3 Trends in Rochester NY Commercial Real Estate: Outlook Shifts from Uncertainty to Cautious Optimism

By Jennifer Jones, C.P.A., Managing Partner & Daniel Nitschke, C.P.A.

Like every market in the country, the market for commercial real estate in Rochester, NY, endured a prolonged pause for most of 2020. At its onset in March of last year, the COVID-19 pandemic raised fears of a market crash, and real estate developers and property managers suddenly found their plans on an indefinite hold.

Although we’re far from done with the pandemic’s social and economic consequences, the business community in Rochester has taken its lessons to heart as local players adapt to new priorities for commercial and retail space. There’s a renewed focus on redevelopment opportunities – for good reason – and downtown property owners who commit to the right amenities and improvements will be well-positioned to attract new tenants.

At Davie Kaplan, here are three trends we see gaining traction for commercial real estate in Rochester, NY, and why:

#1. Redevelopment of Existing Industrial Space for Mixed-use Projects

Even before the pandemic, area developers had their eyes on large buildings and industrial complexes ripe for redevelopment as major users continue to downsize.

Although redevelopment projects bring their own challenges, they can offer advantages in terms of both cost and time to completion when compared to a new build. Lead time for approvals and permitting is often shorter, and total construction costs should be lower.

Perhaps even more important to how a redevelopment project pencils out, however, are opportunities for sizable tax credits and state funding. The Roc the Riverway project now underway was granted $50 million from the State of New York, and that’s just for Phase I. As a renovation to an existing structure, the project’s initial tenant improvement costs may also be eligible for Qualified Improvement Property (QIP) treatment, which means up to 100% of certain projects costs can be deducted in the year that they go into service.

The key to a successful redevelopment is to ask a lot of questions at the outset, and work through different scenarios before committing to a final concept. Tax and financial perspective from outside the development arena can help shape the project’s structure to reduce risk and improve returns.

 #2. Downtown Rochester Remains Relevant

Just like many of the nation’s downtown business districts last spring and summer, downtown Rochester was eerily quiet as the workforce stayed home. Downtown tenants pulled the plug on any expansion plans, and when they did renew a lease it was often for considerably less space at lower rates.

Although reduced occupancy and downward pressure on lease rates have caused extraordinary pain for property owners and developers, lower downtown rental rates could attract new tenants. Businesses now leasing in the suburbs could become good candidates for downtown Rochester.

Plenty of downtown Rochester office space is ripe to be adapted and repurposed for a post-pandemic market. In the short-term, building improvements that will pay dividends are those that enhance indoor air quality and serve the tenant who needs flexibility to accommodate a hybrid remote/onsite workforce.

Longer term, as Rochester builds its reputation for affordability and lifestyle to attract more remote workers, expect to see creative conversions of some of that downtown space into mixed-use developments that include residential units.

#3. Flex Product Continues to Offer a Viable Hedge Against Limited Retail Demand

As the slowdown in demand for retail space continues, owners and developers of commercial real estate in Rochester have found success marketing some of that space as flex space, suitable for industrial or other non-retail users.

Flex space conversions offer a couple of advantages: they are inexpensive compared to new build, and can be completed fairly quickly. The downside? Users may expect shorter lease terms, and new retail prospects may not be interested in sharing a location with a tenant that’s unlikely to generate compatible retail traffic.

Sharpen Your Perspective on Commercial Real Estate Opportunities in Rochester, NY

Davie Kaplan can help – whether it’s identifying tax incentives for a potential redevelopment project or tax planning for existing real estate holdings.  Our expert team of CPAs and financial advisors has been serving businesses in the Rochester, NY area since 1934. We offer deep, industry-specific experience and a local touch, and we’re equipped to help clients of all sizes.

Contact us here or call (585) 454-4161 to schedule a no-obligation consultation.