At first glance, it seems puzzling to build a modern factory on the former Bethlehem Steel site, even without a manufacturer lined up to move into it.
After all, this is a region that is littered with closed-down factories. Over the last 20 years, two of every five factory jobs have disappeared as less skilled manufacturing has shifted to cheaper markets overseas.
So why do we need another factory?
Because there’s still a demand for modern factory space, which is much cleaner and more advanced than in the past.
Yet we don’t have enough modern factories that are ready for use now – and we’re running perilously short of industrial space for the manufacturers that already are here, let alone to accommodate a company that wanted to open a factory here, economic development officials said.
That shortage of industrial space has reached critical levels, those officials said. The constraints are so severe that it means the region could risk losing a growing manufacturer already located here that needs to expand quickly.
Even the Covid-19 pandemic – as much havoc as it’s wreaked on the economy – hasn’t changed that, local real estate brokers say.
“There are fewer buyers in the market, but there’s also a very short supply. That still adds up to supporting the prices,” said David Schiller of Pyramid Brokerage Co. “I’m having trouble finding solutions.”
Before the outbreak, economic development officials and brokers said it already has cost the region a shot at luring several manufacturers from other parts of the country, because those companies needed to move quickly, but couldn’t find anywhere to locate here that suited their needs.
“They’re looking for a readily available product, and if we don’t have it, they will go elsewhere,” said Shana Stegner, managing director for CBRE-Buffalo, a commercial real estate brokerage firm.
CBRE conducts an annual study of the four sectors of commercial space – office, industrial, retail and multifamily. This year’s study, unveiled in early March, found that the vacancy rate for industrial space locally is just over 2%.
That’s down from 6% in 2013 and 9% in 2012. And it’s nearly three times lower than the national rate.
INDUSTRIAL SPACE IS HARD TO FIND
Officials at Invest Buffalo Niagara, the economic development marketing group, have been dealing with the space squeeze for the past three years when they try to help companies find space. When the group put out feelers to developers and brokers to meet outside real estate requests, it found few, if any, responses coming back, especially for large facilities.
“It was very quickly evident that there was a lack of inventory for specific requests,” said Matthew Hubacher, IBN’s research director. “We know it’s a problem.”
That’s why the county wants to build a so-called “spec” factory in Lackawanna. It’s why firms like Benderson Development Co. are starting to talk about putting up warehouses on spec, in both Buffalo and Amherst.
And it’s why local development officials are backing a study by national consultants to measure the extent of the shortage and come up with ways to address it.
Otherwise, they fear, Buffalo Niagara will miss out on changes to expand its manufacturing base, before it even gets a chance.
After all, Western New York has many advantages – a lower cost of living, its geographic location on Lake Erie and proximity to Canada, a pipeline of college graduates and a workforce with manufacturing experience.
But a company won’t even consider all that if they can’t even find a place to go, and fast.
“What is universal is that our clients want to move quickly,” said Gregg Wassmansdorf, senior managing director of global corporate services at Newmark Knight Frank, the brokerage and consulting firm hired to do the study, which has been delayed by the coronavirus pandemic.
“As slow as they might be in developing their strategy, once [companies] have committed to a strategy, they want a solution as fast as possible,” Wassmansdorf said. “So that means states and communities and local areas need to be as ready as they can be for those opportunities when they come.”
The shortage of available industrial space represents a significant threat to the region’s otherwise collaborative economic development efforts. It’s also remarkable for an area with a long legacy of heavy manufacturing that left dozens of closed and abandoned factories across the region that have become outdated after decades of inactivity.
“If you would have told someone in the mid-’90s that there would be a time when Buffalo Niagara would have a dearth of industrial availability, they would have said that’s a great problem to have,” Hubacher said. “But that’s where we are now.”
Hubacher said the shortage is most severe for the largest industrial buildings, with at least 100,000 square feet in size, as well as for buildings that were for sale, and buildings with significant electrical capability of at least 3 megawatts.
“To find buildings that have or two of those features has become increasingly difficult,” Hubacher said. “To find a building that has all three of those criteria is nearly impossible.”
To fill the gap, an affiliate of the Erie County Industrial Development Agency is seeking a developer to put up a “spec” industrial building on part of the former Bethlehem Steel property in Lackawanna. The agency is seeking proposals for a light-manufacturing warehouse facility of at least 120,000 square feet, and the county previously sold another portion of the site – so the project would meet two of the three criteria.
“Increasing our stock of available industrial real estate is vital as we market the region to expanding companies and site selectors, and compete for meaningful job creation opportunities,” said Tom Kucharski, Invest Buffalo Niagara’s president and CEO.
Many of the region’s available industrial properties over the years were what Hubacher called low-hanging fruit – buildings that were “relatively newly constructed and in relatively good shape and could be put back into service with relatively minor upgrades.”
Others that were older but still structurally intact have been converted into new residential, office and retail space, especially in the last decade.
What’s left are “buildings that might take a little bit more work to get back,” Hubacher said.
But the shortage also points out the financial challenges that developers have long faced locally with almost any kind of construction project – the costs aren’t usually justified by the rents and sales prices that the space can fetch. So developers and companies must typically seek out tax breaks, government grants or loans, or other incentives for the project to make financial sense.
“That’s where there’s a lag in this market,” Wassmansdorf said. “It’s always more expensive to build new product, and in order to build new product, you have to justify them with rents that will support that, and it appears we’re not at a point where the rents will justify market-based new construction.”
That’s what makes Buffalo Niagara somewhat unusual, he added. Many cities across North America also have low building vacancies and space shortages, coupled with low unemployment. Yet unlike those other markets, rents in Buffalo have not increased significantly, eliminating a market factor that normally would encourage new construction, Wassmansdorf said.
For example, developers locally built about 330,000 square feet of industrial property in 2018 and 141,000 square feet in 2019 – all warehouse space in the eastern suburbs – with just under 300,000 square feet planned for 2020 from converting a retail plaza into an industrial park. But developers in Pittsburgh put up five times that amount in one year, while Cleveland added 10 times that much, Hubacher said.
“We have to figure out what some of those other levers are that might change the cost,” Wassmansdorf added. “We’ll work on that.”
Wassmansdorf’s team of four consultants – who were hired earlier but have been unable to perform their work since March – will spend the next few months exploring the causes and seeking solutions. They will analyze the industrial market in all eight counties of Western New York, looking at existing buildings in each county – as well as land that is zoned and ready for industrial development – and evaluate what needs to be done with each. They will review industrial development policies at the state and local levels. And they will examine the market for “speculative” building.
Their report and recommendations – originally due in June – are now expected in the fall, Hubacher said.
Published by The Buffalo News
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