Buffalo Building Reuse Project – Residential Demand Study Downtown Buffalo City of Buffalo, Erie County, New York State Prepared for: Buffalo Niagara Partnership Project #17-5565 January 2018 Downtown Buffalo | Executive Summary Page vi EXECUTIVE SUMMARY
Executive Summary
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Executive Summary Real Property Research Group (RPRG) has been retained by the Buffalo Niagara Partnership to evaluate the residential market in the Downtown Target Area relative to present market conditions, current trends, and future needs and propose future growth opportunities in the targeted areas. We have compared the Downtown Target Area with the Primary Market Area (PMA) as illustrated in the map to the right:
Downtown Buffalo’s traditional role as the core of the greater Buffalo region has been reshaped as new economic forces, such as the development of the Buffalo Niagara Medical Campus, the expansion of the University of Buffalo campuses further to the northeast, and the dispersion of retail and office centers to more outlying areas of the city and the suburbs have created competing activity nodes throughout the region. Our review of the targeted area’s overall setting as well as economic and demographic and the competitive housing trends within the City of Buffalo are summarized below:
Targeted Area – Strengths:
• The core physical assets still remain – a concentration of historic yet functionally obsolete structures that are suitable for adaptive reuse projects; the government functions (city, state, federal); high-rise office towers housing financial and other professional institutions; emergence of in-town higher-end options, and new recreational/entertainment hubs such as HarborCenter and Riverworks.
• The presence of a large waterfront – Lake Erie – along with large swaths of cleared former lakefront industrial sites and an existing upscale lakefront for-sale community – Waterfront Village – provides an opportunity for imagining a new urban Buffalo.
• Ten of the 25 largest employers in Erie County are located within the Downtown Target Area.
• All of the area’s transportation networks radiate from the central core.
• Downtown Buffalo serves as the entry point to the Niagara Falls area and the Province of Ontario and greater Toronto Metropolitan Area.
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• The most significant reshaping of the downtown economic and physical fabric has been the development of the Buffalo Niagara Medical Campus (BNMC), located on the northern boundary of the Target Area. BNMC is a consortium of the region’s premier health care, life sciences research, and medical education institutions. The value of construction recently completed, underway, or planned at the 120-acre campus is projected at $1.6 billion with an estimated 12,000 employees working at the campus in 2017 that is expected to rise to nearly 17,000 by 2025.
Targeted Area – Challenges: • The very assets that created the powerful manufacturing and transshipping center in the City’s core at the turn of the century laid the groundwork for the current dispersion of employment, institutional, and residential centers throughout the area. As the lakefront industrial areas languished, new locations were found for development of medical and educational centers in more outlying area.
• Currently, the downtown and adjoining areas are characterized by a scattering of residential nodes that include Waterfront Village, the Central Business District, Larkinville, Canalside, the Allentown/Medical Center, and Westside/ Elmwood Village. No single area has developed within the downtown core that has created the nucleus for an urban destination focus.
• Due to this dispersion, services necessary for maintaining and enhancing a viable urban residential center (dining, shopping, entertainment) are scattered throughout the Target and Primary Market Areas.
• Much of existing downtown development is interspersed either by large tracts of vacant/parking lots or separated by major roadways.
Economic Analysis: • Formerly a center for manufacturing, shipping, and grain storage, Buffalo’s economic base is transforming into a modern economy buttressed by the health care, education, biotechnology, and finance sectors.
• Since a loss of 12,000 jobs during the first decade, the countywide job base has steadily grown to 467,000 jobs as of Q2 2017, a small gain of 8,000 jobs since 2009. In a similar fashion, employment forecasts provided by the regional transportation council for the Target Area record jobs losses of 9,000 between 2010 and 2015 due to closures of medical and financial offices. These losses are expected to be erased through 2020 as the full impact of the Buffalo Niagara Medical Campus is realized.
• Since 2010, the unemployment rates in the city and county have steadily dropped reaching levels of 6.6 and 4.9 percent, respectively, as of September 2017.
• According to the US Census On The Map program, only a small number of core residents work where they live (1,113) in the targeted area compared to the far greater number of workers (51,613 workers) commuting from outside the central core boundaries to work in the Downtown Target Area. Thirty-eight percent of these workers commute more than ten miles or
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more to work and 28 percent of these commuters (5,500) commute 25 or more miles. In addition to a portion of residents who reside in neighborhoods surrounding the central core, some long-distance commuters who wish to shorten travel times and experience a more urban lifestyle could also become residents in the Target Area if suitable residential options are provided.
