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Commercial Real Estate in Area Found to Match National Pace
By Jonathan D. Epstein
Updated: January 19, 2010
Western New York now has more vacant office, retail and industrial space than a year ago, but, because of its conservative, cautious mindset, the region’s commercial real estate market is doing as well or better than most of the country, a national brokerage firm says.
That was the consensus of a series of presentations to dozens of local real estate professionals Tuesday evening by CB Richard Ellis’s local brokers.
The firm’s 2010 MarketView Event highlighted new that was not unexpected, but was reassuring nonetheless, as an indicator that the commercial property arena here remains healthy.
“We bode well when compared to our neighboring cities,” said Shana Stegner, director of office sales and leasing. “Our smaller, non-speculative office market reacted well, and we can look forward to 2010.”
Overall vacancy rates are up, especially for industrial properties. The pace of absorbing vacant property was down, as a significant amount of empty space went onto the market and wasn’t occupied. And new construction was down sharply last year for office and industrial space, but was up in retail, led by two Walmart supercenters and a Lowe’s store.
Lease prices are stable for office space but lower for retail. Sales of multiple-family apartment units are down to their lowest level in at least five years. And sales prices for industrial space are down sharply, indicating that Western New York isn’t as different from the rest of the country as many people like to think.
“We do follow national trends more than we think,” said Stephen Blake, the CBRE vice president in charge of industrial sales. “That was a little surprising to me and dispels the statement that our prices don’t change. Well, they do.”
The annual MarketView report by CBRE, one of the nation’s largest commercial real estate firms, is widely watched and anticipated as a barometer of how the overall market is doing.
In office space, the overall vacancy rate ticked up slightly to 10.58 percent for Class A, Class B and “Flex” space with at least 10,000 square feet available. That’s less than what the firm projected a year ago.
The area compares favorably to the nation as a whole, which has a rate of 17.2 percent. Rates for most major metropolitan areas exceeded Buffalo’s, with 28.5 percent in Detroit, 24.1 percent in Phoenix, 21.5 percent in Atlanta and 14.4 percent in Miami. Only Toronto and Manhattan came in lower, at 9.1 percent each.
And lease rates are stable, even though some landlords are offering more concessions to attract and retain tenants.
A key factor is the firm’s projection of 900,000 square feet of new construction last year, but only 130,924 square feet was built. “The demand for new construction is still there, but it’s down,” Stegner said.
About 455,000 square feet of new and projected construction is expected throughout all “sub-markets,” including the Genesee Gateway project in downtown Buffalo, the McGuire Development Co. medical office project at the former Evangel Assembly of God Church at Maple and Ayer roads in Amherst, and Krog Corp.’s project on Quaker Road in Orchard Park.
The big question going forward is “phantom vacancy,” in which the nation’s job losses are not fully reflected in office vacancy rates, but could be later this year, Stegner said. Companies that have had big layoffs may decide to consolidate and unload extra space when leases come up for renewal, driving vacancy rates up and forcing the market to absorb the space before it can recover.
On the industrial front, the vacancy rate soared 35 percent to 12.8 percent. That’s just a tenth of a percentage point below the national average, so “we are “virtually shadowing the national scene,” said Blake, who tracks 64 million square feet of industrial space in the area.
Regionally, Buffalo’s vacancy rate was higher than that of Toronto, Cleveland, Syracuse and Pittsburgh, and only Syracuse had a sharper increase.
Construction activity, meanwhile, fell from 580,000 square feet to just 75,000. That’s “the lowest we’ve ever seen,” he said.
And absorption is also down, he said, as the market gained 2.08 million square feet of vacant space.
As a result, sales price per square foot for warehouses fell 14 percent, while prices for manufacturing fell 27 percent.
Looking ahead, Blake said the vacancy rate probably will climb further to more than 13 percent, but not much more. “We’re getting to the bottom,” he said. “I expect we’ll see a slight increase in vacancy, .‚.‚. but we’ll be just fine.”
In retail, vacancy rose a notch to 12.94 percent from 12.63 percent. By comparison, Las Vegas has had 11 quarters of vacancy increases, rising from to 13 percent from 3 percent.
The area’s mall sector is doing well, driven by international shoppers. “Canadian shoppers continue to support our market,” said Michael Clark, director of retail tenant services. “They really are a boost in the arm in Western New York.”
Finally, sales of investment properties, especially multiple-family housing, are down 60 percent from the average of the past four years and down 71 percent in the number of units sold. But that tracks what’s happened nationwide and is not likely to change, said Robert Starzynski, who heads investment property sales.
Prices are “holding up well,” he said, with an average unit price of $29,322 last year compared with $31,000 for the last five years. That’s still 20 percent higher than in 2005.
Specific trends point to continued steady development of student and senior citizen housing, he said, especially given the area’s “older, static population.” Projects will continue to involve re-using former offices, warehouses, churches and schools.