Back in 2017 when Indian tech support company Infosys set up shop in Rhode Island, offices and office workers were a key pillar of Providence's downtown renaissance.
Seven years and one pandemic later, there are few signs of the 1,000-plus employees the company promised to hire in Infosys' sleek but somewhat sleepy downtown offices.
And Infosys is not alone. Across the city, security guards watching over downtown building lobbies on some days are among the few people walking through the door. Entire floors of buildings feel like pre-2020 time capsules on many floors, and there's plenty of street parking between 9 a.m. and 5 p.m.
Just down the street from Infosys, Hasbro moved out of downtown Providence, leaving its offices at 15 La Salle Square empty.
Unlike most areas of everyday life, office work has not gone back to the way it was before COVID-19, as remote work has become a permanent fixture of the economy.
So far the change has been mostly felt by landlords, real estate brokers and the banks that write commercial mortgages, but that could be about to change, as Providence completes its first property revaluation since demand for office space really began to tumble.
If the value of the city's office buildings is written way down, the burden of funding city services will shift to residential property owners. And most observers believe it has gone down. The only question is how much.
"I don't have the expertise to tell you how much, but I can just tell you that, in America, the value of office buildings has dropped greatly," former mayor and downtown building owner Joe Paolino Jr. said recently.
How does he know? The 100 Westminster St. office building he bought a decade ago is now worth 40% less than what he paid for it.
On the flip side, he bought the former Amica building at 10 Weybosset St. earlier this year for $4 million below its $16 million assessed value.
The worst-case scenario for any city is the so-called "urban doom loop" where falling tax revenue leads to cutbacks in public services and more companies moving out, driving even greater erosion in the tax base and on and on.
No one sees that happening yet, but after years of flush public coffers, cities across the country are on guard.
Chris Marsella, chairman of the Providence Foundation Board and head of Marsella Development Corp., which built many of the offices in the Capital Center, describes the potential worst-case scenario: "Buildings going vacant and sitting there with financial institutions holding the keys instead of local investors wanting to do something. ... You then have these buildings not operating, not producing income, not paying taxes, or unable to pay taxes, then we start to see the impact on our city."
What is a Providence office building worth?
It's tough to say how much downtown Providence office values have fallen since the pandemic, because, with the market depressed and interest rates elevated, few significant buildings have been sold recently.
And few, if any, companies have signed large new leases for office space here.
Experts describe a market in suspended animation, with many tenants playing out long-term, pre-pandemic leases and landlords with no way to get the same rent they are getting from someone else and with no way to refinance their mortgages at workable interest rates.
Michael Saccoccio, president of the Rhode Island Commercial and Appraisal Board of Realtors, said across the board commercial reassessments "are down close to 40% statewide."
On the bright side, Saccoccio said declines are larger in cities such as Boston and New York, which have a larger inventory and bigger exposure to remote-friendly tech firms and corporate cost-cutting.
In the second quarter of this year, downtown Providence office vacancies rose 19.8% from the same period last year, and asking rents were down $22 per square foot, according to an analysis from brokerage firm Hayes & Sherry.
Downtown "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, the report said, "office utilization rates continue to range between 45-55%."
Matthew Fair, a broker with Hayes & Sherry, said in an interview that the higher-quality "Class A" office buildings in Providence should come out OK.
"That's not to say lower valuations will not affect banks and investors and the city will not have negative consequences to tax revenue," he said. "But the lenders don't want these buildings. They are doing everything they can to not take them back, and that trend is going to continue."
The Providence Journal Building
From 2016 to 2018, then-Gov. Gina Raimondo enticed three high-profile technology companies to Providence that would go on to lease space in the just-sold and renovated Providence Journal Building: General Electric Digital, Virgin Pulse and Infosys.
The extent of GE Digital's continued presence in Rhode Island is unclear. The company's incentive agreement with Rhode Island Commerce – which could have paid up to $11 million in tax credits – was terminated before any payments were made, Commerce spokesman Matt Touchette said.
Rhode Island Commerce doesn't track the status of companies whose incentives have been terminated, Touchette said, and can't say whether GE Digital employs anyone in the state anymore or not.
Infosys' offices in the first floor of the Journal Building, in the cavernous space where the printing presses used to be, are still open.
But activity there is light, and Infosys' incentive agreement with the state was also terminated after it did not meet its obligations in the deal. Infosys was approved for $13 million in "Qualified Jobs" tax credits for employing new workers and another $1.3 million in additional incentives. None were paid, Touchette said.
Infosys did not respond to Journal inquiries.
