The Rhode Island commercial office market is tighter than it has been since the late 1980s, according to a CB Richard Ellis “Market Index Brief.” The tight conditions have some experts suggesting that the construction of new office space could occur in Providence in the not-to-distant future. The overall vacancy rate for the downtown Providence market was 12.4 percent at the end of 1999, with all downtown districts performing well – except for the Westminster District, according to the CB Richard Ellis report.
That particular district, according to the report, “continues to experience high vacancy rates primarily as a result of the high concentration of class D buildings.” Class A and B buildings throughout the city are now experiencing vacancy rates of 5.9 percent and 11.7 percent respectively.
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According to the CB Richard Ellis report: “The downtown Providence market ended 1999 on a very positive note with 46,500 square feet of absorption over the previous 12-month period. That number was calculated on last year’s market total of 5.8 million square feet, which lowered the overall vacancy rate from 13.2 percent to 12.4 percent.”
A supply and demand issue
Alden Anderson, a vice president and partner at CB Richard Ellis in Providence, points to a simple and long held explanation for the tightening of the city’s office space market.
“It’s a fairly clear supply and demand issue,” he said. “There has been literally no new supply put on the marketWe have had a very prosperous economy and companies have been growing – without new space.”
Joseph R. Paolino, Jr., the capital city’s former mayor and now the president of Paolino Properties, said that Providence is slowly inching toward the construction of new office space.
“Eventually, you are going to see new construction,” he said. “I think it could start in 12 to 24 months.”
Paolino reaches that conclusion, he said, by examining the region’s overall economic climate. For several reasons, he said, Rhode Island is well positioned.
”Internet and telecommunication companies are enjoying tremendous growth and they are looking at Rhode Island,” said Paolino. “They can get space here cheaper than in Boston. If you have good fiber optics and a good telecommunication infrastructure, you are going to get interest from those types of companies.”
Paolino also points out that as more of the older buildings located downtown are converted to living space, the available office space tightens further.
”The dead class B and class C space is being taken off the market,” he said.
Paolino believes high-speed rail will ultimately increase the likelihood of new office space construction. Companies from Boston, he said, may be more likely to move here if they do not have to worry about relocating workers.
”You’d be able to get here from Boston in about 27 minutes,” said Paolino. “You can’t get from downtown Boston to Logan Airport in 27 minutes.”
Anderson, of CB Richard Ellis, believes the Providence market could in fact see new construction – but only when a particular corporation takes the lead in making it happen.
”That will be purely driven by a new user or the expansion of an existing one,” he said. “It is unlikely that someone will build out of the ground without a firm commitment in hand.”
Even Paolino also tempers his enthusiasm with the realization that things tend to move slowly in Rhode Island.
”Although we are better off than we have been in the past, we do not expand as rapidly as other New England states.”
Sheldon Rodman, president of Rodman Real Estate in Providence, said he has also witnessed a substantial absorption of office space in the last 18 months.
“It is reminiscent of the 1980s,” Rodman said.
He has seen a similar trend for industrial space.
“We’re experiencing the same in the industrial sector – a lack of inventory,” Rodman said.
Like Paolino and Anderson, Rodman foresees the construction of new office space in the capital city – after the legislature tinkers a bit with the state’s climate for economic development.
“That is a definite possibility if we can improve on some of our tax positions,” he said. “We are in a position to attract people to the city. But we still need improve on our tax structure if we are to compete with Massachusetts and Connecticut.”
Other findings
Other findings from the CB Richard Ellis “Market Index Brief” include:
With almost all of the districts in the downtown market experiencing positive absorption, the Financial District stood out as the highlight with 74,904 square feet of absorption.
Districts with negative absorption were Randall Square and the Jewelry District collectively totaling 102,924. The Jewelry District’s 88,480 square feet of negative absorption was primarily the result of the addition of the Davol Square property and its 68,000 square feet of vacant space and the closing down of Harvard Pilgrim Health Plan representing 30,000 square feet on Richmond Street and additional space in the Coro Building on Point Street.
In the downtown market the low vacancy rates are putting pressure on rental rates, with an upward movement of 7 to 9 percent in rental rates of Class A and B buildings. The Capital Center District represents the highest average lease rate at $28.62.
The overall weighted average lease rate downtown is $18.33 per square foot net of tenant electric for outlets and lights. This is up from $17.69 at the end of 1998.
The Rhode Island industrial real estate market is also extremely tight, with very few modern, vacant buildings of any size.
Rhode Island continues to be an area with practically no speculative industrial construction. This is unlikely to change in the near future, as prices have not reached a level necessary for speculative construction. Build-to-suit projects are a realistic possibility with strong-credit tenants. The leasing market continues to be secondary to the buy/sell market.
The expectation has been that the land prices would push upward as the existing building inventory dwindled, but that has not been the case. The publicly subsidized industrial parks are capturing most of the industrial land sales. The most recent industrial land sales have been at Highland Park in Woonsocket and Cumberland and in the Silver Spring Industrial Park in Providence. The per acre sale price for these parcels are approximately $60,000. Sales activity in the privately developed parks is in the $80,000 to $100,000 per acre price range.
The suburban office market (outside of Providence) had an impressive 112,141 square feet of absorption with 88,608 square feet coming from the Aquidneck Island sub-market alone. The Northern Rhode Island sub-market accounted for 37,450 square feet of absorption.
In summary, today’s user has even fewer alternatives than last year. There has been an increase in sales prices, but this seems to be leveling off, as new construction becomes a real alternative.
Another factor likely to impact the Providence office space market in the near future is the possibility of new rehabilitation projects at the Foundry Complex off Promenade Street. Two buildings there may soon be renovated, one with 180,000 square feet and the other, 300,000 square feet.
