CITY HIGHLIGHT, MAY 2004

BIRMINGHAM CONTINUES TO GROW

Birmingham, Alabama, is experiencing an impressive amount of activity, particularly in the retail sector. To bring you the latest news from this area, Southeast Real Estate Business asked executives from the retail, office and industrial sectors to provide insight on their areas of expertise.

Retail

Shelby County is the fastest growing county in Alabama and Hoover is the fastest growing city among the 35 cities in the greater Birmingham market. Both are experiencing rapid retail development to meet the needs of a growing population.

AIG Baker is developing three centers in Birmingham: Patton Creek Shopping Center, The Village at Lee Branch and Hayes Marketplace.

Patton Creek Shopping Center is situated on 78 acres between Interstate 459 and State Highway 150 in Hoover, next to Riverchase Galleria. Anchor tenants include Galyan’s, Rave Motion Pictures, Barnes & Noble, Circuit City, Linens ’n Things, Ross Dress For Less and Cost Plus World Market.

The Village at Lee Branch is a 194,179-square-foot center on 67 acres located near the intersection of U.S. 280 and Alabama 119. The $30 million project is anchored by Publix and Academy Sports and includes 47,000 square feet of shop space. Walgreens and Compass Bank are located on outparcels. Phase I of the project is 90 percent leased. Phase II, scheduled for completion this summer, will include a Hobby Lobby store and a 15-screen theater operated by Rave Motion Pictures.

Hayes MarketPlace is a 750,000-square-foot center to be built at the intersection of Interstate 65, County Road 52 and U.S. 31 in Pelham. The project, scheduled to open this fall, will include a traditional power center, a theater and 13 outparcels.

Birmingham-based Colonial Properties Trust is reportedly considering the sale of its 17 malls. The company has stated that it may sell some of its properties to reallocate capital in its portfolio. The real estate investment trust owns five malls in Alabama, one in the Birmingham area. Whether Colonial Properties Trust plans to sell any of its assets is unclear; however, the company is actively engaged in new development projects.

Colonial Properties Trust plans to build an 800,000-square-foot shopping center at I-65 and U.S. 31 in Alabaster. Colonial Promenade Alabaster will reportedly be anchored by Wal-Mart Supercenter and Belk. The addition of a theater has also been discussed as part of the project. Delivery is scheduled for 2005. Colonial Properties Trust is also developing Colonial Promenade at Trussville, Phase II, a 300,000-square-foot center anchored by Sam’s Club and Kohl’s. The center is scheduled to open this winter.

Trussville will gain several new restaurants in the coming months. Tomatapie Pizzeria, Mikata Japanese Steak House and Costa’s Famous Bar-B-Que & Fine Steaks will open at Colonial Promenade Trussville. Quiznos Sub and Trussville’s second Starbucks Coffee Company will add to the selection of new eateries in Trussville.

Bayer Properties is seeking zoning approval for Cahaba Village, a proposed shopping center on 10 acres on Green Valley Road in Mountain Brook. In addition to the shopping center, the developer reportedly plans for Whole Foods, a bank and Stoney River steakhouse to occupy three outparcels.

Aronov Realty Management recently developed a new community center at the intersection of Highway 119 and County Road 26 in Alabaster. The 70,400-square-foot White Stone Center includes a 44,000-square-foot Publix and shop space.

Riverchase Galleria may soon add a new owner and be under new management. General Growth Properties has agreed to purchase a 50 percent ownership interest in the 1.7 million-square-foot mall, one of the largest in the Southeast. Jim Wilson & Associates is currently the owner of Riverchase Galleria and will remain General Growth’s 50 percent joint venture partner. The mall has suffered from the loss of anchors Macy’s and Just For Feet. Tony Roma’s restaurant, which operates on the mall’s outer ring, closed and is vacant, and the mall has shop vacancies.

However, several recent successes can be touted at Riverchase Galleria. Costco opened its first Birmingham store there last year, and Ted’s Montana Grill will open its first Alabama site there this summer. The Western-themed eatery is under construction at the former Fuddrucker’s site outside the mall. The former Kmart at Riverchase Galleria is being redeveloped into a multi-tenant retail property named Riverchase Crossings Shopping Center. Bed Bath & Beyond will move from its store in Riverchase to occupy 38,600 square feet in the former Kmart building, located at the intersection of Lorna Road and U.S. 31. Other tenants will include Michaels (23,500 square feet), Office Depot (21,510 square feet) and 5,000 square feet of shop space.

City officials are ramping up to boost economic development on the eastern side of Birmingham, particularly the area surrounding Eastwood Mall. Research conducted by the Birmingham Regional Chamber of Commerce cites the area’s proximity to the interstate and its location near some of the wealthiest sections of metro Birmingham as strengths. Eastwood Mall is nearly vacant and in need of new anchors.

Significant transactions include the sale of Southgate Village in July 2003 for $8.7 million. Regency Centers acquired the center with joint venture partner Macquarie CountryWide Trust of Australia. The 75,092-square-foot center is anchored by Publix.