According to the Commerce Corporation's first-quarter incentive report, in the last five years, the state has also terminated Qualified Jobs incentive agreements with:
- Agoda Travel Operations
- eMoney Advisor
- iXblue Defense Systems
- Magellan HRSC
- SenTec
- Trade Area Systems
- VistaPrint Corporate Solutions
- Greystone Lincoln
- Ivory Ella LLC
- Granite Telecommunications
- Johnson & Johnson Services
- Alliance Paper Company
- Xeros
- Epiq Systems
- Rubius Therapeutics
- Response Technologies
- MTX Group
Virgin Pulse is still open for business under the name Personify Health since a $3 billion merger last year. At least some sections of Virgin/Personify's multi-floor Journal Building offices have been dark since the pandemic, which the company attributes to remote work arrangements.
"Personify Health has approximately 200 employees in the Rhode Island/Massachusetts region that take advantage of our Providence office," a spokesman for the company wrote in an email. "However, we have a hybrid work policy so the number in the office varies from day to day. It's a great location to host larger team and department gatherings as well, with close proximity to restaurants and hotels. We host team members from across the country and from our international locations several times annually."
Virgin Pulse/Personify has been paid around $3.8 million of the up-to $6 million in state incentives it was eligible for if it reached 292 Rhode Island-based employees, according to the first-quarter report.
Virgin Pulse signed a lease in March 2017, but how long the lease has to run was not disclosed by the company.
What does this mean for the tax base?
Rhode Island cities must reassess the value of their property every three years, with a full in-person valuation every nine years.
Providence's last revaluation was in 2021 (for tax year 2022) while the pandemic was still raging and its effects on the long-term real estate market were hard to figure.
The value of Providence's commercial real estate grew from $3.5 billion in 2021 to $3.9 billion in 2022, according to budget documents. Those commercial properties include medium and large apartment buildings and retail properties, so it is not clear how much of the value is tied up in offices.
Over the same period, the value of residential property in the city grew by more than $4 billion, to $18.6 billion.
Like 2021, the upcoming revaluation will be a "statistical" valuation based on sales data and models, without the on-the-ground analysis of individual buildings that happens in a full revaluation. With relatively few large office building sales since 2021 to go on, it is unclear whether commercial value will dip, stay flat or grow after the upcoming statistical revaluation.
Either way, it is likely that large commercial property owners will challenge their new assessments, just as they have frequently over the last several years.
Last year there were nearly 300 appeals of city tax assessments, according to data from the Assessor's Office, and around 80 were approved. Of those that were denied, many are appealed to the city Board of Tax Assessment Review and, with the majority denied there each year, often to Superior Court.
When a property owner wins in court, the city has to pay interest on any overassessment.
After the last revaluation went into effect for tax year 2022, there were 780 appeals, more than double the number last year.
Office-to-housing conversions, and other possible solutions
Providence Mayor Brett Smiley, through spokesman Josh Estrella, said it was too early to speculate on whether declining office values would strain the city budget.
"By focusing on the quality of life issues that impact our community we are striving to make in-person work a more attractive option for employees which is better for our local businesses and our economy as a whole," Estrella wrote in an email. "Importantly, the City is also embracing the adaptive reuse of commercial buildings for housing so that the vacant buildings across different zones can be put to a productive use and improve housing availability while still bringing people Downtown."
With office rents depressed and apartment rents sky high, many property owners see residential conversions as the solution, although the cost of transforming old buildings into homes is high.
Developers say these high costs, combined with the city's high commercial tax rate, make many projects impossible, and for years they have argued for relief through tax-stabilization agreements or use of the "8-law" break for affordable housing.
No building exemplifies the challenges of an office-to-apartment conversion like the redevelopment of the Industrial Trust "Superman Building," which appears to be on hold again despite a $41 million public incentive package plus a city tax treaty.
Arnold "Buff" Chace Jr. has been involved in many of Providence's downtown office-to-apartment conversions and worked as a consultant on the Superman Building. He was part of the group that bought the Journal Building just before Virgin Pulse and Infosys moved in and still owns a small stake in the building. He's also involved in a dispute with the Providence City Council over controversial tax breaks meant for affordable housing given to 10 of his downtown properties that will be heard by the Rhode Island Supreme Court.
"I think we know the solution. It's just going to be much more of a mixture of uses, which then leads to more things for people to do and longer hours downtown," Chace said about the office market problem. "Our goal is to have 18 hours a day of activity on the street so it doesn't roll up at night."
And what will get the Superman Building project back on track?
"I think the state is looking at adding additional resources that would be necessary to get it on," Chace said. "And obviously we're trying to do everything we can to encourage the governor and the legislative leaders to make that extra push, because I think it'll be transformative."
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