Finally some stability in R.I. industrial market

STEEP FALL: The West Warwick warehouse purchased by Brookwood Financial last year for $10 million, or $11.5 million less than it sold for in 2007. / COURTESY CBRE NEW ENGLAND
STEEP FALL: The West Warwick warehouse purchased by Brookwood Financial last year for $10 million, or $11.5 million less than it sold for in 2007. / COURTESY CBRE NEW ENGLAND

In December 2007, Trammel Crow Co. bought a 548,000-square-foot warehouse and office within throwing distance of Interstate 95 in West Warwick for $21.5 million.
Then the housing bubble burst, the economy contracted and some of the tenants in the building at 1600 Division Road left. Eventually the Trammel Crow affiliate that owned the property started falling behind on its mortgage with Citizens Bank. Five days before Christmas, Brookwood Financial Partners LLC of Beverly, Mass., announced an agreement with Citizens to buy the warehouse in-lieu-of-foreclosure for $10 million, $11.5 million less than Trammel Crow paid for it five years earlier.
Plunging sale prices and rents have been the fate of many Providence-area industrial properties, even relatively good and recently built industrial properties, in the years since the financial crisis.
With a shrinking manufacturing sector compounding the soft Rhode Island economy, warehouses and factories less than 40 years old began to look more like the century-old mills the region has been repurposing than modern commercial space. But there are signs that now, nearly a half decade since starting its plunge, the industrial market has stabilized.
Built in 1973, the West Warwick property purchased in December by Brookwood Financial “was acquired at a significant discount to both the current replacement value and the owner’s purchase price in 2007,” Brookwood noted in a press release announcing the acquisition. “Given our low cost basis in the property, we will be able to offer very attractive rental rates and generous tenant-improvement allowances.”
At the close of 2012, the vacancy rate for Rhode Island industrial space dropped below 10 percent for the first time since 2009, according to statistics from CB Richard Ellis-New England. The availability rate, which includes space that is occupied but on the market, also hit a three-year low of 11.8 percent, after reaching 13.2 percent at the end of 2011.
“Last year was slow in both leasing and sales, but we are starting to see activity now,” said Michael P. Wall, vice president with CB Ellis-New England in Providence. “Rhode Island is a market with less institutional ownership and more small businesses, who typically want to own their own building, so we are seeing the movement in small- to medium-sized sales,” Walls said. “The quality spaces in the 40,000-square-foot range are tightening up.”
Examples of companies buying buildings in 2012 include uniform maker Donnelly’s Inc., which bought a 56,000-square-foot manufacturing space in Cranston’s Howard Industrial Park for $2.3 million, and Rhody Rug Inc., which bought a 50,000-square-foot building on Powder Hill Road in Lincoln for $1.3 million.
Of course, the industrial market is still far from rosy.
While a number of local companies have taken advantage of the low prices and cheap financing, including the U.S. Small Business Administration’s 504 loan program, to buy buildings, demand for leases remains weak, and both sale prices and rents are still bouncing along the bottom.
Asking lease rates in industrial buildings were flat from 2011 to 2012, at between $4.50 and $7 per square foot for smaller spaces, according to CBRE.
Average sale prices actually declined year over year, especially for larger buildings, which went from between $25 and $40 per square-foot in 2011 to between $10 and $35 per square foot last year.
George Paskalis, senior vice president at MG Commercial Real Estate in Providence, said the Providence area, like much of the Northeast, suffers from having a comparably older industrial building stock geared toward traditional manufacturers that isn’t very attractive to investors.
“Years ago when they built these, they didn’t take into account the business models of today,” Paskalis said. “Most businesses are looking for higher ceilings, rectangular in configuration, wide open with 10 percent to 15 percent of office. A lot have these buildings have 10- to 11-foot ceilings and multiple additions. Tenants and buyers go out and tour the market and realize there are only a few buildings that meet their needs.”
The age of the stock means that even with prices low, many companies looking to move can’t find an attractive space here. Smaller spaces are doing better than large and newer buildings in industrial parks and are significantly more attractive than older buildings in urban areas, Paskalis said.
Because demand for space has fallen, there has been very little new construction and practically no new speculative construction.
Paskalis said he expects 2013 will end up relatively similar to 2012, with activity still focused on properties of less than 50,000 square feet.
“As long as interest rates remain low, which we anticipate, there is going to be demand on the buy side,” Paskalis said. “In 2013 we anticipate supply constrained somewhat and this may positively affect the lease side as companies can’t identify a purchase, they may turn to lease. The Rhode Island market is still really a 10,000-to-50,000-square-foot market.”
Looking ahead at developments that could shape the landscape in 2013, Wall at CBRE pointed to the future of the 85-acre Leviton complex in Warwick, which has been on the market for years with proposals for conversion or demolition. Taking so much space out of circulation could tighten up the market.
On what the best prospects for demand-inducing industrial growth would be going forward, Wall said recycling and alternative energy are the first ones that come to mind.
Perhaps the most significant recent Rhode Island industrial investment has come from Sims Metal Management, the global scrap-metal company that bought the former Promet shipyard site in Providence and broke ground in November on a $30 million auto-shredding plant in Johnston. Other metal recyclers have either sprung up or expanded in Rhode Island in recent years, taking over previously unused industrial land.
The Deepwater Wind project has the potential to not only use up space in the Quonset Business Park itself, but could stoke demand from potential suppliers in the area.
Solar and biofuel operations have also created some industrial activity.
“It’s not sexy by any means, but it is something you will see capital being committed to it,” Wall said. •

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