• The diversity of the economic base is reflected in the list of the 25 largest employers in the Buffalo area. Ten of the largest 25 employers in the county are located in the Target Area including two medical centers.
Demographic Analysis: General Population • Expansion of major employment nodes in the Primary Market Area (including the Downtown Target Area) and the introduction of new multi-family residential options in the downtown area have resulted in moderate growth trends since 2010, reversing population and household losses during the 2000 to 2010 period.
• As of 2010, the Target Area accounted for 15.2 percent of the PMA’s population; the PMA accounted for 9.4 percent of the county’s population.
• The number of households in the PMA declined during the 2000 to 2010 period, losing 2,786 households (-6.7 percent). The percentage of households lost in the Target Area was half that of the PMA – a loss of 3.3 percent or 209 households.
• Esri projects that the Primary Market Area’s household base will increase by 0.2 percent, or an annual increase of 87 households over the next five years. The Target Area’s household base is expected to grow over the next five years at a faster rate of 0.9 percent annually (66 households). The Target Area household base is expected to total 7,207 households by 2022.
• As of 2017, 46.4 percent of market area households are renters.
• The Primary Market Area’s population is relatively young with a median age of 33 years. The age distribution for the Target Area reflects a higher concentration of adult households between the ages of 35 and 61 years residing in the downtown. As a result, the Target Area has a higher median age of 36 years. Young adults are also a sizable component in both the Target area and PMA with a 27 percent share. Roughly one-half of households in both areas live alone.
• Target Area and PMA households have significantly lower incomes than Erie County with 2017median incomes in the $30,000 to $31,000 range compared to $52,700 in the county. Twenty-one percent of Target Area residents earn between $35,000 and $74,999, and 25 percent earn more than $75,000. In the PMA, 24 percent earn between $35,000 and $74,999 and 20 percent earn over $75,000
• As of 2017, about four in five (78.6 percent) of households in the Downtown Target Area are renters. In contrast, the rentership rate in the PMA is 72.5 percent. Since 2010, almost all net new household growth in the Target Area and PMA were renters, an emphasis that is projected to continue over the next five years
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• Younger working age households under the age of 45 form the core of renter households in the two geographies: 45 percent in the Target Area and 53 percent in the PMA.
• The plurality of owner households is older (age 45 to 64), representing 40.5 percent of all homeowners in the Target Area and 42 percent in the PMA. Younger households ages 25 to 44 years are more of a presence in the Target Area comprising one-third of all owner households compared to 22 percent of PMA owners.
• While renters in the PMA are typically less affluent than homeowners in Buffalo, it is estimated that there are 5,961 renters (21 percent) with incomes in excess of $50,000. The 2017 median income of owner-occupied households is relatively high at $65,122.
Demographic Analysis: Senior Population • In the year 2010, there were an estimated 13,626 householders age 55 and older in the PMA. By 2017, this group increased at an annual rate of 1.7 percent or 244 householders. Senior household growth was more than eight times the overall household growth rate of 0.2 percent. The 62+ age cohort grew at an even faster pace of 2.2 percent. The age cohort with the largest increase in absolute terms was the 65-74 cohort.
• Over the next five years, annual growth in householders age 55 and older is projected to continue at a slower pace of 1.0 percent or 256 householders (still significantly higher than the overall household growth rate of 0.2 percent. The 62+ age cohort also grew at a steady pace of 1.7 percent.
Competitive Rental Analysis: RPRG judges that there are many positive factors that contribute to our belief that new rental product in Downtown Buffalo can be successful. • RPRG surveyed 24 general occupancy market rate rental communities in the Target Area and another 23 general occupancy market rate rental communities in the PMA outside of the Target Area. Communities are classified as Upper Tier with threshold rents of $1,300 for one-bedroom units and $1,800 for two-bedroom units. All of the Upper Tier communities opened since 2001.
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• Twenty-one of the Target Area Upper Tier communities are examples of adaptive reuse of former commercial structures.
• Even though with a cluster of properties located within the central corridor between Delaware Street and Michigan Avenue in the CBD, other properties are scattered closer to the Medical Campus, waterfront, along the Niagara Street corridor, Allentown, and Elmwood Village. Given the dispersed nature of the residential development, there is no corresponding concentration of retail, dining, and other services conducive to a vibrant “downtown” scene.
• Recently, there has been a relative boom in residential development downtown with eight rental communities placed in service since 2014 and the other six communities since 2010.
• The overall stabilized vacancy rate in the Target Area is healthy at 4.2 percent- the vacancy rate for the Upper Tier is somewhat higher at 6.2 percent compared to 3.3 percent rate in the Lower Tier.
