What's Next for the New Buffalo?

By Bob Richardson
NAIOP Upstate New York – The Commercial Real Estate Developers

Observers of the real estate market in Western New York have witnessed a pace of development not seen in this region for generations.   Both casual observers and industry insiders are enthusiastic about recent trends.  Both see that public dollars and pubic project have fueled the rebirth of Buffalo.  Both groups wonder whether the trend can be sustained.  However, developers, contractors, labor unions and all of the industries who have participated in the rebirth of Buffalo are collectively holding their breath to see what 2018 will bring.

To understand what aspects of the resurgence of Buffalo are likely to continue in 2018, it's important to clarify what has actually happened in Buffalo in the past five years and why.   The "why" may actually be the easiest to capture and it can be summarized in three economic conditions that lowered the barrier to financing a project:

  • Historically low interest rates on construction loans and commercial mortgage have lowered the cost of borrowing
  • The historic tax credit program, local adaptive reuse and brownfield tax incentives, and the general investment climate have lowered the cost of investment capital
  • Optimism fueled by the Buffalo Billion and other public initiatives

These lower costs have enabled projects to be completed and be profitable in spite of local rental rates which remain very low.  They have encouraged risk taking and more aggressive investment posture by local real estate investors and developers.

The final reason for the rebirth of real estate in Buffalo can be observed in "WHAT" has happened here since 2012. 

For more than 40 years there was very little development in Buffalo and all of the real estate in our market is aging to a degree that it is no longer suitable for its purpose.  Just like cars get older and less functional, real estate becomes stale, is downgraded and eventually comes off of the market.  Because Buffalo had gone so long without an update or a fresh coat of paint, the market was in desperate need of a refresh and a re-supply.  

Almost without exception, you can attribute each project in Buffalo since 2012 to this supply-driven retooling of the market.  It's particularly apparent in the class A office market and luxury apartment market.   In 2012, there was virtually no supply of these products in the market.  While observers continue to be amazed at how rapidly new product in these categories have been absorbed in the market, the reality is that there had been no options for shoppers in these categories for many years and this constraint on supply created the pent-up demand that is now moving the market.

In reviewing the list of projects since 2012 we see example after example of resupplying the market to a lower, but stable level of demand which had been unsatisfied.  In this "supply-side" resurgence of Buffalo, real estate projects are largely competing with others within the region – downtown with the suburbs, Northtowns with the Southtowns, etc.   Whether its millennial renters, startups or small businesses, we're largely facing local competition.

So, what about the demand side?  Are we seeing organic increases in demand?  Unfortunately, we aren't.   Demand for real estate emanates from population growth, job growth and/or wage growth.   In each of these areas, Western New York is not performing.  We're still losing population.  While the unemployment numbers are down, the actual number of people working is shrinking too.  Our limited wage growth hasn't kept pace with inflation. 

Where does that leave us?  What can we conclude? 

First, the resurgence in Buffalo is real.  There is improvement, stabilization and areas of strength from which we can expand.  However, we need to be realistic and aware that what's driven the progress so far is a lack of supply so acute that it needed to be rectified.  However, this supply-side restocking has created the opportunity we now have.

Second, we should be clear that the new Buffalo is a temporary condition that requires us to act.  There's more to be done.  While some would have us taking a victory lap, there's no time to celebrate.  While we have momentum, while the national economy remains strong, while the capital markets are favorable, we have to reinvent Buffalo. 

For the next stage, we will have to look outward and compete for opportunities.  Whether it is to attract millennials to come to Buffalo - not in a trickle but in waves.  Whether it is to compete for jobs of the future - not the jobs we lost in the 1970s.   We have a once in a generation moment to choose growth and prosperity.  

It's not a hard choice but making the changes we need to make won't be easy.

Rowley's Rochester Report 2018

Joe Rowley with Bob Richard, NAIOP Upstate New York preisdent.

