Western New York's commercial real estate markets continue to thrive amid reduced office vacancies, booming apartment building sales and strong demand in retail and industrial sectors – despite major store closings in several malls and an uptick in empty manufacturing space.
The four regional markets have benefited from increased tenant confidence and growing interest in Buffalo as an attractive but affordable market. They've also seen expansion in the medical and educational fields, creative conversions of empty office and industrial space into new apartments, and the arrival of new restaurants and food-service operations to the region.
And the expected redevelopment of One Seneca Tower could remove a significant black cloud on the market.
But the region still faces challenges from a flat suburban office market, a lack of enough available manufacturing facilities to meet the need and the loss of major Macy's and Sears stores, which are contributing to worries about the future of the area malls.
The annual study represents one of the most comprehensive public analyses of area commercial real estate supply and demand, detailing how much space is available in each sector locally, how much is occupied, how much it costs and how it's being used.
Other firms produce similar reports, but keep them for internal use, making CBRE's more closely watched.
"Our industry relies on this data," said CBRE-Buffalo Managing Director Shana Stegner. "Economic development agencies, lenders and developers, to name a few, all look to our market knowledge year over year."
According to CBRE broker Sarah Cashimere-Warren, the office vacancy rate in the Buffalo-Niagara area fell to 12.5 percent, down by a percentage point from 13.5 percent a year ago. That's better than the national average of 13 percent.
More than 300,000 square feet of new space was added to the market through new construction projects, but tenants filled up 337,154 square feet. And the rate of new construction has slowed, although new projects have been announced.
Back-office tenants seeking high-density space and parking are still attracted to the suburbs, and the healthcare industry continues driving new medical office development, CBRE reported. Buoyed by confidence, office tenants extended lease terms, but they're also rightsizing and shrinking footprints to be more efficient. They're also increasingly seeking higher-quality and newer space.
Downtown Buffalo in particular will benefit from the conversion of One Seneca to other uses, which removes significant potential empty office space from the market, the report said. The Buffalo Niagara Medical Campus is also proving a big draw for tenants, generating demand for new construction or redevelopment.
As a result, the vacancy rate for Class A space in the central business district dropped, while the rest of the city and even the suburbs remained stable. "The Buffalo market is poised for positive growth in 2017," the report said. "Downtown momentum is here to stay."
Apartment building sales in Western New York hit their highest level last year since before the 2008 recession, amid continued low interest rates and the attractiveness of Buffalo's small-market prices. In particular, investors are eager to make deals before the Federal Reserve raises rates further, CBRE broker Robert Starzynski reported.
Last year, more than 2,867 apartment units were sold in 185 transactions, generating total dollar volume of $147.45 million. That equals $51,556 per unit, a slight drop from the prior year, but still the second highest price in over a decade and more than 43 percent higher than the average of the last 11 years.
Specifically, there were 85 deals in Buffalo, totaling $40.98 million, or $54,934 per unit. The rest of Erie County combined for another 64 deals, valued at $96.26 million, or $52,229 per unit. The remaining transactions were in Niagara County.
Meanwhile, conversions of older buildings into new apartments continues. "With more people seeking a 'city lifestyle,' new development, adaptive reuse and overall redevelopment within the city is likely to continue," the report said.
The market for manufacturing and warehouse space remains tight in Western New York as an ongoing lack of available new space has hindered tenants in their real estate searches. But the region's vacancy rate ticked up nevertheless to 4.6 percent last year, up from a historic low of 3.6 percent, CBRE reported.
That's because two buildings totaling about 750,000 square feet became available in the eastern suburbs, while nearly 1 million square feet in the city was either demolished or converted to apartment projects – making the remaining vacancy a larger share of the overall inventory.
Only 197,000 square feet of new space was built in 2016, but 504,000 is projected for this year. Demand for warehouse space is particularly strong, with online commerce sales expected to grow by more than 9 percent a year for the next five years, noted CBRE senior associate Lida Eberz.
“With the economy continuing to improve and national forecasts looking strong we fully expect that our metropolitan Buffalo industrial market will reflect the same," she said. "With this increased demand to move goods quickly, the demand for efficient distribution warehouses will remain very strong for the foreseeable future.”
Finally, four years of falling retail vacancies ended last year with a slight increase in the region's overall rate, to 10.3 percent. That's three percentage points higher than the national average, according to Michael Clark, CBRE-Buffalo's director of retail services.
Activity was brisk last year, with Macy's closing its department stores at Eastern Hills and McKinley malls, and Sears announcing the closings of its stores at Boulevard Mall and the Walden Galleria.
With all the changes and struggles to fill space, Mountain Development is now talking about converting Eastern Hills into a "lifestyle center." Cleveland-based Forest City Enterprises has put Boulevard Mall in Amherst up for sale. While a new Whole Foods is coming to Amherst's Northtown Plaza this summer, the future of the rest of the plaza is uncertain.