Despite numbers, commercial real estate on upswing

Statistically, 2013 was an uninspiring year for Providence commercial real estate.
In the downtown office market, the vacancy rate rose as corporate moves left a net of 81,000 square feet of space newly unoccupied during the year, according to figures from CB Richard Ellis New England.
But sometimes numbers don’t tell the whole story and local real estate professionals remain optimistic that the market is heading, albeit slowly, in the right direction.
“It is such a small market that when you have a couple of building swings each way you can have a large change in the vacancy rate,” said Karl Hayes, partner at Providence brokerage Hayes and Sherry Commercial Real Estate. “One of the things that has happened this year is tenants committed to long-term leases and made commitments they weren’t making a few years ago.”
Many of those long-term renewal leases may not boost the current vacancy rate, especially if the firm slimmed down their footprint in the process, but they will create market stability and firm up demand further down the road.
CBRE Senior Vice President and partner Alden Anderson described a building level of interest in properties that bodes well for 2014 and beyond.
“I think a certain amount of this is more qualitative in nature than quantitative,” Anderson said. “When you are involved in any business venture, you just feel momentum, either with you or against you. In the market today, I feel there is a favorable momentum with regard to interest at the tenant, landlord and investor level.”
Some of the notable leases signed in 2013 included law firm Partridge Snow & Hahn moving into 30,000 square feet in the Textron Building on Westminster Street and retail analytics firm Swipely moving from Fox Point into 25,750 square feet at 10 Dorrance St.
But along with the new leases, some significant buildings remained empty throughout 2013.
One Empire Plaza, last occupied by 38 Studios LLC, remains dark with 104,000 square feet of unoccupied space. And just down the street, there are 59,000 square feet available in One Weybosset Hill, according to CBRE. The 25,000 square feet at 180 South Main St. that Partridge Snow & Hahn left is still available, as is 33,000 square feet in Blue Cross & Blue Shield of Rhode Island’s building at 50 Exchange St.
For building owners, perhaps the best news in 2013 is that a substantial chunk of Providence office space, although not filled, has come off the market by being shifted toward residential use.
That includes Rhode Island’s tallest building, the “Superman Building” at 111 Westminster St., where 350,000 square feet has reclassified out of the office market even though plans to turn it into apartments remain tenuous.
Across Interstate 195 in the Promenade neighborhood, CBRE has also taken the 190,000-square-foot shell space at 25 Holden St. in The Foundry complex out of the market, on the expectation it will be built-out as homes instead of offices.
Despite the reclassification, Foundry Associates partner Tony Thomas said the firm is looking at building that unfinished section of the restored mill complex as apartments, but has not made a decision on actually doing it and abandoning offices.
If the Superman Building and 25 Holden St. hadn’t been removed from the downtown office inventory, last year’s vacancy rate would have climbed much higher than it did.
At the beginning of 2014, downtown Providence has just over 5.8 million square feet of offices, the smallest total since 2006 and roughly 500,000 square feet less than in 2009, according to CBRE figures.
Leeds Mitchell IV, senior vice president at MG Commercial Real Estate, said what the Providence market is missing currently is demand in the midsize range that might normally be filled by legal and financial services firms.
Hopefully technology companies will pick up some of that slack, Mitchell said, pointing to the recent leases for Swipely and mobile software firm MojoTech LLC as examples.
“Providence is still missing the bread-and-butter 5,000-square-feet-to-10,000-square-feet tenant for the last few years,” Mitchell said. “The class A vacancy rate is under 10 percent and looking pretty good for 2014. If we could backfill some of the class B, it would show things are really starting to improve.” Like leases, sales of downtown buildings were relatively slow in 2013, with the Gateway Center’s $13.2 million acquisition by Albany Road Real Estate Partners and the $19 million American Locomotive Works purchase by Foundry Associates the most notable transactions.
Looking ahead, two downtown buildings with major leases expiring in the next 18 months include 1 Citizens Plaza and 100 Westminster St., according to CBRE.
The future of RBS Citizens Financial Group Inc., which is scheduled for an IPO and the subject of sale talks by the Royal Bank of Scotland, could play into what happens at the building that bears its name.
In response to an inquiry, Citizens spokesman Jim Hughes would not directly comment on how the bank’s ownership situation could impact its office needs.
“We have a lease with options to renew well into the future,” Hughes wrote in an email.
At the Blue Cross building at 50 Exchange St. a lease agreement was reached just before the start of the new year for one of the two-and-a-half floors that had been available, according to Blue Cross spokeswoman Stacy Paterno.
Paterno couldn’t disclose the identity of the new tenant, who will occupy 22,500 square feet, leaving about 33,000 square feet still available.
With construction on the former I-195 properties still some ways off, the only new office space expected to hit the market in the near future is the 48,000 square feet in the former C J Fox building being renovated on West Exchange Street.
That limited supply could push rents, which rose slightly in 2013, higher in 2014.
“Right now it is difficult to build in Providence at the rental rates we have,” Sherry said. “You will need over $40 per square foot and the market is now in the low $30s. Existing buildings will eventually get absorbed until we get to a point where someone will have to build a new building.” •

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