State of real estate: Current market magnifies fair housing issues

While potentially disruptive headwinds are in the forecast, the Rochester commercial real estate market is largely in a solid position in terms of vacancy rates and financial stability.

Multifamily vacancy rates are exceptionally low, around 3 percent for the metro area, industrial and manufacturing space continues to be in high demand with approximately 95 percent filled, and even the office vacancy rate is at a somewhat tolerable 18 percent.

Saucke

“The market is relatively strong overall,” said Casey Saucke, senior commercial real estate relationship manager at ESL Federal Credit Union.

The residential market, however, continues to lag as record-low inventory has left would-be homeowners frustrated — and still paying rent instead of a mortgage.

And that may not change anytime soon. The shortage of affordable homes is acute and is contributing to the continuation of a decades-old disparity between white and Black homeownership, according to Tysharda Thomas, associate broker at New 2 U Homes.

Thomas

In Rochester, homeownership among white residents is 73.3 percent but just 32.5 among Black, Thomas said.

“We’re seeing offers at least $28,000 over (listing); at other brokers, they’re seeing $46,000 over,” Thomas said. “We have seen houses go for as much as $200,000 in Brighton above the listing price.

“So, yes, those fair housing issues we had are in the past, but they’re not in the past, because our people have not saved money, our people cannot afford those prices, so it’s just yet another way of steering them and getting them in certain neighborhoods. That Greece area that I could get a three-bedroom, one-and-a-half-bathroom house for $80,000 or $90,000 is now $150,000 to $160,000. And yes, sometimes they are being approved for that amount, but you can’t compete with the people that are going up to $200,000 and $250,000.”

Saucke and Thomas were joined by Andy Gallina, president of Gallina Development Corp., and Kevin Overton, partner at Harris Beach PLLC for the Rochester Business Journal’s State of Real Estate virtual panel discussion last week. The event was sponsored by ESL.

Gallina Development has a significant footprint in downtown Rochester with The Metropolitan, Innovation Square, One East Avenue and the Seneca Building. Each building has welcomed new tenants, the student housing portion of Innovation Square is especially strong and four luxury apartments are being created on the top floor of The Metropolitan.

Buckingham Properties, in partnership with Butler/Till, is close to filling the newly construction building at 260 East Broad St. Butler/Till moved in during the fall of 2021, the 28 residential units are leased, a wine bar opens in August and a new restaurant will open in September.

Home Leasing’s redevelopment of the blighted northwest corner of the intersection of East Main Street and North Clinton Avenue is expected to begin in October and Dutton Properties continues refurbishment of properties just to the west.

Gallina

“The market is not as robust as I would like, but we remain optimistic that we will start to get more tenancy in the downtown corridor,” Gallina said. “I think we’re going to see more activity in this next fiscal year.”

Among the headwinds facing developers: the perceptions about the safety of downtown, Gallina said, plus rising interest rates and continuing labor and materials costs combined with supply-chain issues, Saucke said.

“We have continued to hear some of our developers and clientele say they either need to table or restructure development projects moving forward,” Saucke said, “until there’s more of an economic climate to allow a new development to pencil out and perform overall.”

But even with interest rates more than double what developers and building owners were able to lock into for previous projects, there are no major fears from lenders.

“Over last 10 years with historic low interest rates, the majority of our clientele and our portfolio and [have] really positioned themselves well with long-term low-interest rate debt, and that’s really allowed most properties to perform well into the future,” Saucke said.

The watch area deals with loans where the interest rate will convert to today’s numbers. Still, Saucke said ESL is in a strong position with its borrowers.

“We do think that the majority of these assets will be fine,” he said, “because there was either a value-add proposition up front or, in the case of a longer-term asset, there probably has been enough equity built up or property depreciation and rent growth along with controlled expenses to justify a higher interest rate to carry those forward.”

Overton

The residential market isn’t so fortunate. Escalating mortgage rates — to 6.5 percent or more — have made it more difficult for first-time buyers to make a deal work, especially when competing against buyers with more capital, as Thomas noted.

Her firm, New 2 U Homes, works to not only help people find homes, but also to educate them on building wealth.

“We’re helping motivated people achieve their real estate goals,” Thomas said. “We work a lot with first-time homebuyers, first generation homebuyers, to get them into house, to help them understand credit and financial wealth and all of those things that they were not taught as children.”

She said many grew up in an environment where the family rented and they aren’t familiar with homeownership requirements “because that isn’t where we came from.”

The battle they face: Rising rents mean it’s more difficult to save for a house.

“More than half of the renters state-wide are rent burdened,” Overton said. “More than 30 percent of their income goes to housing costs. Housing costs in the city have risen 30 percent since 2015 and home-buying prices increased 50 percent in that same time period.

“Outside the city, rents have risen 40 to 60 percent since 2015 and home prices have increases 50 up to 80 percent in some places.”

That likely won’t change, either, as the cost of construction rises.

“With the increased construction costs, with the increased labor costs, the supply shortages, it costs so much to construct a new facility, that to create low-rate housing probably doesn’t a whole lot of sense without some additional support from the government,” Overton said.

Which is why Gov. Kathy Hochul devised her Housing Compact in hopes of spurring development of not just affordable housing but also market-rate units. The plan would provide incentives for certain developments, including the conversion of office or other commercial properties into residential.

“There needs to be some sort of subsidies or some incentives for municipalities and developers to bring these projects to bear,” Overton said.

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