CITY HIGHLIGHT, MAY 2006

BIRMINGHAM CITY HIGHLIGHTS
Jimmy Adams, Hugo Isom, Jack Brown, Barbara Bushnell

Multifamily Market

The word is out about the Birmingham multifamily market. Investors and developers, both local and international, have recently taken note of the strong fundamentals in the Birmingham market. While many of the other Southeastern markets, including Atlanta, Charlotte and Raleigh/Durham have suffered several tough years of softening rents, Birmingham has thrived. The strength of the apartment market in Birmingham is due, in large part, to the lack of new construction in the market. Since 2001, new apartment deliveries have been virtually nonexistent, with approximately 1,500 to 2,000 new rental units delivered in the period. This anemic new development supply in a metropolitan area with population approaching 1 million has resulted in one of the strongest multifamily rental markets in the region. Out-of-state buyers, predominately from California and other West Coast states, have been flocking to Birmingham to invest in existing multifamily communities.  

Although the development of new multifamily rental communities has been relatively slow since 2001, last year was a breakout year for new condominium projects. Like many other cities around the country, Birmingham is experiencing a dramatic surge in condominium living. Recent projects include Bristol Southside, a 171-unit, ground-up condo development by Nashville-based Bristol Development Group, which has been tremendously successful. Additionally, announcements were made for large scale mixed-use condominium projects including SoHo Square, 76 units being developed by Cypress Partners; and The Capri, a project involving Euro American Advisors and developer Tom Hinton that will overlook Caldwell Park and the Birmingham skyline. These new condominium projects are in addition to several condominium conversions that are taking place in the market, which are the first conversion projects to hit Central Alabama.  

The condo phenomenon is having a significant impact throughout the city, but nowhere more noticeable than downtown. One of the most visible projects driving the downtown area’s residential renaissance is the conversion of the City Federal office building to condos. Atlanta-based Synergy Realty Services acquired the building and has commenced the renovation to residential for sale condominiums. Strong sales are reported, with 60 percent of the building sold out. The redevelopment to condominiums of the former Cabana Hotel by California-based Leer Corp has also been announced, but is pending the resolution of a lawsuit. Rental living is also in high demand downtown. Jemison Flats Lofts, a historic renovation, loft style rental community, is collecting the highest rents per foot in the MSA.

The multifamily development outlook for this year and 2007 looks quite robust. The vast majority of the new multifamily development is likely to involve for-sale condominiums. Additionally, many of the projects announced last year will deliver units this year and in 2007. The conventional apartment developers are shopping for land opportunities to develop new communities. It is likely that the supply of new apartments will increase in 2007 and 2008.

— Jimmy Adams is an investment advisor in the Birmingham, Alabama, office of Southeast Apartment Partners.

Retail Market

Birmingham, like most other similar sized Sun Belt cities, has undergone tremendous retail growth in the past decade. Driven by an economy based on the University of Alabama at Birmingham and its formidable medical center, as well as banking and automotive manufacturing, Birmingham’s retail growth has mirrored the demographic patterns attendant with such economic growth.

Last year, a fourth phase of specialty and boutique shops was added to The Summit, the highly successful 1 million-square-foot lifestyle center in southeast Birmingham. Also, specialty grocer Fresh Market has found tremendous success in southeast Birmingham, while Whole Foods is set to open later this year in Mountain Brook.

Despite the positive reception to high-end retailers, the greatest volume of retail development has come from the discount sector. Hence, the two biggest stories during the past 2 years are Target’s recommitment to the Birmingham market after a 6-year absence and the absolute dominance of Birmingham’s development landscape by two companies: Colonial Properties, Inc. and MAP Development, Inc.

These two companies could not be more diametric. Colonial is a $5.6 billion public REIT led by CEO Tom Lowder and MAP is a small, privately held company owned by Mark Peeples. Colonial has demonstrated absolute dominance of large-scale developments as well as Target-anchored developments, whereas MAP has owned the Wal-Mart pipeline of developments in this market. Although not necessarily pitted against one another, the two retail behemoths, Target and Wal-Mart, have clearly tapped these two companies to implement strategies to carve out market share in Birmingham.

Beyond the interesting dichotomy posed by these two development companies, it is also interesting that Target has finally decided to throw its forces into the fray. Since Wal-Mart began super-sizing its stores in the late 90s, it has opened nine Supercenters in the metro area to Target’s two. In addition, Wal-Mart has two small format stores (Irondale and Fairfield) and one neighborhood market (Center Point), giving Wal-Mart a total of 12 stores in the market. In the past year, Wal-Mart has announced plans for, or undergone, construction on four new Supercenters (Eastwood, Tarrant, Calera, and Fairfield) and two others are rumored — one for west and one southwest Birmingham. When this current wave of Wal-Mart expansion is complete, there should be 13 Supercenters in the market. Then one must assume a major roll-out of Neighborhood Markets could be next.

