Commercial office space: Syracuse's lagging market

CNY Business Journal (1994-95), Nov 13, 1995 by Dennible, Christy

It is perhaps the biggest real-estate story of 1995--boasting a new lease on life, with a March 1995 national occupancy rate of 85 percent. It is the long-awaited recovery of the U.S. office market. And while the recovery is neither complete nor consistent across the nation's metropolitan areas, this new office vitality is well positioned to continue climbing upward.

"The recovery of the U.S. economy, beginning in 1993 and then picking up the pace in 1994, had to create office demand," affirms Jeanette Rice, the senior vice president in the research and analysis department of Houston-based Holliday Fenoglio Dockerty & Gibson, Inc., an AMRESCO subsidiary. "At the same time, we haven't added any new office space for a long time. So now that we've had two to three years of good economic growth nationally and no construction, it has done very well for the office market."

The boost in occupancy levels itself cannot explain the renewed enthusiasm for the office market, but rather the cessation of office construction and the economic renewal that began in 1992.

"I would say Class A suburban space, nationally, is probably down to a single-digit percentage or very close, " Rice explains. "That market is getting tight, but downtown markets still tend to be soft. Class B and Class C space are lagging behind, which is true anywhere in the country, including Syracuse."

Since late 1993, a handful of metropolitan office markets has climbed above the 90-percent occupancy mark. The significance: each occurrence announces the arrival of double-digit rent increases and speculative construction, Rice points out.

National Market Recovering

With the national office market facing recovery and growing by leaps and bounds, how is the Syracuse office market (for all intents and purposes pertaining to this story, office market is defined as within a 10-mile radius around downtown Syracuse) faring in comparison? Well, to be quite honest, we are lagging behind other parts of the country in terms of our recovery. And it seems our Central Business District (CBD) and our suburban markets are suffering higher vacancies and a low demand for expansion space in the marketplace. The real key is that we need business expansion in the marketplace from within and without, in order to begin to reverse this trend...or to pick it up.

"We've had bank mergers and corporate downsizing, particularly in the downtown market," explains Richard Mulherin of The Pioneer Development Company in Syracuse. "Recently, in one of my buildings, we've had two large tenants, IBM and American General, who both went through corporate downsizing. They both reduced their space to 70-75 percent, which freed up almost 100,000 square feet of office area. Developers such as ourselves are not building any buildings. We are using the Class A space available. I think it is fair to say that, when we lag behind other parts of the country, very possibly they went bad first and suffered perhaps worse than we currently do. That is why they may come out of those depths quicker than Syracuse might. We lag behind, maybe that is why it is a little late."

An all-too-familiar example to Syracuse occurred just last week: Nationwide (insurance) announced that it is leaving and taking 250 jobs to Cleveland. In doing so, it will vacate its building. Consequently, its daughter company, Wausau, which has been looking around the Syracuse market, has decided to occupy that building. This creates another hole in the office market, because Wausau was out there looking for 35,000 square feet. Not anymore] As the local tenants move around within the Syracuse market, they are leaving spaces in one place, and filling up holes in another. The bottom line? Syracuse needs expansion.

"It

Syracuse office market

is not tracking the same way

as the national recovery

," exclaims Jeffrey L. Emhoff, SOIR (Society of Industrial and Office Realtors) and vice president of R.L. Hood Company in Syracuse. "One of the major issues in our scenario is we are not getting much activity from outside of our marketplace. This is the difference compared to some of the other markets around the country; one of the reasons you see this robust activity in the other markets is that some of the vitality has returned. There is expansion within the market and there is growth in these markets from outside.

"Our suburban markets have maintained about the same level of vacancy or occupancy for the last three years now," Emhoff continues. "A company will downsize, close its local office, and another will pick it up--so we are maintaining a level line. There has been no new construction of suburban multitenant office buildings in four or five years now and so that part of our market has just managed some equilibrium. There is not a lot of space, but there is not a lot of demand, so it is kind of maintaining its balance."

Syracuse Sees No Boom

"The Syracuse market overall has seen no boom by any means," adds John Funiciello, president of JF Real Estate, Inc., in Syracuse. "Corporate downsizing has hurt companies like AT&T and IBM, and left a lot of space on the market. However, the problem does not seem to be with the Class A office space. That is where we have high occupancy rates of 90-100 percent in our properties."