When Curt Schilling’s game company 38 Studios announced it would move into offices at One Empire Plaza in Providence, government officials extolled its virtues for the local economy.
Mike Giuttari, president of Providence-based MG Commercial, recently took some time to talk about the office’s impact on the city’s real estate market.
PBN: In general, what will the 38 Studios office mean for the real estate market?
GIUTTARI: At this point, we still do not know how much space 38 Studios is going to occupy in the building. With Blue Cross & Blue Shield of Rhode Island recently vacating approximately 300,000 square feet in the Empire area, it may not mean too much for the market itself on a numbers basis. The bigger impact may be on an emotional level; an out-of-state company actually moving into Rhode Island, occupying a fairly significant portion of space in a sub-market that has been approaching 50 percent vacancy with the departure of Blue Cross.
There are certainly other sizable office leases being signed this year in Providence, but the difference is that this was an out-of-state company that had no prior presence in the state before this lease. Most of the other deals are a shifting of space around the city, mainly to improve a company’s position due to the current low rental rates and availability of space.
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PBN: Does the fact that 38 Studios is a technology company rather than, say, an accounting firm, affect the market in a particularly unique way?
GIUTTARI: From what it looks like, the word is that at least three other related companies are considering the move to Rhode Island if 38 Studios makes a home here, and all three are of a substantial size for this market (similar to 38 Studios). These types of companies, and people, feed off the intellectual power of each other, unlike accounting firms or law firms.
It would also give the engineering and technology students from the local universities more options for work when they graduate, keeping that type of intellectual capability in the state, instead of them leaving for Massachusetts, New York or some location other than Rhode Island.
PBN: Could the move impact rental rates, which have been falling in the Providence area?
GIUTTARI: The particular move of 38 Studios itself most likely would not have a meaningful impact on rental rates in general. It is not enough of an absorption component in the market, given what we know, to change the overall rates. Additionally, it is a unique deal for this market, most likely in size, that landlords and tenants would discount it as an aberration in the day-to-day typical office leasing market.
PBN: Were you surprised 38 Studios opted for One Empire Plaza, advertised as a class B space?
GIUTTARI: I was not surprised. From what I understand, the initial desire was to be in the city of Providence. They wanted a mixed-use, active area. The building itself did not generally need heavy renovations and most likely, they received a generous tenant improvement allowance, favorable rent and probably free rent at the beginning of the lease. In an area with 50 percent vacancy, and a building that is empty, the tenant would have a tremendous amount of leverage. If the buildings on the short list were comparable, 38 Studios probably got the most favorable financial deal at that location.
PBN: We don’t know the details of the space, but could you walk us through what likely happened behind the scenes as the company searched for a home?
GIUTTARI: From the “search for space” perspective, it was most likely as any other office search would go. First, leave it wide open to the state, narrow it to the preferred location (Providence), develop a short list of properties that meet most of the requirements, send RFPs to the final three and then negotiate the best deal.
What was somewhat unique in the 38 Studios deal is that there was a lot of money at stake with a company that essentially had no product. There was/is a big risk with 38 Studios that some of the desirable landlords were not willing to take on. I think one or two of the short listed sites fell off the list when those landlords did not want to get into the game of spending a lot of upfront money on a company with no track record.
