NORTHEAST SNAPSHOT, SEPTEMBER 2008

Rhode Island Office Market

Rhode Island’s office market, like many other major markets in the country, has taken a hit, as of late.

“Office development is somewhat curtailed at the moment, due to the capital environment that we are in,” says Alden Anderson, senior vice president and partner with the Providence office of CB Richard Ellis - New England.

This has caused many developers delaying their project kick-offs until the economic climate improves, but some submarkets have still seen activity, mainly in the Providence suburbs.

“The submarkets with the most robust activity would be the northern Rhode Island market and the West Bay office market — West Bay being number one and northern Rhode Island being number two,” Anderson says. He adds that this excludes the Providence central business district, which has been able to maintain strong fundamentals throughout the current economic climate.

The West Bay market, for all of its activity, has also brought a lot of office product to the market. This was tempered with the recent sale of the Brooks Pharmacy headquarters. Shortly after constructing the 240,000-square-foot building, Brooks was sold to Rite-Aid, which decided to put the building on the market, rather than occupy it. Luckily, the Rhode Island Institute of Technology, which has been in acquisition mode lately, bought the property.

“When you have a suburban office market that is only 7.6 million square feet, that [would have] been a big chunk of space to absorb in the market, on top of the other currently available space,” Anderson says.

With moderate absorption, the overall vacancy rates for urban and suburban space at 14.8 percent at the end of last year and a lot of that vacancy can be attributed to the overall growth of the market. Most of the suburban development in Rhode Island tends to be on a smaller scale, ranging in size from 45,000 to 100,000 square feet. This is because most of the construction is done on a speculative basis. Local developers have used this approach to their advantage by expanding their portfolios from within.

“Generally speaking, the active developers [in Rhode Island] with significant portfolio, have expanded their portfolios organically with speculative development that is seeded by the tenant base,” Anderson says.

He adds that a developer will look at the number of tenants within its portfolio looking to expand before developing new product. Once these new tenants move in, the developer back fills their old locations with new tenants or other tenants seeking expansion. This also has the advantage of mitigating the developer’s risk when building on spec.

Ironically, the shining star of late in the Rhode Island suburban office market would have to be Aquidneck Island, which is driven by the defense industry. Rents here are also substantially below the cost of new office product, suppressing new development and driving rent growth. The Aquidneck Island market ended 2007 with a 5.8 percent vacancy rate, a number that is in stark contrast to the 30+% vacancy rate in the mid-1990’s and currently leading the Rhode Island suburban office market.

For the future, Anderson sees a sea change happening within the office market.

“We are entering a period where the market is shifting more towards a tenant market than a landlord market,” Anderson says. He adds that some markets, such as West Bay, this dynamic in the near term will benefit tenants that are in the market for space.

Despite its East Coast location, Rhode Island can sometimes take on the characteristics of a more inland office market, which tends to avoid the speculation that crops up on both coasts.

“Rhode Island historically have been a fairly smooth and steady market on the trend line, without boom and bust cycles compared to some of the more active markets, such as Boston,” Anderson says. “You don’t see the peaks and valleys in the office market, with regard to vacancy rates and rental rates.”

— Coleman Wood

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