Sharp Realty & Management LLC acquired the 200,000-square-foot Pelham Plaza Shopping Center for an undisclosed price. The property is anchored by Food World.

Smaller transactions include the acquisition of Victoria Plaza Shopping Center in Pelham for $900,000 by T&T Investments LLC, and the acquisition of Shades Crest shopping center for $900,000 by Birmingham-based LH Properties.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors

Office

Is the worst over for the Birmingham office market? Although lacking robust demand, we believe the office market has turned the corner. Compared to the previous 2 years, 2003 featured renewed interest in office space and positive absorption. Challenges certainly remain; however, minimal speculative construction coupled with a steady to slightly growing economy all point to good signs for the Birmingham market.

In 2003, new construction consisted of only one building, a 470,000-square-foot addition to Amsouth Bank’s operations center in Riverchase. Total absorption was a strong 623,376 square feet; however, only 148,635 square feet of the absorption was multi-tenant. This represents a favorable increase over the 94,000 square feet absorbed in 2002.

For the second year in a row, the downtown market has posted positive absorption figures, pointing to a revival in downtown interest. In addition to positive absorption, brisk building sale activity was again the norm in all submarkets for 2003. Strong pricing highlighted most sales, with some transactions generating the highest prices paid per square foot in a decade — another positive sign for the overall health of the office market and real estate as an investment. The Midtown submarket, from Lakeshore Drive to Highland Avenue, continues to show the strongest occupancy of 89 percent. Compared to an overall vacancy rate of 15 to 16 percent, this submarket continues to show strength and will most likely be the area in which any new development is announced.

Rental rates in 2003 stayed flat or increased slightly in all four submarkets. With no catastrophic occupancy and rate swings, landlords are optimistic about the future. However, quoted rental rates do not reflect concessions that are currently available in today’s office market. New construction is anticipated to remain negligible in 2004 and into 2005. Although a few quality office sites remain available, it is unlikely that any new multi-tenant Class A office buildings will be constructed without substantial pre-leasing.

For the foreseeable future, savvy tenants will continue to lock in lower rates for longer-term leases. The office market is expected to continue a slow rebound, but until demand increases substantially, the near term will remain a tenant’s market.

— Dan Lovell, SIOR, director—office group, Graham & Company Inc.

Industrial

Graham & Company completed Parkwest Distribution Center, a bulk warehouse project in the Birmingham area, last year.

The industrial market is beginning to return to a balanced situation as leasing activity has increased after a slow leasing year in 2003. This activity is very welcomed given the delivery of new speculative construction occurring in 2003 and 2004. Also, build-to-suit construction has increased in the last year. The automotive sector is driving some of the new construction activity as both Honda and Mercedes expanded production for the 2005 model year. Conversely, the Birmingham market has not seen any new industrial activity associated with the Hyundai plant now under construction in Montgomery. Long-term benefits should persist given Birmingham’s location in relation to all three plants.

Much of the new speculative development occurring is of high quality and has elevated the definition of Class A industrial space in the Birmingham market. Additionally, new construction has occurred in further out locations, thereby expanding the scope of the market. This is a direct result of site scarcity related to topography, zoning and other limiting factors. Two multi-tenant projects of 208,000 square feet and 182,000 square feet were delivered in the second half of 2003. Both were 100 percent speculative and are now occupied at 63 and 29 percent, respectively. Tenants include Gardner Inc. (52,000 square feet), JanPak (52,000 square feet) and MBC – United Wholesale (78,000 square feet). A third multi-tenant project of 300,000 square feet is under construction with 120,000 square feet pre-leased by Decoma, a Mercedes supplier. Build-to-suit activity has been significant as well with two major projects occupied in the first quarter of this year. The larger is a 600,0000-square-foot tire distribution center leased and operated by TNT Logistics for Michelin. The smaller totals 294,000 square feet and is leased to Plastech Romulus, a supplier to Johnson Controls serving Mercedes-Benz. Both developments were pre-sold to institutional investors. A third 100,000-square-foot build-to-suit is currently under construction for Federal Express with a mid-year delivery date.

A characteristic of a secondary market like Birmingham is that a few vacancies can significantly influence the market. The overall vacancy rate at year-end bottomed out at 20 percent on 8.6 million square feet of multi-tenant bulk distribution base. The same 2002 percentage was 16 percent. New speculative deliveries have impacted this year’s unusually high vacancy rate; however, the Oxmoor and Central submarkets had approximately the same vacancy rate with little or no new spec space in 2003. Activity has definitely picked up in these areas thus far in 2004. An example is the recent 77,000-square-foot lease to Bridgestone/Firestone. However, it may be the end of the year before these submarkets and the overall market return to a balanced situation.

The outlook for 2004 is that automotive transactions will curtail as the 2005 models launch production this summer. Class B space will begin to rebound after a 24-month lull, and 100 percent speculative construction will slow while build-to-suit or partially pre-leased multi-tenant buildings will continue to be built into 2005.

— Sonny Culp, SIOR, vice president, Graham & Company Inc.

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