these days tend to be much smaller.
“It’s a 100,000-plus-square-foot building and that size of tenant just isn’t around,” said Mike Giuttari, president of MG Commercial Real Estate.
As a result, the Empire office-space submarket that had been approaching full occupancy at the beginning of the year – after vacancy rates of more than 30 percent in 2010 – will likely see that rate spike up again.
Last year the vacancy rate for the total 6 million-square-foot downtown Providence office market dropped 3 percentage points to 19 percent, according to CB Richard Ellis New England.
Out of the roughly 3.6 million of that in the core Downcity area, the 104,000 square feet of One Empire Plaza is a noticeable chunk.
“It is a lot of square feet to dump in downtown Providence,” said developer and landlord Joseph Paolino Jr, who owns nearby 444 Westminster St., which was leased by the city planning department last year. “I know there was a lot of money spent in there and it is a nice area, so it should be marketable. But it is a good institutional building, not necessarily a good multitenant building.”
Built in 1981, One Empire Plaza was bought in 2008 for $26.7 million by Berkeley Investments of Boston along with 15 LaSalle Square from Blue Cross, which remained briefly as tenant while its new building was under construction. Up until a few weeks ago, the investment looked to be panning out well, with 38 Studios signing a lease for One Empire in September 2010 and then last year Hasbro Inc. agreeing to move into a newly renovated 15 LaSalle Square.
But Berkeley spent more than $1 million to renovate One Empire Plaza for 38 Studios and is now owed $10.8 million by the defunct video game company under the terms of its lease for the building, according to bankruptcy documents.
With the state first in line for a piece of 38 Studios’ assets, Berkeley is unlikely to see much from the liquidation. Calls to Berkeley for comment were not immediately returned.
Based on the building’s $11.6 million assessed value, according to Providence Assessor’s records, Berkeley will be paying a $427,000 annual tax bill for the property despite not having a tenant.
To accommodate 38 Studios, One Empire Plaza received a creative-workplace makeover with traditional offices along the windows broken down to make way for more common and group spaces.
“It is a very collaborative space because they worked in teams,” said Libby Slader, founder of Libby Slader Design, in Pawtucket, which redesigned the interior. “It is not old-school offices, so it would really have to fit with the culture of the company: something technology or creative.”
Built for a single user, One Empire Plaza faces some of the same questions, albeit on a much smaller scale, as the Bank of America Building in the Financial District, which many believe will struggle to find another single-user tenant when the bank leaves this year.
If demand for large, undivided chunks of office space remains soft, Berkeley could face a difficult decision on whether to make a substantial investment in order to break the building up.
Paolino suggested Berkeley look to Hasbro, the kind of company that could work in One Empire, to see if they need any space in addition to 15 LaSalle Square or wanted to move more workers from Pawtucket to Providence.
While Hasbro has no plans to seek out more downtown office space, company spokesman Wayne Charness said the demise of 38 Studios does not dampen the toy maker’s enthusiasm for its move to Providence when LaSalle Square renovations are completed at the end of the year. “Certainly we were looking at Providence long before 38 Studios moved into the area,” Charness said. “While it is too bad what happened, we are still excited to move to the city.”
Charness said Hasbro did not have any collaborations or business with 38 Studios at the time of the bankruptcy.
In the technology and creative sector right now, Giuttari said the kinds of companies looking for office space are more in the seed or early-growth stage and are looking for offices in the 5,000-square-foot range, not the 100,000-square-foot range.
“That’s the kind of group that is out there that can use the space,” Giuttari said. “You do not see accountants and lawyers in those types of buildings.”
As for what impact 38 Studios’ bankruptcy will have on the larger real estate market, most experts say it will be noticeable, but relatively minor.
Unless the building is broken up, One Empire Plaza’s vacancy is unlikely to exert significant downward pressure on rents because the market for 100,000-square-foot tenants is so small.
“It shouldn’t affect rents because it’s a unique size,” Giuttari said. “Any deal is likely going to be a one-off with a company that just fits that particular space.”
Karl Sherry, partner at Hayes & Sherry Real Estate Services, agreed.
“It will definitely have an impact, but I doubt it will be significant,” Sherry said in an email.
Allan Doyle, principal at Larew Doyle & Associates commercial mortgage brokers, said the downtown office-space market is heading in the right direction and One Empire Plaza will not derail it.
“It is an embarrassment for the state, but from a real estate perspective, it will not really slow the pace of our recovery, which is seeing slow improvement,” Doyle said. “I don’t think the building is stigmatized at all because of 38 Studios.” •

No posts to display