Capstone: Vacancies a challenge for R.I. commercial real estate market as sales improve

THE RETAIL SECTOR saw the greatest improvement in Rhode Island last year, accounting for 43 of the 239 total commercial real estate transactions in 2013. / COURTESY CAPSTONE PROPERTIES
THE RETAIL SECTOR saw the greatest improvement in Rhode Island last year, accounting for 43 of the 239 total commercial real estate transactions in 2013. / COURTESY CAPSTONE PROPERTIES

PROVIDENCE – Rhode Island’s commercial real estate market saw improvement across all sectors in 2013, but high vacancy rates, shorter lease terms and a dearth of high-bay warehouse properties continue to challenge the market’s recovery, according to Capstone Properties’ 2013 real estate survey.

Commercial real estate sales rose 10.6 percent during the year to 239 compared with 216 sales in 2012. Total sales value increased as well, rising from $363 million in 2012 to $479 million last year.

Apartments “remain a safe investment in the eyes of investors compared to industrial or office” units, Capstone said. The apartment market has continued to outperform the other sectors, with 1,891 units sold in 2013 for total value of $170 million compared with 751 units the previous year for $71 million total.

“While some sectors showed modest declines as compared to the recession years, there were gains in the office and retail categories,” Capstone said. Specifically, the report cited the sale in December of the Wal-Mart and Kohl’s properties in the Rhode Island Mall, as well as the continued efforts of the I-195 Redevelopment Commission to begin marketing The Link for sale.

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Retail sales accounted for 43 of the 239 total commercial real estate transactions in 2013, with a median sales rate of $115 per square foot and total sales value of $113 million. In 2012, 27 sales totaled $75.3 million with a median sales rate of $101 per square foot. Despite the rise in sales, however, the statewide retail vacancy rate of 6.5 percent has not improved significantly compared with the previous year, Capstone said.

In the Rhode Island office market, sales remained flat during the year, but several major transactions “reflect continued investor confidence in multi-tenanted, well-located properties,” including Foundry Associates’ acquisition of the American Locomotive Co. property for $19 million and United Way’s $3.3 million purchase of 531 Valley St. in Olneyville.

The office vacancy rate rose to 9.7 percent in 2013 from 9.1 percent a year before. Capstone cited one million square feet of vacant space in downtown Providence, not including the Superman Building at 111 Westminster St., which Bank of America vacated in April 2013.

Office lease rates have held steady with no significant increases, Capstone reported, and the vacancy rate is still high by historical standards.

“One of the recession’s lingering effects is companies signing shorter-term leases,” Capstone said. “Previously, a five-year lease was typical, but companies are now choosing two- to three-year leases with options to renew.”

The industrial market was the only sector to see sales decline in 2013, dropping to 49 sales from 53 in 2012. However, the total sales value increased over the year, to $53 million from $47 million.

The report noted that buildings smaller than 15,000 square feet posted a third consecutive year of median sales value growth, rising from $53 per square foot in 2012 to $62 per square foot last year. Although total sales value for the year fell to $10 million compared with $13 million 2012, Capstone said the under 15,000-square-foot segment has been “one of the key drivers of the market’s overall improvement, since the smaller user is the dominant base in the local economy.”

Transaction value and sales volume also improved for buildings larger than 60,000 square feet, with total sales value rising to $12.8 million from $8 million in 2012. Among the significant transactions in this sector were the sale of a 265,000-square-foot building at 60 Delta Drive in Pawtucket, and the sale of the Leviton Manufacturing Co. building to Dean Warehouse Michael Integlia for $6.2 million in November.

“There are high pockets of vacancy throughout the state, but the lack of high-bay warehouse properties will continue to limit the ability to attract larger companies to locate in Rhode Island,” said Capstone of the challenges facing the industrial sector in 2014.

For all three sectors – retail, office and industrial – the statewide vacancy rate dropped to 7.4 percent last year from 8 percent a year before, which Capstone attributed to increased corporate optimism and a movement by international companies to bring some manufacturing back to the United States.

By region, the southern Rhode Island/Newport area had the highest overall vacancy rate in 2013, which rose to 14.3 percent from 12 percent in 2012. Capstone commented, “The anticipated growth in the Quonset area did not materialize in 2012, but new initiatives by the state should allow this region to begin to absorb some of the new vacancies.”

In the northern region of the state, vacancy decreased from 7.6 percent to 6.8 percent, while in Rhode Island’s Central West Bay region, the vacancy rate fell from 6.6 percent to 5.6 percent.

The Providence metropolitan area saw its vacancy rate drop from 7.7 percent in 2012 to 6.8 percent in 2013.

“There has not been any new construction in many years, so the existing buildings continue to be absorbed and the lease rates stabilize,” said Capstone of the Providence-area vacancy situation. “There are not any large blocks of space available above 25,000 square feet.”

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