Real Estate October 14, 2012 9:30 AM

Third Quarter Office Market Overview

Third Quarter Office Market Overview
Buffalo Rising
Buffalo Rising 13

Market Activity
By Q3 2012 the Buffalo market maintained 19.8 million square feet (msf) of office space operating at a vacancy rate of 12.8% and lease rate of $16.66 per square foot (psf) gross.  The spike in vacancies over the past year is largely attributed to a revision in the inventory of buildings surveyed.  The CBD supports 9.7 msf of space operating at a 12.1% vacancy rate and lease rate of $15.85 psf gross. 

The suburban market supports 10.1 msf of office space and an overall vacancy rate of 13.5%.  The Northtowns communities of Amherst and Williamsville rank as the region's premier suburban office location, supporting the largest inventory of space and highest lease rates.  The region's inventory of class A space totals 7.2 msf operating at an average vacancy of 8.9% and lease rate of $19.42 psf gross.

While average asking lease rates have remained relatively flat during 2012, there is a growing trend for those tenants renewing leases to negotiate lower effective lease rates and increased incentives.

During Q3 2012, the Buffalo office market reported net absorption of 40,156 sf, bringing the year-to-date (YTD) total to 102,657 sf.  YTD 2012, the CBD absorbed 84,594 sf of space with the suburbs absorbing 43,990 sf.

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Through Q3 2012, office property sales in the Buffalo market were on the upswing with 24 transactions involving 436,334 sf of space and $19.5 million in proceeds.  By comparison, for the same 9-month period in 2011 only twelve office transactions totaling 81,876 sf of space and $6.0 million in proceeds were reported.  YTD 2012, Cushman Wakefield Pyramid Brokerage Company brokered the sale of the two largest office sale transactions, including the $3.3-million sale of 2350 North Forest and the $3.0-million sale of 95 John Muir Drive, both in Amherst.

Outlook
During the next 12 months the Buffalo area office market will face several challenges as large blocks of space are coming up for renewal.  Asking lease rates will remain flat with effective rates for renewed space likely trending lower.  Net space absorption is forecast to improve slightly, resulting in a modest increase in occupancies.  The possible departure in late 2013 of HSBC and Phillips Lytle from One HSBC Center could bring 740,000 sf of available office space onto the CBD market and potentially adversely impacting occupancies, lease rates and property values for the overall market.
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13 Comments Leave a comment
M-Rodgers
October 14, 2012 11:19 AM
M-Rodgers

Thanks for posting

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RaChaCha
October 14, 2012 9:03 PM
RaChaCha

Without anyone to walk me through this, it took a couple of reads to absorb but was worthwhile. Found a few things especially interesting:

* Assuming I'm reading this correctly, the city/burbs split in office space is nearly 50/50 (10.1 msf suburban & 9.7 msf "CBD" -- presumably meaning city).

* Also, the least rate for Class A space doesn't seem to be all that much more than the average for all space.

* I'm assuming that "absorption" means new space coming on the market.

* I'm puzzled by the sharp drop in leasing activity in 2011 & 12.

It sounds like we'll need a Buffalo-market-wide strategy for dealing with a vacant HSBC Tower.

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WCPerspective
October 14, 2012 9:09 PM
WCPerspective

Absorption is total increase in occupied space, not newly-built space. :)

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RaChaCha
October 15, 2012 12:25 PM
RaChaCha

Thanks! So I take it then that an increase in absorption in both city & suburban markets means real growth, rather than just a rearranging of the deck chairs. That's a good thing.

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elmdog
October 15, 2012 9:16 AM
elmdog

I am hoping that Billion dollars for Buffalo will fulfill its goal and put someone large in DT buffalo....

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No_Illusions
October 15, 2012 11:13 AM
No_Illusions

With a billion dollars I certain hope it wouldn't be spent on a single entity. With that much cash you could attract an entire industry/sector to Buffalo. Buffalo is already a mid-sized hub for Bio-Med and Finance. It is also the debt collection capital of the US apparently. Education is also already a strong sector.

