The commercial real estate market slowed last year and CB Richard Ellis-New England’s Providence office said in December that it was unclear how long it would be until there was a turnaround. Providence Office Senior Vice President and Partner Alden M. Anderson Jr. spoke with Providence Business News this week about what has happened in the first half of 2009.
PBN: Since CBRE’s last market update, has commercial leasing and buying slowed significantly?
ANDERSON: Since our year-end 2008 Market Overview, we have seen a continuation of sub-par market activity with a degradation of deal structure. With an imbalance between supply and demand, we continue to see the market favoring the demand side deals. Both buyers and tenants have the stronger hand in negotiations with landlords and sellers. The imbalance is more pronounced in the office market than in the industrial market.
While office activity is slow with ample supply in most submarkets, the industrial market currently has a bit more stability and stronger deal flow than the office side.
PBN: Which Providence districts are seeing the most leasing activity?
ANDERSON: The most active districts in Providence currently are the Financial, Jewelry and Promenade districts with similar activity in the pockets of commercial space on the East Side. The educational and health care related institutions currently are significant drivers for market activity. The Providence market is fortunate to have this institutional driven demand as it generally props up the market in a down cycle. The continued expansion of education and health care in the Jewelry district is driving activity in the submarket and providing demand for other submarkets as tenants look to relocate out of buildings that are slated for an alternative use.
PBN: Are per-square-foot lease rates dropping in the city?
ANDERSON: Lease rates have seen some erosion – 5 percent to 8 percent – in the first two quarters of 2009 but the more significant change has been in landlord concessions.
Landlords are offering more free rent and additional tenant improvement dollars to tenants as an incentive to get them to commit. In the end, it ultimately means a reduction in the net effective rents that landlords are achieving. It is important to note that landlords with well located buildings and strong occupancy levels have generally been successful in holding pricing during this down cycle with only modest additional concessions necessary to make deals.
PBN: Are many tenants staying put, waiting until the economy improves to put into motion their moving plans?
ANDERSON: Tenants are definitely taking a wait-and-see approach to their office needs. That is driven by three factors: uncertainty in their business, future market pricing and capital constraints. Many companies are (a) experiencing a very challenging business climate, which means they really don’t have a clear picture on their future office space needs, (b) expecting additional deterioration in market fundamentals which may allow them to get a better deal in the future, and (c) are having capital constraint which means they don’t have the financial resources available for a move. There are certainly other factors that effect companies decisions but these three primary factors are driving a common trend of lease extensions so that tenants can see more clearly what the future holds as the economy recovers.
PBN: And how long do you expect these conditions to continue?
ANDERSON: Rhode Island historically has been a slow recovery economy which I don’t see being different this time. There will be more available office space coming on the market in the next 12 months, particularly in the Class B market, so I expect to see continued adverse pressure on rents. I would project that we will see an uptick in activity by early to mid 2010, but I would expect a considerably longer period to achieve a market equilibrium. It is going to be a challenging few years.
