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Plenty of office space but little available for manufacturing

It’s a great time to be an office tenant in Western New York but a lousy time to look for manufacturing space, as the two primary commercial real estate sectors for businesses head in opposite directions.

Significant new construction in recent years, coupled with a glut of existing vacant office space downtown, is making life difficult for landlords while putting tenants in the driver’s seat in lease talks. With vacancy rates now in the upper teens or even more than 20 percent by some measures, it could take Buffalo as long as 22 years to absorb what it already has.

And notwithstanding some high-profile deals, sales activity is slack as a result, except for smaller office suites or certain sub-sectors like stand-alone suburban buildings or medical offices.

On the other hand, industrial tenants seeking large facilities are virtually out of luck in the Buffalo Niagara area, as most of what’s available is small, and developers have shown no interest in building any more without a specific client to fill it.

Meanwhile, the business for retail investment properties picked up in the last year with several sizable deals, particularly sales of several suburban shopping plazas by Cleveland-based DDR Corp. And the multifamily market in the city is booming from a renewed interest in urban living among both young professionals and older couples.

“When you’re hot, you’re hot. And when you’re not, you’re not,” said David Schiller, director of sales for Pyramid Brokerage Co., of the local market. “We’re not going to see other things become hot until we see employment and population growth.”

The divergent fortunes of the four commercial real estate sectors demonstrate how much Western New York’s economy has changed. A region once dominated by heavy industry – and later filled with abandoned factories – now finds itself with too much office space but not enough manufacturing space to meet current and future needs.

Meanwhile, after decades of little to no construction activity, the rebounding downtown is spurring the build-out of new medical, research and office facilities that are competing against existing but aging office buildings. And as tenants consolidate space or shift from old to new, an already troubling vacancy problem grows.

But that same resurgence also is prompting significant demand to live in the city, particularly in the downtown core, driving growth in the market for multifamily and investment properties, which has experienced a flurry of activity in the past few years.

Office vacancies

With office vacancies rising sharply in the last year and significant new space coming online, there’s plenty of options available for commercial office tenants, both overall and especially in downtown Buffalo.

According to a second-quarter report by Cushman & Wakefield and Pyramid, the Buffalo region held some 20.43 million square feet of office space by the end of June, with 10.139 million square feet in downtown Buffalo and another 9.9 million square feet in Amherst. A separate year-end study of 195 buildings by J.R. Militello Realty reports 12.22 million square feet of office space downtown – up by nearly 1 million from a year ago.

Pyramid found 17.5 percent of the space in the region to be vacant as of June 30, while national research firm Reis Inc. and CBRE-Buffalo’s MarketView report calculated the year-end vacancy at 16 percent and 14 percent, respectively.

Even worse, Pyramid and CBRE each say almost 20 percent of the central business district space was empty, while broker James R. Militello’s firm pegged the vacancy at 23.1 percent – nearly three points higher than a year ago. “I wouldn’t say the small to medium-sized market is hot,” Schiller said.

That puts the power in the hands of tenants, who will demand a better deal. As a result, landlords are likely to hold lease rates steady or even cut them, while offering more concessions to lure tenants in an increasingly competitive market. And that, in turn, could drag down building revenues and property values, especially in downtown Buffalo.

And Militello says he’s not worried, since he says the vacancy figures are inflated by the inclusion of the Statler and Seneca towers. Half of the Class A vacancy and three-quarters of the Class C vacancy come from those two properties. Otherwise, those vacancy levels would be “manageable,” he said, with rates of 11.1 percent and 15.6 percent, respectively.

“Both the inventory of space and the amount of occupied space continues to grow,” he said. “That is a positive indicator of the health and stability of the downtown market.”

Industrial space

Where there’s too much office space for the market to absorb, there aren’t enough manufacturing or warehouse facilities to serve the demand. “There’s a scarcity of high-bay, well-located industrial space in Western New York,” said Richard Schechter, senior director at Pyramid.

As of June, the metro area contained 109.64 million square feet of industrial space, including 64.2 million square feet of manufacturing and 42.3 million square feet of warehouses. Less than 9 percent of that space is empty, well below the national average of 11.7 percent.

Retail property

A flurry of sales has characterized the retail property market in Western New York, which is generally strong in the city, suburban business districts and in strip centers, said Gunner Tronolone, a commercial real estate broker at M.J. Peterson Corp.

Sales ranged from individual store or restaurant properties to sprawling strip plazas, with price tags in the millions. And the activity is only likely to improve because of the economic resurgence and growing confidence in Buffalo that is drawing people and businesses back to the city.

“Retail follows critical mass, population and income demographics,” Tronolone said. “If development projects are successful and people come, the retail will follow.”

According to CBRE’s Marketview report, the retail vacancy rate in Western New York fell for a third straight year to 10.3 percent, marking the lowest level since the brokerage began tracking the rate in 2000. The regional rate dropped by 1.3 percentage points from last year and 4.1 points in the last three years, and is now below the national average of 11.5 percent.

Reis pegged the local vacancy at a higher 13.3 percent, compared to 10.2 percent nationally. That’s down 1.2 points from a year ago for the third-best improvement among 79 metro areas.

Apartment projects

Multifamily investment properties have been a high point for the market, as younger workers still want flexibility without owning a home, while the baby boomer generation of empty-nesters and retirees seeks to downsize. As a result, demand for more apartments increases – especially in the city – and the supply gets eaten up as soon as it becomes available.

According to Reis, only 2.8 percent of apartment units were vacant in the Buffalo Niagara area as of year-end. That’s the 13th-lowest among the 79 large metro areas in the country. And it was down by two-tenths of a point from the prior year. The national average was 4.2 percent.

That’s driving activity in both building sales and conversions of old warehouse, industrial or office space into new apartments. In fact, much of the attraction for multistory warehouses in the city now is for conversion, as such buildings lend themselves well to a high density of units; they’re built well, and their high ceilings are appealing for loft-style apartments. And federal and state tax credits make the projects more affordable.

So developers and investors are snapping up opportunities wherever they can find them, and the newer apartments are being leased immediately.

“I think that multifamily is the hottest investment area,” Schechter said, citing the opportunity for investors to diversify their holdings by purchasing buildings with multiple units.

Data from CBRE shows 146 multifamily transactions last year, down from 179 in 2013 but ahead of the previous five-year average of 140. In all, 3,168 units changed hands, at an average price of $48,258 each – the highest in at least 10 years.

email: jepstein@buffnews.com