Stubborn inflation and interest rates continue to set the tone of impending recession expectations, as has been the case for nearly 12 months, and has yet to fully materialize. Although sales volume and value have weakened, Multifamily, Industrial, and Medical Office continue to be the dominant sectors in the investment market as underlying economic and demographic fundamentals favor these asset classes.
SUPPLY AND DEMAND:
The Rhode Island (RI) office market supply remains static with no new speculative development on the horizon. We don’t expect any new meaningful inventory for the foreseeable future. The lack of new inventory and the continued trend of adaptive reuse among the older historic office buildings along with user acquisition mainly from the healthcare and academic institutions have provided for structural market stability. The Central Business District (CBD) is slowly regaining the daytime population as employers try to bring their people back to the office with varying degrees of success. In the Class A/CBD buildings, we are seeing office utilization rates continue to range between 40-45%.
We are beginning to see tenants make long-term decisions around their footprint needs, often resulting in square foot reduction due to a flexible workspace strategy. We expect more sublease space to hit the market in the near future. Companies are also focusing on higher-quality buildings with amenities that will help them attract workers back to the office. The calculus of this flight to quality allows tenants to maintain cost parity given their reduced footprint needs even while paying up for top-quality offerings. The properties receiving the most activity right now are those offering on-site dining, fitness, and meeting areas that have been built or renovated in the recent past. A prime example of this is at 3 Davol Square, Providence, where Wexford/Ventas recently completed a $15M gut-renovation to a historic brick-and-beam building located in the heart of the Innovation District next to many of the area’s top medical and academic institutions.
Rates have largely remained flat with some signs of strength for top-quality assets. Concessions are on the rise due to the higher cost of construction impacting build-out costs. Overall RI market rents increased by about $.16 per square feet (psf) from $20.34 psf at the end of Q1 2023 to $20.50 psf currently. Construction costs continue to increase which has provided upward pressure on rental rates and make relocations more challenging.
There continues to be a focus at the state economic development level on attracting life science companies to the market. The RI Department of Health has awarded an 80K square foot (sf) state lab facility to be built in the Innovation District. The developer is planning to build additional lab space for the market to absorb. This will be a significant development for Providence and one that could be catalytic for growth given the proximity to Boston and the strong talent pool surrounding Brown University’s Medical School and the local healthcare institutions.