The beginning of this market report from David Cohen seems positive:
The office sector in Rhode Island’s commercial real estate market has seen a strong carryover and positive momentum from 2017, into 2018, which we continue to enjoy today. The market has seen positive absorption in most areas and with little speculative development on the horizon, lease rates are being affected accordingly. It’s safe to say, it is no longer a Tenant’s market.
The doubt begins to creep in with that phrase, “little speculative development on the horizon.”
Commercial real estate can stop being a tenant’s market because so many tenants are looking for space that the market can’t keep up with demand or because artificial constraints are keeping the available supply so low that even a tepid economy can’t find the floorspace to operate. The key difference between these two circumstances is that, in the first, something is driving the market, which is rushing to keep up while, in the second, something is preventing the market from keeping pace even with mild demand.
The noted lack of speculative development is suggestive of the second possibility. If the market were rushing to meet new demand, the speculators would be speculating. Furthermore, Cohen notes that, while large businesses can build the space they need…
… tenants who drive the market, that is those looking for 15,000 square feet or less, will be hard pressed to find many viable options. The largest developer in this market, Michael Integlia, & Co is realizing 90 percent occupancy rates with lease rates for first generation space in the $25 per square-foot range. Unfortunately lease rates are not keeping pace with construction costs, which is stunting any new development.”
So, high construction costs — attributable in no small part to union rules, zoning restrictions, and the whole panoply of regulations — are one thing suppressing the market. That isn’t sufficient, though, to explain the end of a tenant’s market. As it turns out, there is something driving demand, but it’s very limited and not ideal. See if you can spot it:
… Recent projects include the redevelopment of South Street Landing, a $230 million dollar renovation of the former Narragansett Electric power station which is now home to the URI/CCRI Nursing School as well as some of the administrative offices of Brown University. Just a block away, construction is underway for the 191,000-square-foot Providence Innovation Center. This will be occupied by the Brown University School of Professional Studies, Johnson & Johnson and the Cambridge Innovation Center.
The redevelopment of 75 Fountain Street, a 160,000-square-foot building, once fully occupied by the Providence Journal, has also enjoyed positive absorption. The redevelopment by Nordblom Company and Cornish Associates has attracted companies such as Tufts Healthcare, GE Digital and Virgin Pulse to join the Providence Journal.
Just about every tenant mentioned in those paragraphs is either a government entity or a recipient of government incentives. If that’s what’s driving the commercial real estate market, it’s a very limited force.
Worse, it appears to be displacing economic growth that does have some external driver. A company that wants to expand in Rhode Island for some reason other than government subsidies is finding that vacancies have been “absorbed” by the subsidized, without “speculative development” popping up to replace it.
These are the outcomes that us pointy-headed-analyst types have warned about with an economy built on constricted economic flow and crony capitalism, and as interesting as it may be to see it in action, we shouldn’t want to be able to observe these natural experiments. At least, let’s learn from them.