A New York real estate consulting firm calls Buffalo an "excellent" prospect for investors looking to build or purchase apartments in 1991.
Landauer Associates said in its 1991 multifamily housing forecast that Buffalo is ripe for increased apartment construction and that established complexes could bring a 12 percent return on investment.
Once synonymous with heavy industry and the term "Rust Belt," Buffalo has diversified its economy and should be able to withstand all but the most severe recession, allowing job growth to continue, Landauer said.
"Buffalo has very much been overlooked concerning multifamily housing and that's unusual," said Hugh F. Kelly, Landauer's senior vice president and author of the forecast. "People haven't come in and overbuilt the area as happened in other areas during the mid-1980s."
Kelly pointed to the area's growing population and job force as leading to a shortage of apartments. Return on investment on an existing apartment complex also makes Buffalo attractive, Kelly said.
"You can purchase a sound complex in the Buffalo area for $25,000 per unit and earn a 12 percent return in the first year," he said. "You can't get that return in retail or office buildings."
Local apartment owners and developers concur with the study.
"There definitely is a need for new apartments in Buffalo and Erie County," said Thomas Barillari, chairman of the Niagara Frontier Builders Association's Apartment Council and president of First Elmwood Management Corp.
"In the last 10 to 15 years, few new apartment complexes have been built; our company has not constructed a new complex in about 10 years," he noted.
Little new construction, combined with the elimination of 1,500 to 2,000 units through condominium conversion over the last decade and rising housing costs for first-time home buyers have driven the current vacancy rate in Erie County down to between 2 percent and 5 percent. Nationwide, the rate is about 7.2 percent.
Between 25,000 and 35,000 units are located in the county; rental rates for a two-bedroom apartment range from $400 to $590.
While the need is real, a number of factors could prevent new units from being constructed.
"There are three major pitfalls keeping new units from the market," said Ray Penman, vice president of the M.J. Peterson Corp. The company manages and/or owns about 2,900 units in Erie County.
"If a developer can overcome the costs of financing, taxation and construction, units will be built," he said. "There is plenty of land already zoned for multifamily housing."
While few apartments have been built since the mid- to late-1970s, Peterson and First Elmwood, along with a number of other owners, have invested heavily in rehabilitating units. Peterson alone has redone more than 700 units in the last 12 months.
"Large builders are looking at the Buffalo area to build and national lenders like the area because they see an appreciating market and the low vacancy rate," said Dennis Penman, executive vice president with Peterson. "Developers also can get projects done here in two years, where in another hot market it may take five years due to the
Landauer's Kelly said that it was unlikely that national developers would enter the Buffalo market in the new year, due to the short supply of local construction funding.
"That means using non-Buffalo institutions and they have to be educated about the Buffalo market and education takes time," Kelly said.
Buffalo joins such cities as Pittsburgh, Cincinnati, Chicago, San Antonio and Austin, Texas, in the Landauer survey as markets where apartment construction will bring a good return on investment.
But the handful of cities named appear to be in the minority. October and November surveys by the National Association of Home Builders indicate that most areas of the country do not exhibit conditions conducive to new apartment construction.
Multifamily housing starts plunged in October to an annual rate of 177,000 units -- the lowest in at least 31 years -- before jumping 102 percent last month, to 357,000 units. Home builders officials termed the November rebound a fluke, and said December's figure would split the difference.
The home builders association said there were no positive developments regarding multifamily housing. Rental vacancy rates climbed over 7 percent during the third quarter despite declining multifamily completion levels. In addition, absorption rates for rental units remained stagnant and rents remain too low while household formation rates decline.
In the Buffalo area, multifamily permits let through October were down 4.6 percent compared to the first 10 months of 1989. Still, only two Northeast metropolitan areas fared better: Rochester's permits were up 0.7 percent, while Scranton-Wilkes-Barre, Pa., was up 6.3 percent.
Despite a negative permit number, Buffalo is poised for a rebound should the national economy strengthen and the Mideast situation cool.
"Buffalo is a community which should fare better than most Northeast communities," said Joseph McIvor, executive vice president of the Niagara Frontier Builders Association. "Multifamily construction could be a safe place to invest if you're not looking to make a killing."