• It is difficult to present a realistic picture for lease-up paces since most of the newer rental communities in both areas are smaller in size ranging from 3 to 80 units. Properties along the Niagara Street corridor are leasing slowly due to the pioneering nature of the area. The newer communities south of downtown close to Riverwalk present a mixed picture with monthly rates of three to seven units. The two Target Area communities have leased at rates from 3 to 10 units per month.
• After making adjustments for current incentives and variances in utilities policies in the Target Area’s Upper Tier inventory, the average effective studio rent is $1,000 for the single studio model sized at 590 square feet ($1.69 per square feet). The one-bedroom average rent is $1,547 for units sized at 1,034 square feet ($1.50 per square foot). The two-bedroom average rent is $2,007 for units sized at 1,424 square feet ($1.41 per square foot). Three-bedroom units average $2,519 for units sized at 1,788 square feet ($1.41 per square foot).
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• A comparison of rents over a two year period indicates that rents in the PMA generally remained flat over the two-year period while vacancies declined moderately.
• Three rental projects in the Target Area currently are under construction (totaling 204 units). Studio Units One Bedroom Units Two Bedroom Units Three Bedroom Units Competitive For-Sale Analysis:
We believe that the for-sale market in Downtown Target Area present opportunities for expansion given the strong track record of existing for-sale communities and premium prices commanded at key communities that represent regional top of the market positioning. We focus on condominium and townhome developments since these communities are better suited to downtown living.
• Based on a review of MLS sales over the past year, the median sales price of Target Area condominiums sold for two and one-third times the price of PMA – $466,000 versus $200,000 – with smaller premiums for Target Area townhomes ($455,500 versus $435,000).
• The downtown for-sale community commands premium pricing relative to the greater PMA.
• All of the townhome properties are located along the waterfront; the three downtown for-sale communities are condominiums.
• The highest priced property, The Avant located at 200 Delaware, commands sales prices from $500,000 to $1,400,000. Eight of these downtown properties have witnessed sales in the past year ranging from $400,000 to over $1,000,000.
• Despite these results, only one major new for-sale community is being proposed along the waterfront because of hurdles with land acquisition and financing.
Recommended Rental Products: Demand Analysis: The three and five year demand analysis yields a total demand ranging from 670 to 1,400 units. However, other factors such as additional sources of demand from projected employment growth (as described below) and attracting commuters who wish to shorten drive times and experience a more urban lifestyle to live downtown leads us to believe that the true demand is actually understated. The development of contemporary residential properties where none (or few) had existed before should induce new commuters to the PMA to consider living closer to places of employment.
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We believe a significant potential source of additional demand can be tapped from the nearly 53,000 workers who commute to jobs located within the Target Area based on data derived from the 2015 US Census On The Map analysis. Assuming that the commuters who travel ten or miles or more are candidates to consider in-town living if attractive residential options become available in the Target Area yields a total potential demand ranging from 90 to 370 households (if say 0.5 to 2.0 percent of commuters chose to live downtown over the next five years given amore attractive range of rental options). As more residential options are developed and the employment base is enlarged In future years, the stream of commuters deciding to relocate downtown could accelerate.
Proposed Rental Product Recommendations: Based on the past performance of the Target Area and PMA, proposed development, potential demand derived from household growth and employment growth in the PMA, RPRG is positive about the development of additional market rate rental housing in Downtown Buffalo. We are presenting two scenarios – the first product that would be attractive to young professionals who have moved to the central core to be close to employment and recreational amenities and the second product attractive to well established adult households and empty nesters/ active adults who want an alternative to suburban living and live closer to employment, cultural attractions, and the Lake Erie waterfront. We have also recommended that the next tier of rental product be larger in size than the typical 38-unit community currently operational so that new residents can be offered a fuller slate of amenities.
Product One – Upper Tier Mid-Priced RPRG would expect a Downtown location to draw young professionals who fit one of several primary demographic/situational profiles, as presented below:
• Recent Arrivals to the Area • Single Young Professionals, including Roommate Arrangements • Young Couples.
RPRG recommends rents generally positioned in the mid-range of the Upper Tier price continuum that would be attractive to younger professionals just beginning their careers: $1,025 for studios; $1,550 for one bedrooms; $1,950 for two bedrooms; and $1,200 for the workforce housing two bedroom units (80% AMI).
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The results of our Affordability Analysis for the model Upper Tier Product One rental community indicates that the 80-unit community would need to capture 1.2 percent of income-qualified households in the PMA as of 2020, assuming a minimum income of $40,473 and a maximum income of $92,100. The rental community would need to capture only 1.4 percent of income qualified renter households to obtain full occupancy.
