With leases climbing and new office buildings rising, Rhode Island’s industrial real estate market is at its strongest in a decade, according to a recent commercial real estate study. Rodman Real Estate Inc., a Providence commercial real estate company whose annual survey covers 45 established industrial areas encompassing 25,690,894 square feet of space, tracked office sales, leases, and vacancy rates for industrial property statewide for 1998.
One of its most significant findings is that vacancy rates have dropped in Rhode Island for the fourth consecutive year, down to 5.4 percent from 5.9 percent in 1997. The vacancy rate was 8.65 percent in 1997. The drop is attributed to the low cost of financing and general strength of the national economy.
Seifert Systems Invests in Energy Efficiency to Strengthen Operations
For manufacturers, energy is more than just another operating expense. It plays a critical role…
Learn More
But the study also noted that there is a shortage of buildings on the market, especially high quality, Class A buildings between 5,000 to 25,000 square feet. The median sale price for Class A space in 1998 was $52, with the high price being $92.27 and the low being $20 per square foot. And that is not likely to change unless there is an increase in speculative office building, according to Rodman.
With so little quality office space available – which the report said made the market more difficult to analyze – leases are beginning to climb and more and more companies are beginning to build rather than lease, despite the high cost of doing so, said Neil Amper vice president of Rodman.
“What’s happening is that most of the growth has been within the state – people are expanding and absorbing all the first-class space that’s come on the market,” Amper said. “There’s quite a bit of new construction, more than we’ve seen in close to 10 years.”
Examples of this can be seen statewide. In Cumberland, AKL Flexo Tech, a Warburg, Germany firm, purchased a 26,000 square foot shell of a building in the Highland II Corporate Park for $1.17 million. It has committed to spending $5.5 million to fit it to the company’s needs. Retail Store Systems, a software company, has also just completed building a 25,000 square foot building in the same office park.
Meanwhile, at the opposite end of the state, Kiefer Park at Quonset Point is nearly full of new buildings, Amper said. However, the report also shows that vacancy rates at Quonset and the southern portion of the state have increased from under 2 percent in 1997 to 5 percent in 1998, primarily because of the closing of the former Imperial Wall Paper Co. in Hopkinton. Vacancy rates also shot up in the state’s East Bay section, from 4 percent in 1997 to 11 percent in 1998. The vacancy is centered in the Portsmouth Industrial Park, the report states. But it also predicts that the defense and related industries will keep the market stable there.
One factor that hurts the Providence market is the city’s inventory tax, which Amper cites as a reason that warehouses and distributors avoid the city. Statewide, however, he predicts that the current market trends that have strengthened the market will cause vacancy rates to fall significantly in the first and second quarters of 1999.
The lack of space – and the availability of mortgage money – is prompting more and more companies to build, despite the high cost, which can often run from $50 to $60 per square foot, Amper said. What they’re not doing, he added, is moving into old mill buildings. While the old factories may be available, the cost of making them comply with the Americans with Disabilities Act and with today’s fire codes deters most companies, he said.
But with leases rising, office building are beginning to become more attractive to investors, according to the report. Buildings with 10 to 12 tenants may be especially attractive, Amper said. The lack of available space has caused leases to pay near asking prices, the report states.
For example, in the most popularly sized buildings, those between 15,001 and 25,000 square feet, leases jumped from just over $3.50 per square foot in 1997 to $4.46 in 1998. Leases were down in other areas, however, especially in the 30,001 to 60,000 square foot range, where average leases dropped from about $3.50 per square foot to $2.47.
Similar drops occurred in the median sales prices of buildings 15,000 square feet and under, which plummeted from nearly $40 per square foot in 1997 to just over $30 per square foot in 1998. But Amper noted that some categories had only a few sales, and therefore a single “distress” sale in a category can distort the overall picture, which remains quite good for Rhode Island.
Even as the Rhode Island market improves, however, it still trails the Boston area, which is among the hottest real estate markets nationwide. Rates are 25 to 30 percent higher there, Amper said, adding that he has one client who has been searching for space in Boston for six months. Every time they’ve found a building, Amper said, it has been bought out from under them.
“Boston is hot as a pistol,” he said.
