News & Transactions

Providence Office MarketBeat Q2 2024

Matt Fair, Partner

Steve Flachbart, Sr. Vice President

ECONOMY:

Inflation has softened and most signs point towards continued lower guidance in the labor markets giving hope for much-needed interest rate reductions as early as September 2024 with the possibility of two 25 basis points (bps) reductions in 2024. Although sales volume has been hit hard, values for Multifamily, Industrial, and Medical Office continue to be strong as they have become the dominant sectors in the investment market due to underlying economic and demographic fundamentals favoring these asset classes.

SUPPLY AND DEMAND:

The Rhode Island (RI) office market supply remains static with no new speculative traditional office 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 daytime population as employers try to bring their people back to the office three or four days a week with varying degrees of success. In the Class A/CBD buildings office utilization rates continue to range between 45-55%.

We are seeing tenants make long-term decisions around their footprint needs, which often results in square foot reductions due to 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 higher rents on a per-square-foot basis for top-quality offerings. Hasbro recently announced its intention to not renew its downtown lease in the 135,000 SF Class A/LEED GOLD building located at 15 LaSalle Square. Early interest in the property has been surprisingly strong, largely attributed to its “best-in-class” amenities and infrastructure.

PRICING:

Rates have shown signs of strength, especially for top-quality assets. Concessions are on the rise due to the higher cost of construction impacting build-out costs. Overall RI market rents decreased by about $.03 per square foot (psf) from $22.06 psf at the end of Q1 2024 to $22.03 psf currently. Construction costs continue to increase, increasing upward pressure on rental rates and making 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 building additional lab space for the market to absorb. This will be a significant achievement 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 other local healthcare institutions.