Office space is getting harder to find across Buffalo Niagara, while vacant industrial sites are in even shorter supply. But the wave of department store closings has left plenty of retail space empty.
Those are the main findings of an annual survey of the Buffalo Niagara commercial real estate market by real estate broker CBRE Buffalo.
The report said increased leasing activity among financial and healthcare tenants, as well as in the suburbs, helped strengthen Buffalo's office market.
The region's industrial market remained very tight, with a record-low vacancy rate amid an ongoing lack of enough space to meet new demand.
But the closing of department stores at local malls contributed to a rise in empty space within the retail market.
"Locally, vacancies are up overall, but not in well anchored regional and neighborhood strip centers," said Michael Clark, associate real estate broker at CBRE Buffalo for retail services. "Smaller tertiary markets like Buffalo tend to take more time to absorb or re-purpose large vacant retail boxes, and as a result the overall vacancy rate is negatively impacted for a longer time.”
In the multifamily apartment sector, activity remained robust for the third straight year, with a heavier volume of apartment building sales at prices exceeding $50,000 per unit.
The annual MarketView report from CBRE provides an overview of the four major commercial real estate sectors, indicating how Western New York is faring in vacancies, new construction, absorption of space and prices.
The local agency office, headed by CEO Darby Fishkin and Managing Director Shana Stegner, released its much-anticipated findings Thursday evening in a presentation held at the new Admiral Room banquet facility in the Marin Building at 237 Main St. in downtown Buffalo.
According to CBRE, about 12.5 percent of the region's office space was empty as of the end of last year, down from 13.1 percent a year ago, as the suburbs finally saw drops in their vacancy rates to balance what had already been happening in the city. That local rate is also below the national average of 12.8 percent, which itself is the lowest since 2007, prior to the Great Recession.
A total of 357,210 square feet of empty space was taken up by new leases during the last year, while 356,760 square feet was added through new construction – down from the prior year, and consistent with national trends. That includes Ellicott Development Co.'s new 500 Pearl project, as well as some of Rocco Termini's Chandler Street incubators.
The highest vacancy rates were in the city, at 15.2 percent in the central business district and 13.8 percent elsewhere, and building owners and landlords are investing in renovations and upgrades to attract new tenants. On the other end, only 8.1 percent of the space in the eastern suburbs was available.
Lease rates reached new highs downtown, at $22 to $26 per square foot, with demand focused on high-quality buildings with amenities. Prices were down for traditional suburban space, where the focus is on efficiency of space.
Activity was strongest among banks like Bank on Buffalo, Evans Bank, Bank of America and Northwest Bank, with several new branches or office facilities opening, while interest in "flex" space and co-working are picking up.
CBRE noted that several "prominent firms" are "seeking large amounts of office space," totaling over 500,000 square feet. More than 450,000 square feet is now under construction or planned, while other projects are waiting for commitments from tenants. Redevelopments also are in progress, including Douglas Jemal's One Seneca Tower.
“It was an overall active market in 2018, especially across the financial services and healthcare industries," said Sarah Cashimere-Warren, real estate salesperson for office sales and leasing. "We await the decisions of several large users currently searching in the market and the impact those moves will have on future vacancy.”
Western New York's steadily declining industrial market continues to face a shortage of space. The record-low vacancy rate makes it harder for industrial firms to find suitable space.
Only 3.4 percent of the warehouse, manufacturing and flex space – 2.24 million square feet – was vacant at the end of last year, down even from the prior year's record low of 3.5 percent, CBRE noted. For the 14th straight year, Buffalo's rate is well below the national average, currently 7.1 percent, and it's also below that of Cleveland, Pittsburgh, Rochester and Albany, according to the report.
“The record low industrial availability rates continue in the region," said Steve Blake, associate real estate broker for industrial sales and leasing at CBRE Buffalo. "Leasing velocity is slowing locally as we see some push back from tenants who are being presented with increasing rates that aren’t being seen in larger metro areas.”
More than 608,332 square feet of industrial space was taken up by tenants or redeveloped for new uses last year, while only 331,000 square feet of new space was built – half of what was proposed. Manufacturing space is particularly short. The average sale price for industrial properties was $41.06 per square foot.
Continued store closings by Sears, Macy's, Bon-Ton, Kmart and other retailers again drove up the retail vacancy rate locally, to 11.6 percent from 11.3 percent – the third straight annual increase, according to CBRE – as more than 376,212 square feet of occupied space was given up.
But mall owners and developers are seizing the opportunities to reclaim those valuable spaces, snapping them up in purchases and making plans for reuse or redevelopment, the brokerage said.
“The enclosed mall sector experienced the vast majority of large box closures," Clark said. "However, as in past years, developers and investors have been quick to acquire the vacated real estate when made available."
That's what's happening at the Eastern Hills Mall, where owner Mountain Development Corp. has teamed up with Uniland Development Co. on plans to create a mixed-use "town center" or "lifestyle center" project at the sprawling Transit Road property. Similarly, CBRE noted, the former Bon-Ton store at Southgate Plaza in West Seneca will be converted for multiple uses, including office space.
Meanwhile, a pair of empty big-box stores near the Boulevard Mall were reoccupied, offsetting the loss of Bon-Ton and Toys R Us, while a former Walmart in Lockport was purchased by Minnesota retailer Runnings for its first local location.
Last year, a total of 2,325 apartments were sold in 181 deals for a total price of $170.6 million. That's roughly the same number of transactions as in each of the prior two years, but a pair of "outlier" deals drove the average price per unit way up, to $73,376.
One was an independent senior-living complex in Orchard Park with 100 units, while the other was a private student-housing complex off Sweet Home Road near the University at Buffalo's North Campus, with 192 apartments. Not counting those deals for 300 apartments, the total price was $104.73 million, or $51,514 per unit – the fourth-straight year in which prices surpassed $50,000 per apartment.
Buffalo itself accounted for 58 of the deals, for almost $40 million, with another 45 in Niagara County and the remaining 78 in the Erie County suburbs.
Despite the flurry of renovation and redevelopment projects in recent years that have created new apartments throughout Buffalo and the surrounding region, CBRE said that "supply has not quite kept up with demand," particularly from millennials and seniors.
That's based on the continuing pace of adaptive reuse and infill projects, as well as their occupancy level, even though the regional population "remains flat with little if any growth forecast for the near term," CBRE said.
“The combination of interest rates and demographics that skew toward high rates of households renting, out of both preference and necessity, are keeping the investor appetite strong in Western New York,” said Robert Starzynski, associate real estate broker for investment sales at CBRE Buffalo.