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Dynamic market forces commercial real estate to evolve

Dynamic market forces commercial real estate to evolve

Although the once-vibrant Xerox Tower in Rochester stands vacant, Rochester’s downtown commercial real estate scene continues to reinvent itself, showing some needed resilience.

“This is a very dynamic market right now, and it’s dynamic in different ways,” says Heidi Zimmer-Meyer, president of Rochester Downtown Development Corporation. As part of her job, she has tracked downtown commercial inventory since 1983.

Downtown Rochester is defined as the area within the former Inner Loop, plus the High Falls, Upper East End, and Alexander Park neighborhoods. The most recent statistics show that, as of 2018, more than 24 percent of competitive market space–space that owners rent to others–in downtown Rochester was empty. This rate is determined without considering non-competitive commercial space, which is owner-occupied.

While a 24 percent vacancy rate might sound alarming, Zimmer-Meyer says the downtown area is experiencing new growth when it comes to overall use of commercial space. This was the first time in four years the commercial vacancy rate declined year-to-year; it peaked at 25.9 percent in 2017. The last time downtown enjoyed a vacancy rate of less than 20 percent was in 2010.

The trend is good news for Rochester Downtown Development Corporation, which keeps close tabs on commercial occupancy rates. Each June, its leaders attempt to quantify vacancy rates for competitive commercial real estate. They assign each property to one of five categories, known as Class A, Class AR, and Class B, and what is referred to as non-traditional space and medical space. These categories account for 117 buildings and more than 9.5 million square feet of downtown commercial real estate.

Conventional tenants–law firms, financial firms and traditional corporate outfits–are not growing in general, Zimmer-Meyer says. However, between January 2016 and March 2019, innovation enterprises and creative-class companies downtown increased from 108 to 175. An innovation enterprise is described as a technology-based, telecom-related or research-oriented organization. Examples of creative-class enterprises include marketing and advertising firms, architecture firms, film and video companies, recording studios and graphic designers.

Ken Greene, a real estate broker with WinnCompanies, has been active in Rochester real estate since 1990. He has seen the business center in Rochester shift from Kodak headquarters to the intersection of State and Main streets. He says it has shifted again, this time east of the river to the East Main Street and Clinton Avenue area.

As Greene surveys the downtown business landscape, he sees progress and a zero-sum game.

“It is progress when buildings like The Metropolitan bring in a technology company like Datto, and Sibley is attracting NextCorps and 60 start-up technology firms,” he says. “It is a zero-sum game when Woods Oviatt moves to Legacy Tower from State and Main streets. Overall, we’re landing on the side of good news because, with the shift, we are bringing in new tenants from outside the area and more residents are moving downtown.”

Ken Greene, a real estate broker with WinnCompanies—which renovated the Sibley Building—has been active in Rochester real estate since 1990. He says he believes the center of business activity downtown has migrated east, from the Four Corners to Main and Clinton. (Photo courtesy of Ken Greene) Ken Greene, a real estate broker with WinnCompanies—which renovated the Sibley Building—has been active in Rochester real estate since 1990. He says he believes the center of business activity downtown has migrated east, from the Four Corners to Main and Clinton. (Photo courtesy of Ken Greene)

Downtown’s metamorphosis isn’t new, of course. Since 2000, more than 50 office buildings–often vacant and contributing little to neighborhoods–have been converted to housing and enjoying renewed life. “They have become valuable, viable, productive structures again, and they have been returned to the tax base,” Zimmer-Meyer says. “This has created a density, vibrancy and liveliness that has become extremely attractive to each of these companies.”

WinnCompanies owns Sibley Square, which is the largest building in Monroe County at more than 1 million square feet. An investment in excess of $100 million and a sound, mixed-use strategy has breathed new life into the former department store, which had become a shell of its once-vibrant self.

“In addition to the residential component, we are curating a tenancy focused on innovation, education, and incubation,” says Greene, who manages the Sibley Center assets. “This creates synergistic relationships between the tenants. We are really happy with the progress we have made so far. It couldn’t have happened without an organization the size of WinnCompanies taking the risk, and the support of the city, county, and state, and institutions like RIT and the University of Rochester.”

By April 2020, Greene estimates the building could be 70 percent redeployed. He is particularly excited about plans to open The Mercantile, a restaurant marketplace ticketed for Sibley’s first floor. “Think a community gathering place with regional meals cooked in front of you for about $10 in about 10 minutes from a dozen different local operators,” he says.

Greene anticipates the marketplace will sit beside The Commissary, a kitchen incubator offering shared industrial kitchen space for rent by the hour. It will act as a licensed kitchen for caterers, home manufacturers and food-truck operators, as well as the equivalent of a food incubator with a performance kitchen. The Mercantile and The Commissary are expected to open by the end of the year.

“Imagine that you have this great recipe for chicken pot pies,” Greene says. “When you cook these at dinner parties, people love them. They tell you to sell them, but unfortunately you don’t have restaurant experience or know where to begin. Your first step is to become a member of The Commissary and say, ‘Teach me about the restaurant business. How do I mass produce this recipe in a way that replicates its quality?’

“They work with you on doing just that–teach you about yield, food costs, sanitation, the important elements in running a restaurant,” Greene explains. “As part of the relationship, they allow you to sell the pies in The Mercantile. Monday becomes chicken-pot-pie day in a pop-up kiosk. The lines are out the door each time you’re there. Then, you request a permanent spot in The Mercantile to sell your pies. All of a sudden, you’re in business as a restaurant with very little capital.”

Separately, another downtown company, Datto, is thriving. It has grown to occupy its sixth floor in the former Chase Tower, now called The Metropolitan, at 1 South Clinton Ave. “They are expanding so fast,” Zimmer-Meyer says. “It’s unbelievable.”

Datto, a cybersecurity and data backup company, is an example of a business that has helped repurpose a building and give it new lease on life. It is a success story for Gallina Development, which owns The Metropolitan. However, there is still plenty of room for improvement.

“We have had success with filling the commercial space at The Metropolitan, but overall we are not seeing rental rates rise in the market,” says Lauren Gallina, marketing director at Gallina Development. “We remain cautiously optimistic about the commercial market downtown. We will continue to invest and look for more opportunities as the market continues to evolve.”

As the real estate scene continues to change, Rochester Downtown Development Corporation is keeping a close eye on an emerging trend called co-working space. There are eight such spots downtown. Instead of renting a large space for a year, those participating in this movement share a space and associated costs with others.

“There are several independent co-work spaces popping up in the region, where small companies can set up shop, make a home, and work to grow,” Gallina says. “This is especially good for start-ups and smaller companies with limited budgets.”

Travis Anderson is a free-lance writer based in Rochester.

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