Target, although never anticipated to be as prolific as Wal-Mart in the south, has seemingly begun to respond to the Wal-Mart onslaught by breaking ground on two new Colonial-developed P-stores (non-grocery) — one in Alabaster and one in Fultondale; thereby, creating a solid presence in the far southern and northern sub-markets. Two other stores are rumored — one in southwest Birmingham and the other in south central Birmingham, both Colonial developments. Target’s foray into Alabama’s grocery business is believed to have proven unprofitable; therefore, most new Targets (and all the ones on the drawing board) will be the standard 125,000-square-foot variety.

Beyond the discounter battles, two new Colonial projects have been the talk of the town: the first, Colonial Promenade Alabaster, a power center with terrific presence on Interstate 65 some 12 miles south of the Riverchase Galleria, has met with huge success. Anchored by Wal-Mart Supercenter, Lowe’s Home Improvement Warehouse, Belk, Ross, Bed Bath and Beyond and AmStar Theater, this new development, which opened in the fall of last year, has yielded retailer sales far in excess of projection. The developer, Bryan Ratliff of Colonial Properties, pushed the envelope by proposing a 500,000-square-foot center in an area of obvious growth, but light residential density. His argument was that the access afforded by I-65 and U.S. Highway 31 would allow consumers from far away to take advantage of the convenience and ease of shopping in Alabaster and enable them to avoid the congestion of the Riverchase Galleria area. What may have seemed like a gamble has paid off and created seemingly boundless demand. Now his counterpart at Colonial, John Hughey, is developing a Target, JCPenney and Best Buy directly across U.S. Highway 31.

In addition to his work in Alabaster, Hughey will open in October of this year the most ambitious retail project in Birmingham since The Summit. Named The Pinnacle, this new 470,000-square-foot lifestyle center sits on a rocky hilltop some 100 feet above Colonial’s SuperTarget-anchored Tutwiler Farms development. When it opens, The Pinnacle, including Parisian, JCPenney, Belk and Best Buy, will immediately render obsolete the Eastwood Trade Area, which has been in decline for the past decade. With easy access to Trussville via I-459 and I-59, The Pinnacle will become a bona fide regional retail destination, giving south area shoppers an alternative to the congestion of the U.S. 280 corridor, as well as the Riverchase Galleria area.

Although not quite a Brownfield, Eastwood Mall has been nonetheless blighted, but is expected to attempt a rebirth later this year when MAP redevelops the old mall into a Wal-Mart Supercenter-anchored open air center. The two malls of the Eastwood area, Eastwood Mall and Century Plaza, were decimated by developments on the U.S. 280 corridor in the past 10 years, which created a more attractive shopping destination replete with the department stores, specialty retailers, restaurants, and amenities affluent consumers demand; thereby, leaving the Eastwood area marginalized by weakened demographics and relocating retailers. MAP Development’s new Wal-Mart-anchored center, made possible by a multi-million dollar commitment from the city of Birmingham, should prove to be a catalyst for future development in this once-thriving retail hub. With Alabama’s dated reliance on sales tax revenue to fund municipal services, there will be increasing pressure on metro municipalities to undertake similar ambitious projects to breathe life back into marginalized retail developments.

What does the rest of this decade hold for Birmingham’s retail environment? It’s not a bold prediction, but look for Colonial and MAP to roll out several new Target and Wal-Mart developments, respectively, which will create opportunities for multiple junior boxes and outparcel users. As a response to the residential boom in Hoover and McCalla, anticipate significant retail growth in southwestern Birmingham along I-459 near McCalla and Bessemer. This southwestern push, coupled with Colonial’s developments in Fultondale, Alabaster, and Trussville, has effectively stretched the limits of the retail marketplace. Anticipate new infill opportunities, like MAP’s Eastwood redevelopment and new mixed-use developments like SoHo Square in Homewood, which combine live-work with specialty restaurant and retail opportunities.

— Hugo Isom is a partner in the Birmingham, Alabama, office of The Shopping Center Group.

Industrial Market

A unique characteristic of Birmingham, Alabama’s industrial real estate market is the large presence of crane and rail served heavy industrial facilities. Until the early 1960’s, Birmingham was the nation’s second steel and iron producer with more than 50 percent of the area’s employment being mining or manufacturing related. Although the employment numbers have steadily declined, these industries have left their mark on the area with millions of square feet of crane-served buildings and an available work force of skilled metal workers.

