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State of local office space accommodates positive outlook

Rochester Business Journal
March 14, 2014

Commercial real estate brokers in the Rochester area feel a touch of optimism as they view the office space market.

“Vacancies are starting to notch downward across most property types,” says Michael Frame, managing broker at the Rochester offices of CBRE Group Inc. “Generally speaking, I think it looks encouraging.”

While other brokers are slightly more bullish about this year, all agree that office vacancy rates remain higher than desired. Still, Rochester’s commercial real estate market tends to be relatively stable.

“You don’t have, like in major markets, great swings that make and break people,” Frame explains. “It tends to be kind of slow and steady-as-she-goes.”

Competitive Class A and B office space in the Rochester area totaled 16.1 million square feet as of the end of 2013, according to CBRE’s Market Outlook report, with the suburbs accounting for about 8.7 million square feet of that total. The overall vacancy rate came to 16.2 percent.

Breaking down its findings by location, CBRE found that 19 percent of the area’s competitive office space was vacant at the end of last year, down slightly from the end of 2012. Class A and B office space accounted for 21.6 and 17 percent of vacant properties, respectively.

Out in the suburbs, the vacancy rate was 13.8 percent, a 1.3 percent drop from last year. Class A space accounted for 11.3 percent of vacant suburban office properties. Class A office space offers more amenities than Class B and usually demands a higher rent.

By contrast, Manhattan’s office vacancy rate rose to 8.5 percent in 2013, an increase of 1.2 percent over last year’s, and that of Buffalo rose by 3.3 percent to 13.7 percent. The nationwide vacancy rate was 14.9 percent, according to CBRE, its lowest level since 2009.

Brokers lay much of the condition of the office market on a combination of factors, starting with the relatively slow pace of economic growth in the Rochester area.

“We don’t have a growing business sector, where there are multiple expansions,” says David Dworkin, a principal partner at LLD Enterprises LLC.

In addition, developers have been buying, redeveloping and repurposing formerly vacant office and manufacturing facilities. The practice, which is less expensive than erecting a new office building, has allowed them to charge rents per square foot that are more suited to the Rochester area.

“To build a new building today, you’re going to be in the low-mid $20 (per square) foot range rent for Class A,” says Jim Ryan, president and co-owner of Ryco Management LLC. “A lot of the markets that we serve are in the mid-teens.”

Though the practice may have benefited property owners and their renters, it has also added to the area’s total available office space. Redevelopment of just one local property, the 109,000-square-foot Seneca Building, gave the Windstream Corp. new offices while throwing an additional 37,000 square feet of office space on the market.

To the west, the closing of Kodak Park—now called Eastman Business Park—freed hundreds of thousands of square feet of office space for redevelopment and reuse. Monroe County bought 562,000 square feet of space from Kodak last year for use as a new downtown campus for Monroe Community College near Kodak’s headquarters, but the 1,200-acre technology and industrial complex has a great deal more room to spare.

Such developments have given those seeking to rent office space lots of options to choose from, particularly in the city. In this climate, the lateral movement of firms from one property in the area to another has driven a great deal of the market’s activity, particularly in the city.

“Somebody leaves 10,000 square feet and moves into 12,000 square feet,” says Gregory Ohler, CEO of Hunt Commercial Real Estate Corp. “You don’t really have a net gain.”

Economic conditions also cut into this part of the commercial real estate market last year.

“There were a lot of deals on the sidelines. … Tenants didn’t relocate, for the simple reason that they were still worried about the economy,” says John Rogers, senior director at Pyramid Brokerage Co/Cushman & Wakefield, who represents commercial tenants.

Excess space also forced some property owners to offer their Class A office space for Class B rents, according to Ohler, affecting the market for Class B properties. Suburban markets, where the availability of parking and other amenities has helped fill the available properties, appeared to feel such market pressures the least in 2013.

“Most of our office parks are at capacity, (with) very few lots left to build upon,” Frame says.

While local commercial real estate brokers and other professionals do not expect a great deal of change in the market for office space in 2014, they remain positive about what the year could bring, particularly if the economy continues to improve.

“We are certainly an encouraging secondary market, with a lot of healthy, technology-driven small and medium-sized companies … that I think are going to show some real promise in the next few years,” Frame asserts.

Says Rogers: “The tougher times are behind us. We’re seeing companies that are expanding and that are looking for relocation.”

At the same time, the market faces challenges in 2014. For one thing, the suburbs no longer have the abundance of land that once allowed businesses to expand easily.

“The one area where we don’t have a lot of product … is suburban, big-block vacancy,” Rogers says. “We’re very much cut off in terms of Class A expansions in the suburbs.”

Businesses could look for office space in the city, but the scarcity of parking limits their choices—especially if the business operates a call center or other facility that requires many employees. Such facilities require as many as seven parking spaces per 1,000 square feet of space, Rogers says, which most city properties cannot provide.

Even a decline in vacancy rates could prove a challenge for the market as businesses that desire to relocate look for new office space.

“They’re not going to have as many options as they might think as they begin their space search,” Frame says.

Brokers like Ohler wonder whether it will come to that.

“We’re at a strong point in the real estate cycle,” he says. “Whether it lasts three to four years remains to be seen.”

Mike Costanza is a Rochester-area freelance writer.

3/14/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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