What is the outlook for the 2008 Buffalo commercial real estate market?

The New Year is upon us. The Ice Bowl is over, but so is an unpredictable 2007- and Buffalo's real estate markets remain stable- with a positive outlook. There is encouraging news in the city's apartment, industrial, office, and retail sectors, which stands out in a bleaker national economic climate. 2008 may prove to be a big year for cities which never saw bubble pricing- and Buffalo is a prime example. According to recent CBRE market research, apartments are showing improvements over 2006 in both year-end sales (4% increase) and in average sale prices, up 17%. The industrial sector is quieter- lease rates have remained flat, with an increase in construction activity and an increase in vacancy. American Axle's plant closing appears to be a major reason for the overall vacancy increase. Additionally, CBRE reports that the office markets are showing positive net absorption, but higher vacancy, lower rental rates, and lower construction activity. Retail markets are showing lower vacancies and increased construction activity, but with lower net absorption. All in all, these figures will not set the world on fire, but they do show our markets' continued resiliency. Most projects show strong cash flow with reasonable value enhancements, and in short, Buffalo shows modest signs of strength, which is uncommon among many larger and more volatile cities today. Two critical questions arise as we start the year. First, where will markets go in the future? Certainly the credit crunch is upon us and will continue for at least the short term. Next, how will this affect Buffalo? According to a recent Goldman Sachs research paper, estimates of the likely credit losses on subprime-related loans could reach $400 billion. In the event that losses are just half that amount, bank capital ratio requirements could imply a total lending reduction of $2 trillion or more, which could have a dramatic trickle-down effect on many sources of capital. Financing will be much more conservative this year and for the foreseeable future. Land loans and land development loans will be far more difficult. Loan to value ratios will be lower (75% vs. 80%), spreads have increased to 200-300 bps over the comparable Treasury and debt service coverage ratios are up. Fortunately, Buffalo and virtually all of our other upstate markets have weathered these storms before. Our markets are full of long-term investors who have the ability to work through these tough times. We also have numerous lending institutions including banks and life insurance companies that understand the relative safety of lending in our markets and want to continue lending here. Here with the Rose Hill Group, we are fortunate to have numerous correspondent life company lenders who want to continue lending in upstate. Our relationship with Stategic Mortgage Alliance, LLC (SAM) gives us a national expertise for our local markets. SAM closed $13.2 billion in 2007. Collectively, we service over $35 billion and employ over 160 commercial originators. RHG has also recently agreed to a correspondent relationship with one of the nation's leading FNMAE apartment lenders, Green Park Financial, to help fill a void for our multifamily lending. FNMAE rates are currently well below the 200-300-bp spread mentioned above and will lend up to 80% LTV. There are great things happening in our Buffalo markets. Tired properties are being re-engineered and brought back to life. Some examples: Brownfield sites like Buffalo Lakeside Commerce Park (250 acres) and Steel Fields (former Republic Steel site), Brierwood Sq. in Hamburg, the Dulski Federal Building, New Era Cap, Statler Towers, 770 West Ferry St., 210 Ellicott St., Trico Building and M. Wile Building, to name a few. All in all, 2008 could be a far more challenging environment for national commercial real estate markets. Fortunately, the Buffalo markets are stable and in balance, and we at Rose Hill Group have lenders who are ready to lend money locally. 2008 will be a very different year from what we all are accustomed to, but in Buffalo, it could be for the better. Dan Monte is the president of The Rose Hill Group of WNY, Ltd., Buffalo, N.Y.