2008 outlook for the western New York office market

The WNY office market has seen some very good development over the past year. For the first time since tracking the WNY office inventory we have seen new development over 1.1 million s/f with an additional 1.4 million s/f reported to be under construction or in planning. Of the 1.1 million s/f of new inventory the market absorbed a very respectable 825,000 s/f, underlying the need for quality office space. For the usually cautious, non-speculative office market the record new construction and high absorption rates provide good news. While Buffalo's Central Business District (CBD) saw an increase of 2.23% in its class A vacancy rate, it still has a reasonable overall (class A and class B) vacancy rate of only 9.8% compared to a national average rate of 10.3% for downtown markets (as reported by CBRE's National Office vacancy Index, Third Quarter 2007.) In the suburban submarkets WNY is seeing an overall (class A, class B and flex) vacancy rate of 14.31% as compared to a national average of 13.9% (as reported by CBRE's National Office Vacancy Index, Third Quarter 2007.) While this rate is in line with the national average, there is a bit of caution warranted when looking at the suburban flex market's rate of 20.94%. This is the second year in a row where vacancy rates have risen for suburban flex space. Lease rates have risen slightly as new space has been placed in inventory. Although some competition due to new construction may put downward pressure on rents, we expect the current upward pressure on lease rates to continue through 2008 for quality space. The overall outlook for the 2008 WNY office market is good. While it may appear that there is a strong increase in construction activity, the WNY market has had pentup demand for quality space and current projects are not seen as over supply. Vacancy rates have been too low in the class A category and new construction is seen as positive for the office leasing market. Inventory Throughout 2007, WNY saw a steady increase in office supply across most submarkets and classes with a total market increase of 1.134 million s/f (a 5.36% increase) of city and suburban class A, class B and flex office space. The strongest increases in supply were seen in Buffalo's CBD, with an increase of 580,000 s/f of class A office space (led by the completion of the BlueCross and BlueShield of WNY's new headquarters complex and the completion of 285 Delaware Ave.) and an increase of 128,000 s/f of class B office space (including the rehabilitation of the Statler Hotel's office space from class C to class B office space.) Buffalo also saw a notable increase in non-CDB class B office space with the addition of 45,000 s/f of class B office space in Buffalo's Cobblestone District by the Savarino Co. The north submarket saw an overall increase in supply of 188,000 s/f led by Uniland Development's addition of 92,500 s/f at its Crosspointe Business Park and Broad Elm Management's 56,000 s/f at its Riverview Commerce Park. Other increases in supply were 92,500 s/f in the south submarket and 55,000 s/f in the east submarket. Vacancy The overall vacancy rate for the WNY office market saw a modest 1.14% increase. Buffalo's CBD saw an increase in class A vacancy rate from a low 3.53% in 2006 to 5.76% in 2007. The CBD's class B space held steady with a small rate increase of .89%. Outside of the CBD, Buffalo saw a decrease in class B (down 1.58%) and flex space rates (down 2.68%.) Vacancy rates fell across all suburban submarkets for class B space, but rose in class A and flex space. The largest rate change was in the south submarket's class A space (up 12.44%.) Given the relatively small size of the south submarket's office inventory, this is not significant. The north and east submarkets also saw increases in class A vacancy rates of 4.15% and 3.67% respectively. class B space vacancy rates were down 3.5% in the north, 5.84% in the south and 1.01% in the east. Flex space saw vacancy rate increases of 2.7% in the north, 4.02% in the south and 3.69% in the east. Net Absorption Approximately 825,000 s/f of the total market's increase of 1.133 million s/f of supply was absorbed by the market, indicating some pent up demand for office space. Buffalo's CBD saw 473,970 s/f of class A space and 74,597 s/f of class B space being absorbed (460,000 s/f of space was attributable to BlueCross and BlueShield of WNY's headquarters building). Other changes include a negative absorption of 43,032 s/f of class A space in the north and negative absorption of approximately 61,138 s/f of flex space in the east. Across all submarkets the class B space saw a positive absorption of 172,581 s/f in the north, 57,925 s/f in the south and 56,707 s/f in the east. Construction Activity A substantial 1.4 million s/f of new office space is reported to be currently under construction or planned for completion in 2008. This is a significant increase in office supply estimated to add another 5% increase to the WNY office market following 2007's 5.36% increase. Projects in the city of Buffalo include the renovation of the former Dulski Federal Building and the addition of Mill Race Commons to City View Properties' successful Larkin Building District. Approximately 133,000 s/f of class A space and 215,000 s/f of class B & flex space in the north submarket are planned including Iskalo Development's 80,000 s/f office building on North Forest Rd. and Broad Elm Management's expansion at Riverview Commerce Park. In the east, 459,000 s/f of class A, B & flex space is planned, including McGuire Group's Rocky Pointe Development, Zaepfel Development's expansion at College Park and Uniland Development's expansion of Airborne Business Park. Shana Stegner is a director, office sales and leasing, at CBRE, Buffalo, N.Y.