In March 2004, due to the economic downturn of the steel industry in the early 2000’s, the market had more than 4.2 million square feet of crane and rail-served properties available. As of March 2006, 2.6 million square feet of this space has either been purchased, leased or is under contract. Notable 2005/2006 transactions include Stock Building Supplies acquisition of the 87,000-square-foot former Jemison Steel Facility, Pre Coat Metals purchase of the 152,604-square-foot former Southern Coil facility, Castle Metals acquisition of the 76,000-square-foot former Integris Metals property, Birmingham Fasteners purchase of the 300,000-square-foot former Butler Manufacturing and Phoenix Metals acquisition of the 76,000-square-foot former Millcraft Industries. Existing availabilities include the 400,000-square-foot former Williams Bridge property and the 230,000-square-foot former Shelby Steel facility, both of which are rail served with heavy crane capacities. This activity has been spurred by a general economic upturn, alternative use capabilities which are mainly suited to the construction supply industry and an increase in new construction costs making these facilities extremely attractive when compared to new construction. The overall free standing industrial building market is 89.4 million square feet with an occupancy rate of 95.5 percent as of year end 2005.

Bulk Distribution Warehouse occupancy levels were at 90.4 percent for the year ending 2005 as compared to 87 percent for 2004. New product being brought on-line for this year is a 380,000 square feet speculative development in Jefferson Metropolitan Industrial Park which will be available for occupancy in early fall. In this same submarket, Mercedes Benz (MBUSI) vacated 500,000 square feet in January for a newly constructed build-to-suit project in nearby Vance. Three new additional projects are underway in the southern submarket. One project is a 250,000-square-foot facility with a MBUSI supplier pre-leasing 85,000 square feet. Another project is a speculative 247,000-square-foot facility being delivered in May. Lastly, a 575,000-square-foot project pre-leased to Custom Marketing Services will also be delivered in May. This new speculative space combined with former Mercedes space coming on line will temporarily drop occupancy levels to approximately 75 percent in the submarket.

Other notable lease transactions during 2005 were Ogihara USA, a MBUSI supplier, taking 70,000 square feet in the central market, Trinity Glass International, a Tacoma, Washington based building products company, taking 120,000 square feet in the eastern market and Infinity Insurance taking 85,000 square feet in the southern market.

The brokerage outlook for this year is positive with several large blocks of bulk space available providing expansion or relocation opportunities. There are remaining freestanding building purchase opportunities in the crane/heavy industrial sector while quality freestanding warehouse purchase options remain scarce.

— Jack Brown is vice president of Graham & Company in Birmingham, Alabama.

Office Market

The overall state of the office market in Birmingham is healthy. The end of last year saw overall occupancy at 89 percent and occupancy in the Class A office buildings finished at 90.87 percent. However, occupancy statistics do not tell the whole story.

Neither do the raw absorption figures. To get a full picture, the absorption rates by submarket need to be analyzed.

The central business district (CBD) Class A market saw an immediate effect of Wachovia’s acquisition of Birmingham-based SouthTrust Bank. Wachovia reduced its office presence in downtown Birmingham by 100,000 square feet. The Class A downtown market finished the year with a disappointing 84 percent occupancy and negative absorption of 128,664 square feet, despite Alabama Gas Company’s addition of 60,000 square feet in the Colonial Plaza office building. Quoted rental rates for the Class A office space in this submarket range from $15 to $24 per square foot. With several of the larger, newer buildings having significant blocks of space for lease, the concessions offered to tenants are increasing and the effective rental rates are much less than asking rates. For value-minded space users, there has been no better time to consider an office in the CBD, which is enjoying a renaissance of sorts with tremendous interest in converting older office properties into condos and lofts.

Down the road and past Red Mountain, the Midtown Class A office market is booming. At the halfway point of last year, Infinity Insurance vacated 100,000 square feet in the Lakeshore Park Plaza Building and moved farther south to the Colonnade. Class A absorption in the Midtown market stood at negative 51,560 square feet at the end of the third quarter. But by the end of the year, the occupancy level had returned to 95 percent and the annual absorption in this market stood at negative 8,549 square feet. Many buildings in this popular submarket are 100 percent occupied and it is no surprise then that two new Class A office buildings have been announced for this market.

Eason Graham & Sandner is planning to build an 80,000-square-foot office building on Woodcrest Place in the Homewood City limits. The architect, Williams Blackstock, will blend the architecture of the new building with the existing Birmingham Water Works pumping station located in the background.

The strength of the Midtown office market is leading to the first new construction in the Birmingham area in quite some time and will counter-balance the softness that will occur in downtown for a few years still.

— Barbara M. Bushnell, CCIM, is president of Birmingham, Alabama-based Bushnell Realty.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.