The prospect of Delaware North Companies leaving the Key Center for a new headquarters to be built a few blocks away has some downtown landlords worried about creating more vacancy in a city swamped with it.
But a Delaware North move won’t happen in a vacuum. It’s part of a growing trend that could be even more troublesome for many of Buffalo’s longtime building owners, who will have to invest in updates or risk being left empty when their tenants demand more to keep them happy.
“There are a lot of buildings (whose owners) have not put a dime into anything and then complain,” said Robert G. McDonnell, vice president of leasing for Ciminelli Real Estate Corp., one of the area’s biggest developers and property managers. “You’ve got to maintain and keep going forward every year. If you don’t, you will fall behind fast.”
Delaware North’s impending move – which is focused on a desire for more efficient space – is just the latest example of prominent tenants uprooting themselves for shiny new or brightly renovated digs. In recent years:
• Phillips Lytle LLP is next door this month from the former One HSBC Center to One Canalside, formerly the Donovan State Office Building.
• HSBC Bank USA consolidated last month from its namesake tower to the renovated HSBC Atrium across the street and a sprawling facility in Depew. It had previously planned to build a new low-rise facility in front of the First Niagara Center until a corporate upheaval and change in business strategy torpedoed the idea.
• Uniland Development Co. is building a new corporate headquarters and training facility for Catholic Health System on Genesee Street at the foot of the Kensington Expressway in Buffalo. Catholic Health is consolidating offices and staff from multiple locations.
• Law firm Damon Morey LLP took over two floors in the Avant Building in May 2009, after vacating space it occupied for 20 years at Cathedral Place.
• Rival firm Jaeckle Fleischmann & Mugel LLP took two more floors in the Avant in October 2011, after leaving the Bank of America Building at Fountain Plaza.
• HealthNow New York moved out of its longtime base on Main Street near Canisius College in 2007 and into a new 469,000-square-foot corporate headquarters at 257 W. Genesee St., off the I-190 downtown. It’s now consolidating within that building, and subleasing part of the building to engineering firm URS Corp.
And that list doesn’t include some smaller tenants, as well as ongoing real estate searches for the likes of PriceWaterhouse Coopers and the Internal Revenue Service.
“There seems to be more movement of some of the bigger office tenants, more of a willingness to move,” said Peter Marlette, managing partner of Damon Morey, the area’s No. 3 law firm. “We certainly have been pleased with the move.”
Moving for efficiency
Many of the moves have generated a spate of new construction and redevelopment on the periphery of downtown, leaving empty older space in the city’s core.
In the past, developers and companies say, office users tended not to move because of the cost and hassle and there haven’t been many better options.
“Historically, there hasn’t been an inventory of spec space that provides opportunities for large tenants to move in downtown Buffalo,” said David McNamara, managing partner of Phillips Lytle, one of the city’s two biggest law firms. “The absence of options tends to cause tenants to stay where they are.”
Today, though, tenants have become more demanding, and developers are eager to accommodate them. “I just think there’s more opportunities now to move than there really was before,” Marlette said. “There are more developers who are building things or proposing building things, or revamping existing buildings.”
All of the companies that have moved are aiming to save money in the wake of the recession, and not just through lower rents. Some are seeking more efficient space, with larger floor plates that can accommodate more people per floor. Workers can be more productive because they’re not wasting time going up and down stairs and elevators. It’s also promotes collaboration.
But the floor size of older buildings can’t be changed, leaving new construction or dramatic overhauls as the only options.
Delaware North’s plans are a textbook example. Uniland wants to build a 12-story tower and parking garage at 250 Delaware Ave., at Chippewa Street. The new headquarters for Delaware North would occupy 109,000 square feet on upper floors, and a 119-room hotel, operated by Delaware North, would take up four lower floors.
Meanwhile, Delaware North would leave about the same amount of space at Key Center, leaving about 80 percent of the South Tower and about half of the entire twin-tower complex empty.
“The majority of the South Tower will end up going dark in the short run,” said Paul Ciminelli, whose firm manages the complex for its New York owner.
And it won’t be easy to “back-fill” it. “My sense is they’re not going to re-lease that space anytime soon,” said Patrick Hotung, general manager of Main Place Liberty Group, owner of Main Place Mall and Tower and the Liberty Building.
Even before Delaware North makes a final decision, the highest quality office space in the central business district - Class A - will be nearly one-fourth vacant by yearend.
And there are few if any opportunities to fill most of it anytime soon, since there aren’t many large tenants around that are capable of absorbing it.
“Downtown Buffalo is dead for offices. There is vacancy everywhere,” said Carl Paladino, owner and chairman of Ellicott Development Co., the biggest landlord in the city. “I would expect that Key Center is toast.”
In a healthy, vibrant market, movements by tenants wouldn’t be such a problem, as other tenants would quickly come along to fill the space. But not in downtown Buffalo, where it’s almost always the same assortment of tenants occupying the space. “The downtown market is tough,” said Ciminelli, CEO of Ciminelli Real Estate. “There isn’t a lot of net new growth in terms of the office market.”
So when space is emptied here, it tends to stay that way for years and years. That’s what’s happened with such buildings as Main Place Tower, the Main Court Building, Main Seneca Building and the Liberty Building – each of which are now 25 percent to 40 percent empty.
“Building owners all over the world lure a tenant from one building to the next. The problem with Buffalo is that there isn’t really any market to refill that much space,” said Anthony Kissling of Kissling Interests, owner of numerous apartment buildings in Buffalo.
Vacancies filter down
By Jan. 1, downtown Buffalo’s office vacancy rate will be 22 percent, said Jim Militello, who owns J.R. Militello Realty. That’s barely better than Albany (24 percent) and Detroit (23 percent), and much higher than Baltimore (16 percent), Boston (11 percent) and Manhattan (10 percent), according to national brokerage giants Cushman & Wakefield and CBRE.
It’s even worse in Buffalo for Class A space, the cream of the crop, with 24.4 percent of all space projected to be empty. And all that empty high-quality space is bound to have a ripple effect down to lesser Class B and C space in older buildings, which become increasingly less competitive.
“You can back fill it, but it’ll take some time and you’ll do it by killing the rest of the market,” said Erwin Zafir, owner of Key Center and the Bank of America Building. “That’s the only way to do it.”
So the emptiness filters down ultimately to the least appealing buildings, which either sit idle, get sold, or potentially get converted to other uses, such as apartments.
“We have a lot of supply, but a lot of it isn’t being kept up,” McDonnell said. “The buildings that haven’t caught up, now they’re playing catch up. They have to put this money in when no rental income is coming in.”
So how does a building owner compete? Invest in new mechanical systems, infrastructure, features and amenities, keep it clean, and provide good service, landlords and brokers say. “It’s competitive,” Zafir said. “You have to keep the building in Class A shape in order to be able to be called Class A.”
He and Ciminelli are working to get Key Center LEED-certified as a “green” building, so that it can be attractive for others. The building already has a high-efficiency heating system, and Zafir has made capital improvements on a regular basis.
“We’ll try to do whatever it takes to try to save the building,” said Zafir.