The commercial real estate market in the Buffalo Niagara region is slowly and steadily improving, and the region could suffer from a shortage of quality office, industrial and even multi-family real estate, according to an annual report released Tuesday by CB Richard Ellis.
The amount of vacant office and industrial space in Buffalo is generally below both the national average and that of other upstate New York cities, the brokerage said. Vacancies are higher in the suburbs than in Buffalo's central business district, but the overall trend is generally the same.
"We're right on track with national levels," said Shana Stegner, director of office sales and leasing in the El Segundo, Calif.-based firm's Buffalo office. "We see good things in 2007 to 2008."
New construction has been ongoing throughout the region, but has generally been absorbed quickly and not left to languish unleased. That's because developers here are being more conservative, building to suit certain tenants and not on speculation that a user will eventually come along.
However, that caution is also leaving the area with a shortage of supply that could drive prices up. Indeed, 85 percent of the newly built office space locally has been taken, and the vacancy rate is now just 8.4 percent, up from 2005 but only slightly, the firm said.
In Buffalo's central business district, only 3.6 percent of class A space -- the best quality -- is still open, and many tenants want bigger floor plans.
"The need for quality office space continues," Stegner told an audience of about 60 at the Harbour Club in HSBC Arena.
Industrial space, in particular, may be at a premium. While the region technically has 120 million square feet of total industrial space, only 63 million is usable for modern industry, the firm said. That's 27 million square feet less than Rochester, and one-tenth of what both Cleveland and Toronto have.
Although more than 300,000 square feet of space was added in 2005, 1.2 million square feet has already been absorbed -- 60 percent in Buffalo. Only 139,000 square feet was added last year, including 90,000 for Cobey Inc. in the Buffalo Lakeside Commerce Park. And most 2007 projects are expansions.
The region's industrial vacancy rate is just 8.3 percent. The useful inventory of facilities with 20,000 to 50,000 square feet is even tighter. "Mid-sized facilities became quite scarce to find, especially stand-alones that were for sale," said Tony Kurdziel, industrial market analyst.
Meanwhile, as companies move into newly built or renovated space downtown, the demand for nearby residential space is rising, while investors locally and from outside the area get in on the action. That's driving the conversion of former industrial spaces into apartments.
"There's a lot of equity dollars chasing a limited supply," said Robert J. Starzynski, associate broker. "That has driven up prices and created a situation where those people with equity dollars are anxious to get into the game or stay in the game."
The annual report by CB Richard Ellis, the nation's largest commercial real estate firm, is a widely watched barometer of the local market. This year, the firm held a formal presentation for the first time, with M&T Bank Corp. President Mark Czarnecki as keynote speaker.
Czarnecki noted one benefit for a company operating in Western New York is the lower real estate costs. The bank, which occupies 1.8 million square feet of space locally, pays 33 percent less to operate property here than in Baltimore and 44 percent less than in Washington, D.C.
New construction costs are 15 to 20 percent lower here, and lease costs are one-fifth as high.
"That's one of the reasons why we find this is a pretty attractive place to be," Czarnecki said. "It appears that more people from outside this area are beginning to recognize that."
Finally, Western New York has about 26 million square feet of retail space, about 10 percent of the total statewide. Although the vacancy rate of 13.5 percent is nearly twice the national average, it is stable and has even declined from 2001 and 2002 when a significant amount of empty space was put on the market from supermarkets. Absorption and lease rates are flat, while construction activity is down.
Big projects include expansions at the Galleria and McKinley malls, and redevelopment of vacant space by Benchmark. CB Richard Ellis expects retail vacancies to continue falling and construction to pick up, but said the pending sale of Tops Markets poses another question mark.
"Overall, our market, while in some ways it's been a little bit flat, it has been good news that there has been slow steady growth across all segments," V. Jeffrey LiPuma, managing partner of the firm's Buffalo office, said in an interview.