PROVIDENCE – The vacancy rate for downtown office space in the city continues to increase since the onset of the COVID-19 pandemic, reaching 15.85% for the fourth quarter of 2021, according to latest market figures provided by CBRE Inc.
That’s the highest rate of vacancy for office properties downtown since year-end for 2015, when vacancy reached 16.9%, CBRE data shows.
“We’re seeing a trend that is relatively consistent with many other urban centers across the country, where the recovery in the urban office market has lagged behind the recovery in the suburban office market,” said Alden Anderson Jr., senior vice president for CBRE.
The downtown Providence office market had a 12.2% vacancy rate in the fourth quarter of 2019, CBRE data shows, just prior to the COVID-19 pandemic causing businesses to retreat from the area and shift to remote work-from-home arrangements.
The vacancy rate increased to 14.5% in the fourth quarter the following year, according to CBRE data.
The Q4 2021 information provided by CBRE states that the downtown Providence office market consists of 6.37 million total square feet of leasable space, with 1 million in available square footage.
By comparison, according to another CBRE report, the vacancy rate for office space in Boston was 10.9% for the fourth quarter of 2021. That’s down from a peak 12% vacancy rate in the fourth quarter of 2020, following a roughly 7% vacancy rate in the downtown Boston office market in the fourth quarter of 2019, CBRE research states. CBRE recently released its Pulse of the U.S. Office Demand report that deemed Boston a “leader” in office space demand recovery in December, following two consecutive quarters of growth since the pandemic started, with 426,000 square feet of positive absorption.
The fourth quarter 2021 market figures provided by CBRE show that the average lease rate in the downtown area ranges from $36.12 per square foot for Class A office space, $23.26 per square foot for Class B office space, and $21.16 per square foot for Class C office space.
That’s a slight increase from the year prior during the fourth quarter of 2020, according to the CBRE data, when the average lease rate was $35.52 per square foot for Class A office space, 23.21 per square foot for Class B office space, and $20.90 per square foot for Class C office space.
“The good news is we’ve seen very little pressure on lease rates during the pandemic,” said Anderson, who added that his firm is starting to see some signs of increased leasing activity this year. “The face rate rental rates, as you can see from our statistics, really haven’t been significantly impacted. … The primary impact on the structure of lease transactions has been an expansion of concessions and deals, whether that be larger tenant improvement allowances, as well as more free rent in deals.”
The downtown Providence market saw an increase of unoccupied office space, or “negative net absorption,” of 118,815 square feet year over year for the fourth quarter in 2021, according to the CBRE data.
Negative net absorption in downtown Providence hit the Capital Center area the hardest, according to the 2021 fourth quarter data, with 39,234 square feet of office space no longer occupied. The loss leaves the Capital Center area with a 27.49% vacancy rate for its 782,615 total square feet of office space, according to CBRE, with 215,107 in available square footage.
The next hardest hit area of the downtown was the Financial District, which lost 47,519 square feet of tenant occupied office space, according to the CBRE Q4 2021 data. That leaves the Financial District with 14.76% vacancy for its total 2,085,364 square feet of office space, with a total of 307,843 in available square footage, according to the CBRE data.
“I would note this is very consistent with what happened post-9/11 and post global financial crisis,” Anderson said. “This is not unheard of territory. However, as opposed to both post-9/11 and post G.F.C., I believe there are a lot stronger market fundamentals in place in key industries that will drive the growth of the market that exist today than were as prevalent after those other market shocks.”
Anderson said in the short-term, as a result of the omicron variant, remote work will continue to result in decreased use of downtown office spaces. But in the long-term, Anderson said he predicts a return to normalcy and traditional use of office space.
“The omicron prolonged companies moving in earnest to have employees return to the workplace,” Anderson said. “That works itself out, I would think, in months, not years. I think in the longer term … there will likely be some more forms of hybrid work models, for certain segments of the workforce going forward.
“But the impact on the market is not nearly as significant as I think some folks have suggested might be the case,” Anderson added. “I don’t think it’s something that is going to permanently destabilize the market. I think we’ll work our way through this and we will continue to see a robust office market. There are a lot of people in the workforce who like going to the office every day. They like leaving home. They like the work-life balance.”
Joseph R. Paolino Jr., former Providence mayor and managing partner of real estate firm Paolino Properties, said he’s more worried about the long-term threat to the market, and that political leaders in Rhode Island need to take action to get downtown companies to bring their employees back into the office. Paolino noted that Bank of America Corp. employees continue to work remotely instead of going into their downtown Providence offices. Paolino said that if the trend continues, more office leases will not be renewed, and the entire downtown economy will suffer, including restaurants, parking lots, hotels and retail.
“Quite frankly, I think our political leadership should be calling in, tapping companies to ask them to come back to work,” Paolino said. “While that doesn’t take place, and remote work continues, many companies will be re-thinking what they’re going to be doing. That’s hit me directly. There are companies looking not to renew leases. It has an effect on the overall downtown. People aren’t traveling here because they can do Zoom.”
The recent report from CBRE also provided information on the suburban office market in the Providence area, which had a 13.09% vacancy rate in the fourth quarter of 2021, with a total of 9.5 million square feet of space and 1.2 million square feet available for lease.
Pre-pandemic, during the fourth quarter of 2019, the Providence area suburban office market had an overall vacancy rate of 12.56%. After the pandemic struck, in the fourth quarter of 2020, the vacancy rate in the suburban area office market was 11.24%.
Negative net absorption for the fourth quarter of 2021 in the suburban market was 251,194 square feet of office space year over year, according to the CBRE data.
Marc Larocque is a PBN staff writer. Contact him at Larocque@PBN.com. You may also follow him on Twitter @LaRockPBN.
