SOUTHEAST SNAPSHOT, FEBRUARY 2008

Birmingham Office Market

Last year, the Birmingham area posted possibly its best year ever in office leasing. The overall occupancy rate rose to a record 95 percent. Absorption of more than 515,000 square feet of office space in a market totaling more than 26 million square feet, has pushed rental rates to new highs and raised the prospects for new development. With no large blocks of space available for lease and rental rate increases of more than 6 percent, new office development is certain for Birmingham.

The only new, speculative development last year was Colonial Brookwood Center. The 169,256-square-foot mid-rise, developed by Colonial Properties Trust, was fully leased prior to completion, including major tenants Johnston, Barton, Proctor & Rose, LLP (45,000 square feet) and El Paso Energy (92,412 square feet). Such a desirable location in the midtown market attracted those two tenants from the CBD, but their vacated office space promptly backfilled by Regions Bank. The extraordinary news of this speculative development is a further sign of strength in the market. Birmingham continues to beg for more available office space.

There is activity across the entire area too. In the 280/I-459 submarket, Blue Cross Blue Shield signed a lease expanding its current premises at Meadow Brook Corporate Park to 236,962 square feet and continues to be one of the largest occupants of office space in the Birmingham area. Other significant new leases signed this year were Fortis College, 23,435 square feet in Lakeshore Crossings Business Park; Surgical Care Affiliates, 43,000 square feet in Galleria Tower; BioHorizons, 44,228 square feet in Riverchase Center; Health Spring, 70,000 square feet in Chase Corporate Center; Regions Bank, 65,500 square feet in Regions Harbert Center; University of Phoenix, 20,165 square feet in Meadow Brook Corporate Center; and Washington Group, 50,000 square feet in Perimeter Park South.

Future development is anticipated for this year. Colonial Properties Trust will likely announce plans for additional buildings at Colonial Brookwood in the midtown market, as well as the Colonnade in the 280/I-459 submarket. One of the most significant development possibilities within the 280/I-459 submarket centers around the existing HealthSouth corporate campus. HealthSouth is currently in negotiations to sell its 400,000-square-foot office campus on 100 acres of land to Birmingham-based Daniel Corporation. HealthSouth will likely downsize and lease a portion of their existing premises, but the acquisition would certainly provide a redevelopment source of needed office space for the market.

Also, Brookmont Realty, developer of Lakeshore Crossings Business Park, is planning to build a speculative office building within the 75-acre, master-planned business park. The 50,000-square-foot building will be their fifth construction within the park. In addition, Graham & Company has plans for redeveloping the former Mountain Brook Inn site in the midtown submarket, a location conducive to a hotel, office, mixed-use development.

Tampa based-Arcis Investments has been the newest and most active out-of-state investor to recognize the real estate potential of the Birmingham area. Its purchase last year of 156,020 square feet of office space in three buildings at Lakeshore Crossings Business Park increased the company’s current portfolio in Birmingham to more than 600,000 square feet.

Currently, Class A rental rates in Birmingham run between $19.50 to $23.50 per square foot. Vacancy rates have declined from 7.3 percent in 2006 to a low of 5 percent last year.

Although the CBD has experienced the most absorption, the midtown submarket continues to have the lowest vacancy rate and demands the highest rents. Even with the merger of Regions and AmSouth Banks, the downtown submarket still managed close a 4 percent increase in occupancy, a significant accomplishment. Not withstanding, the midtown submarket is most likely to see the most future development. A new hotel for the Homewood/SOHO area, potential new office buildings at Brookwood Mall, Homewood Place near Southbridge, and the redevelopment of the former Mountain Brook Inn site are all candidates for solving the office space shortage in Birmingham.

— Walter Brown is vice president, Office Group, with Birmingham-based Graham & Company/CORFAC International.

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