This analysis demonstrates that there is adequate market support for Upper Tier Mid-Range apartments in the PMA. The very low capture rates indicate that income-qualified demand would be more than sufficient to support the proposed apartments.
Product Two - Upper Tier High-End RPRG would expect a Downtown location to draw adult households/ active adults who fit one of several primary demographic/situational profiles, as presented below:
• Professionals (established) • Empty Nesters • Households in Transition
RPRG recommends rents generally positioned in the upper range of the Upper Tier price continuum - one-bedroom rents are comparable to the Antonio; two bedroom rent are also comparable to the Antonio; and three bedroom rents are comparable to 1285 Main Street. 905 Elmwood and Buffalo River Landing are priced above these suggested rents: $1,750 for one bedroom units; $2,200 for two bedroom units; $2,550 for three bedroom units; and $1,000 for the workforce housing one-bedroom units (80% AMI).
The results of our Affordability Analysis for the model Upper Tier Product Two rental community indicates that the 80-unit community would need to capture 0.8 percent of income-qualified households in the PMA as of 2020, assuming a minimum income of $40,182 and a maximum income of $106,425. The rental community would need to capture only 1.2 percent of income qualified renter households to obtain full occupancy.
This analysis would indicate that there is strong market support for high-end apartments in the PMA. The very low capture rates indicate that income-qualified demand would be more than sufficient to support the proposed apartments.
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For-Sale Product
We believe that the for-sale market in Downtown Target Area presents opportunities for expansion given the strong track record of existing communities and premium prices commanded at key communities that represent regional top of the market positioning. We focus on condominium and townhome developments since these communities are better suited to downtown living. We judge that the best opportunities for developing new for-sale residential product involve either the adaptive reuse of existing buildings (such as the Avant or 210 Ellicott Street) or building a new mid-rise structure (Pasquale at Waterfront Place).
This is more of a hypothetical exercise in that developing a for-sale condominium community is complex and subject to many constraints based on the market, the site, financing, and legal issues. We are presenting two models as a basis for discussion that could be introduced to the downtown Buffalo area. Price points might vary based on actual development costs. The first model targets entry-level buyers, akin to the 210 Ellicott Street adaptive reuse property, and the second model targets more established households that would have access to significant equity derived from sales of prior homes, akin to the Pasquale at Waterfront Place (a new construction property).
Target markets for the downtown condominiums would focus on both sides of the age spectrum:
• First time homebuyers • Empty nesters
RPRG has proposed average base pricing for the entry level buyer condominium at $275,000 for one-bedroom units sized at 1,050 square feet and pricing for the established buyer condominium at $525,000 for a two-bedroom model sized at 1,600 square feet. The proposed rent and model schedule are derived from a review of MLS closed sales over the past year.
To measure the potential demand for for-sale housing in the Target Area, RPRG has conducted an affordability analysis of the two condominium products. For the entry level, RPRG has determined that 5,707 Primary Market Area households would be able to afford a $316,250 home. For the established product, RPRG has determined that 3,862 Primary Market Area households would be able to afford a $603,750 home. It is important to note that the ability of market area households to afford a mortgage does not necessarily equate to demand for additional for-sale housing. Such factors as having sufficient equity, creditworthiness, and bank lending practices impact the pool of qualified households.
Conclusions: Over the past ten years, the downtown core has undergone a steady transformation with the introduction of 13 new rental communities totaling 664 units (all adaptive reuse) and five for-sale
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communities with prices ranging from $275,000 to $1.4 million. Major new downtown development initiatives have included the HarborCenter mixed used project, Canalside, extension of the Riverwalk, and improvement of linkages to the lakefront. The emergence of the massive Buffalo Niagara Medical Campus has created a new anchor for the north downtown and reinforces the Main Street/ Light Rail transportation corridor linking downtown with the south campus of UB via the Medical Campus.
Looking forward, the Target Area and overall PMA is poised for a major surge in new multi-family development over the next three years with nearly 600 new units planned in the Target Area (an increase of 70 percent in the residential base) and another 425 units in the greater PMA. Reversing a trend of net job losses in the CBD during the first five years of the decade, the Target Area is projected to gain 5,700 jobs over the next three years and nearly 6,800 jobs over the next five years. Target Unit Type Baths Price Price/SF However, despite these encouraging trends, four major takeaways are derived from our analysis of the Downtown Target Area:
• The overall scale of new residential development is small relative to other reemerging rust belt urban cores. All but one of these communities are adaptive reuse in nature indicating that sites are selected for availability, historic nature, and suitability in a random pattern rather than an agglomeration of development in one particular area.