With a billion dollars, Buffalo could expedite the Nano/smart Materials center for excellence plan by attracting several mid-sized/large companies in that field, or they could attract multiple new/digital media companies to grow Buffalo's small advertisement/marketing sector. Or they could try to bring several other industries that do not have much of a presence in Buffalo, such as games/digital entertainment. Having multiple companies in the same industry often attracts similar companies naturally.

What definitely needs to happen though, it a large chunk of that billion should be set aside for entrepreneurs. A successful start up will create more jobs and be more loyal to the city. Remember if a company is willing to relocate to Buffalo, they will be willing to relocate from Buffalo.

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paulsobo
October 15, 2012 10:34 AM
paulsobo

There are a number of questions here:
-can absorb the HSBC Tower?
-will the owners let HSBC Tower sit idle or will they lower the rents.
-will a lower rent HSBC Tower pull tenants from downtown or will they be able to pull tenants from the suburbs
-will this halt new construction downtown which has been doing rather well (Life Sciences Campus, Larkin, etc)

If HSBC does pull out of the tower, will a new 750,000 sqft building with equivalent jobs be constructed. If not how many fewer employees and how much fewer sqft.

There is the potential, albeit small, to have a new building for HSBC and have rents so low in the old building that they pull in someone from outside the city.

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bradman
October 15, 2012 11:16 AM
bradman

HSBC only rents about 2/3 of the tower, and they stated after the First Niagara and PHH Mortgage sales were announced that they expect the local workforce to remain around 3000 people. The Atrium building by the First Niagara Center is being renovated to house up to 2000 workers, so it's anyone's guess where the other 1000 people will wind up. Given that the company has gone through a massive restructuring and cost-cutting initiative since they initially announced their office space review about two years ago, I highly doubt they'll build anything new here. It's just as likely they'll elect to remain in the tower but with a reduced footprint.

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No_Illusions
October 15, 2012 11:33 AM
No_Illusions

It would have very little effect on the Buffalo-Niagara Medical Campus. The companies that are moving there need highly specialized office space (clean-rooms, special ventilation, large lab equipment, etc).

Other projects though might get put on hold, but if they already found the tenants then they might go ahead.

But yeah the best case scenario for a complete HSBC exit is that the dirt cheap rents downtown will attract everyone downtown, which should make rents rise in a decade.

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sonyactivision
October 15, 2012 12:22 PM
sonyactivision

The vacancy rate is on the bubble, especially given the upcoming changes at the HSBC Tower. The office leasing market is getting worse because companies are holding off on expansion or planning to trim staffs ahead of the fiscal cliff. If that gets worked out there could be good news next year. The Class A vacancy rate is swelling also, from the 4-5% not too long ago. But it's still low enough to justify a modest new build if there's a tennant looking to step up to quality...

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Chris
October 15, 2012 3:59 PM
Chris

The bigger question isn't about where HSBC will be it is who will own HSBC Building. Can Seneca One exist if rents are drastically cut with out subsidy by city/state/etc?

As I recall Seneca One paid above market rate for the building.


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Travelrrr
October 15, 2012 4:07 PM
Travelrrr

They will go into bankruptcy and try to reorganize, resurface with a different plan (most likely mixed-use: commercial, residential, etc.) I'd love to see them go after the local universities'/colleges' housing market.

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ex-716
October 16, 2012 11:48 AM
ex-716

The billion dollars would be much better spent on reducing taxes, especially property taxes which are the very very highest (per $100K value) in the entire nation. Use the money to coax the dozens of school districts in the region to merge and to cut back on bloated government salaries (I don't care if it's buy-outs or pay-offs, but the pay schedules and benefits need radical reform).

Reducing taxes and regulation will do much more than bringing in some "silver bullet" like nanotechnology or biotechnology, which really don't want to be here, anyway, but will come for the minimum amount of time necessary to get the billion dollar loot.

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