While job growth in Rochester and Western New York is somewhat stagnant, the view for commercial real estate developers is moving in the right direction according to Joe Rowley, Managing Broker, SVN | Realty Performance Advisors, who delivered his Rowley’s Rochester Report 2018 to NAIOP members and guests at Locust Hill Country Club on Jan. 25.

“Retail, office and industrial vacancies are down,” Rowley said.  “It is great to see the revitalization. Some spaces that have been vacant for a decade are now occupied.”

Over the last 18 months, Rowley and the team at SVN have generated over $50 million in sales and leasing.

Rowley said dozens of Rochester-area businesses are expanding, going through a laundry list of developments in Rochester and its surrounding suburbs: 

General Electric announced it will keep its Rochester plant open, retaining all 90 employees. “We have a lot of high tech individuals in the workforce, a great testament to the Rochester market.”

About 2,000 new residential units are coming online in Rochester.  “While it’s a pretty minimal amount,” Rowley said the new housing products are focusing on amenities, which renters are looking for.

Eastman Business Park has about 60 tenants.  “When you add up the former Kodak companies, there are still 20,000 to 30,000 employees there.”

Rowley said bonuses being handed out by U.S corporations (a result of the federal tax cut) could impact Rochester commercial real estate developers: “I think there is going to be a trickle down, hopefully in New York state.  We are open for business. It’s a question of how competitive we can be against the rest of the country.”

Is coworking disrupting the office market? The future of office space

Record stores, video stores and retail have all felt the effects of disruptive technology as mobile devices forever changed the landscape of the customer experience.

The same thing is happening in the commercial real estate industry.

Kane Willmott (above), CEO of Toronto-based iQ office Suites addressed members of NAIOP Upstate New York in Buffalo on Jan. 23, talking about the emerging trend of coworking, which provides a shared workplace.  These products were often intended for independent contractors, but many large corporations are also adopting the concept.  iQ Office provides a customized shared office rental solution.

“The iPhone changed everything,” he said. “It has had two effects:  it untethered us from traditional ways of viewing products and services and how we receive them. It also reduced friction in the buying process. The companies that got in early have been substantially rewarded.”

Willmott pointed to Apple, Netflix and Uber as companies that and digitized the marketplace. 

WeWork, with a $20 billion valuation, is doing the same thing in the office place.  Ironically, WeWork’s landlord, Boston Properties, a publicly-traded company, has a valuation just one-third of WeWork’s.

“Office leasing was very much a product,” Willmott said. “Coworking has untethered the tenant from a traditional lease and from the security deposits.  WeWork has presented leasing as a service.”

He sees new wave of growth coming from companies large and small.

A majority of potential coworking clients are microbusinesses, enterprises with fewer than five companies, including the owner, which represented 92 percent of all U.S. businesses, translating into 26 million jobs according to the Association for Enterprise Opportunity.  

“More and more Fortune 500 companies are coming in and using our spaces: short term, long term and for meetings. They are seeing this as an alternative for their workspace solutions.  I think it will be very difficult for traditional landlords to compete with this space in the future,” he said.

Willmott predicts when the coworking market comes, it will come fast.  “If you don’t already offer coworking, you’re going to have to try to catch up,” he told developers.  “Those who have the infrastructure in place will be at an advantage.  This gives you access to small tenants and you can charge more when you don’t have to lock into a long-term contract.” 

Patrick Whelan, Executive Director, Niagara Global Tourism Institute, also spoke, addressing incubators and accelerators as alternatives to traditional office environments.

“The whole idea of coworking is flexibility,” he said.  “This has been commercialized and taken to another level by companies like WeWork.  I don’t think there are too many companies that are going to grow to a point they are going to sign a traditional lease.  There are hundreds of start-up companies in Buffalo and not many are signing traditional leases.”

Whelan said startups are scared to sign a lease, so now they are operating out of coworking spaces where there is flexibility, driving the market to more and more coworking solutions.

NAIOP Upstate New York president Bob Richardson, said it is insightful in the way the office market is evolving into more coworking solutions. “We have an opportunity in Buffalo to see what’s happening in other cities around the world and benefit from how that office market is changing and how we can apply some of those lessons.”