• Over the past two years, rents have remained generally stagnant which means that as the costs of development rise, returns on rental development have diminished.
• The supply of suitable commercial properties in downtown for adaptive reuse project is shrinking. The first wave of downtown revitalization focusing on preserving and converting historic properties to residential uses has largely run its course.
• While the city of Buffalo and the greater Buffalo metropolitan area have steadily lost population over the last decades, the Target Area and Primary Market Area have reversed this trend since 2010 and recorded moderate growth. As a result, demand derived from traditional models of household growth are modest – any new jumpstart to downtown development has to come from a realignment of traditional residential patterns in the region. A major source of potential demand is the tremendous imbalance between commuters who work in the Target Area and those that actually live in the Target Area. If a small portion of these commuter who wish to shorten travel times and experience amore urban lifestyle could be convinced to live downtown, then the demand model expands exponentially.
We have suggested small incremental housing options that can be introduced into the market. However, some central themes have emerged from research and interviews with key downtown developers that highlight the issues holding up a transformative change in downtown:
• There is no downtown neighborhood that has a truly walkable environment. Developers work independently of each other based on availability of properties; there are no programs for infill development. Currently, there is an insufficient population base to support a Whole Foods or Wegmans and no central spot with a viable “urban” mass of dining, entertainment, and
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specialty shopping. As result, there is a widespread perception that “people don’t live downtown”.
• Currently there are few financing or incentive programs targeted to new construction. Numerous programs promote development of adaptive reuse properties that include property tax abatements and historic tax credits. One program that has been used for several new construction projects, the Brownfield Tax Credit, is site specific and thus hard to use when promoting infill development. On a purely market-driven basis, rents downtown are not sufficient to support new construction rental developments.
• Current financial and other incentive programs are limited. The Buffalo Urban Development Corporation’s Revolving Loan Fund has been limited by program restrictions and Tax abatement programs deal primarily with city property taxes and do not include county taxes. The programs of the Erie County Industrial Development Agency have not been fully leveraged to promote downtown development.
• The central core’s emergence as a residential node is still in its infancy. The downtown rental market is performing satisfactorily though rental rates have generally stagnated over the past two years. Vacancy rates have remained in the 4 to 5 percent range.
• To date, the emergence of the Buffalo Niagara Medical Campus has merely replaced jobs lost in the ongoing transitioning of the Buffalo economy. Most of the new jobs are focused on the medical-educational nexus anchored by the medical campus and the two UB campuses. The downtown core needs to attract a greater share of these jobs to induce more people to live downtown.
The most important recommendation stemming from this report is that a new paradigm is needed if the current random nature of downtown development is to change its course. As inspiration, all one needs to look to is 905 Elmwood, a new construction project that leased quickly and commands rents that exceed the rest of the market because it is part of a walkable urban village - Elmwood Village.
There are many existing conceptual plans and frameworks for downtown redevelopment that include the new “Green Code”, waterfront development plans, and financing and incentive programs. However, no concrete actionable plan exists that will create the livable, walkable urban core needed to take downtown Buffalo to the next level. Evidence of a strong latent demand is provided by the new developments that have emerged to date and the unusually strong support for high-end for-sale product in an environment with limited residential support services.
This market study provides a strong rationale for the fourth planning option presented in One Region Forward’s Regional Plan for Sustainable Development entitled “A New Way to Plan for Buffalo Niagara”. One Region Forward is a broad-based, collaborative effort to promote more sustainable forms of development in Erie and Niagara counties – the Buffalo Niagara Region – in land use, transportation, housing, energy and climate. The report outlines four scenarios for development – “Business as Usual”, “Sprawling Smarter”, “A Region of Villages”, and “Back to the City “. Whereas the report does not favor one scenario over another but rather lays out options, this market study provides support for the fourth scenario: “The Back to the City scenario would see nearly all new jobs and homes concentrated in the
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region’s core cities. Transit would serve this denser development much better. More existing homes would be rehabbed than abandoned and former industrial sites would be reused as employment centers”.
It might be simple to suggest another loan fund or incentive program to build some more apartments on a piecemeal basis. Instead, a bold new vision to create a catalyst for attracting new firms, new investments, new services, new residents and new residential options is required. Without changing the current approach, any new development downtown (particularly new construction) will require subsidies or other incentives and probably not be interconnected to other parts of the central core.
What is needed is a long-term comprehensive approach that may require ten to twenty years to fully materialize. This can be considered a “next phase” of the Buffalo Building Reuse Project where strategies are refined to an evolving, and strengthening, downtown market. By creating a blueprint for development that is rational and builds upon existing assets, the development program for a new downtown should emerge.
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