CBRE: Office vacancy rates to rise in Providence

OFFICE SPACE: Steven Brooks, vice president of Berkeley Investments, stands in front of his firm’s LaSalle Square building in Providence that was recently vacated by BCBSRI. /
OFFICE SPACE: Steven Brooks, vice president of Berkeley Investments, stands in front of his firm’s LaSalle Square building in Providence that was recently vacated by BCBSRI. /

As Charles Francis took to the lectern, the wind had just stopped howling and the rain was slowing to a sputter. Francis, president of CB Richard Ellis Rhode Island, said the crummy weather served as a sign of the times for the commercial real estate market in Rhode Island. But unlike the weather outside that quickly turned sunny, the market is unlikely to recover as swiftly.
A market summary CB Richard Ellis (CBRE) released Dec. 3 found commercial vacancy rates increased in every category around the state. CBRE predicted office vacancy rates in Providence would hit nearly 22 percent by next year, up from 17.2 percent currently. Suburban office vacancy stood at 25.5 percent, up from 19.1 percent. And vacancy rates in the industrial market were approaching 9.2 percent, up from 8.6 percent at the end of last year.
The report came on the heels of a survey by Hayes & Sherry Real Estate Services that found similar vacancy rates in Providence. And the day before Francis spoke, the Federal Reserve Bank of Boston released a report that said an emerging glut of Class B office space in downtown Providence remained a “key concern.”
An excess of space across all categories drove down advertised rents between 1.7 percent and 3.5 percent, according to CBRE. Senior Vice President Alden Anderson described Rhode Island as a tenants’ market while his colleague Andrew Galvin told a crowd of real estate professionals that deals were closing for 10 percent to 12 percent lower than the asking price. And the market is likely to remain weak for at least a few years, Anderson said.
“Rhode Island historically has been a little slow to recover, being a secondary market,” he said, predicting larger cities like Boston would recover faster.
With the exception of Class B space, it is lackluster demand, as opposed to an overabundance of supply, that is fueling the vacancy rates, Anderson said. The amount of available Class B space remains high.
Across all classes, the Ocean State has seen a wave of companies move out entirely or shift operations to other parts of the state during the past year. APC by Schneider Electric vacated a factory in West Warwick, Liz Claiborne left its facility in Lincoln and Fidelity Investments moved out of the Gateway Center in Providence. FM Global built a new headquarters in Johnston, leaving empty 317,550 feet of space. And in Providence, Blue Cross & Blue Shield of Rhode Island consolidated its multiple office locations, vacating more than 300,000 square feet of space downtown.
The owner of two of those buildings – at 1 Empire Plaza and 15 LaSalle Square – is now moving to find tenants. Berkeley Investments Vice President Steven Brooks said his company is already undertaking renovations to the exteriors and planning interior renovations once Blue Cross & Blue Shield fully vacates the space within a few months. Berkeley also hopes to add retail space on the ground floor of 1 Empire Plaza and is in the midst of cleaning up the adjacent plaza. Brooks said Berkeley could spend upwards of $4 million sprucing up the buildings.
“We’re spending the money to get the kinds of rents we think we can achieve without going overboard,” he said.
Boston-based Berkeley purchased both buildings in April 2008 for a combined $26.7 million knowing that Blue Cross & Blue Shield would move out, Brooks said. He said Berkeley knew the market would be slow and underwrote its financing in a way that allows the company a year or more to fill the buildings with tenants. The company also plans to seek a contract with the city of Providence, which is looking for 60,000 to 80,000 square feet of office space.
Brooks also pointed out that the two buildings include some of the few available spaces large enough to accommodate a company looking for an office with the tens of thousands of square feet. However, CBRE has been marketing the 160,000-square-foot Providence Journal building down the street from 15 LaSalle Square without success since December 2008, when the paper’s parent company announced it would put the building on the market.
On the flip side, a study released earlier this month said the state’s capital ranked well in terms of cost for operating a corporate headquarters requiring 70,000 square feet of space. The Boyd Company, based in New Jersey, said Providence ranked in the middle of the pack of major cities in terms of the cost of operating a headquarters with 325 employees. A Providence headquarters would cost $24.9 million annually to operate. The two other New England cities studied, Boston and Stamford, Conn., both cost more, with New York City topping the 50-city national list as the most expensive, at $30.7 million a year.
And there are other bright spots. United National Foods, the nation’s largest purveyor or natural foods, relocated its corporate headquarters to Providence from Connecticut in September. And the Jewelry District in Providence is attracting tenants and interest after Brown University announced intentions to build a new medical school at 222 Richmond St.
The conversion of the Brown-owned building from offices to a school will also send tenants looking for new space, said Galvin, who estimated a demand for 25,000 to 40,000 square feet of space.
Landlords able to deliver facilities with green features will likely have a leg up on such tenants, a panel at the CB Richard Ellis presentation said. Shay Sims, a vice president at CBRE, Thomas Dziki, a vice president at United Natural Foods and Ara Krafian, president of architectural firm Symmes Maini & Mckee Associates, all said clients want landlords who place an emphasis on environmentally friendly features.
Many corporations want their facilities to match their corporate values, but most are driven by the potential cost savings, Krafian said. Krafian, whose firm designed the new Blue Cross & Blue Shield headquarters in Providence, said the health insurer spent a little under $1 million to install green features. Due to energy savings and government incentives for installing green technology, the company will make that back in two-and-half years, he said.
“This is not about being crunchy, it’s not about trying to be green, it’s about good business sense,” Krafian said. &#8226

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