CITY HIGHLIGHT, MAY 2007

BIRMINGHAM CITY HIGHLIGHTS
John Coleman, Steve Ankenbrandt, and David Ashford Jr.

Birmingham Industrial Market

Within a 2-hour drive of Birmingham, Alabama, there were more than 700,000 cars and trucks manufactured in 2006. In 1998, Mercedes-Benz opened its first manufacturing facility outside of Germany in the Birmingham metropolitan area and in 2005 doubled the plant size, which currently employs 4,500 people, with a $600 million capital investment. The Mercedes development put Birmingham, and Alabama, on the global radar screen for future automotive expansion. Since that time Honda, Hyundai, Toyota, International Truck and, most recently, Isuzu have opened or announced manufacturing facilities in Alabama. 

The latest addition to this ongoing economic success story is Isuzu Motors December 2006 purchase of the 280,000-square-foot former Del Monte facility located in Birmingham. Isuzu will begin facility construction later this year to modify the plant for the manufacturing of a light duty truck.   State investment in economic development has become a focal point of media scrutiny, but the majority of citizens in Alabama feel the state’s investment in Mercedes has proven to be a prudent move. The total economic impact for the state is 44,834 direct jobs and 79,356 indirect jobs with a payroll of more than $4.8 billion. The Birmingham metropolitan area is home to 84 companies or 32 percent of Alabama’s automotive supplier network. Birmingham automotive leases of note include MBUSI’s 518,000-square-foot build-to-suit project in 2005, Decoma, a division of Magna International’s lease of 120,000 square feet, Ogihara’s lease of 80,000 square feet and the AGC Glass lease of 85,000 square feet. 

A snapshot of the total metropolitan industrial market shows a 95.1 percent occupancy rate for freestanding industrial buildings, with the total multi-tenant warehouse market standing at 83.6 percent, both figures represent the year ending 2006. Bulk distribution warehouse levels are at 83.4 percent, the lowest occupancy  rate since 2003. This lower occupancy rate can be primarily attributed to the delivery of several new speculative Class A distribution facilities. There is currently more than 1.9 million square feet of bulk space available or, based on historical absorption rates, about 3 years of supply.  Notable Class A bulk warehouse lease transactions during the last few months include HH Gregg‘s 62,000-square-foot lease, Gulf States Beauty Supply’s 120,000-square-foot lease and ORS Nasco’s 62,400-square-foot lease.

The brokerage outlook is one of opportunity in the bulk warehouse arena with several sizable blocks of space available with few quality options in the freestanding industrial market.

— John Coleman is a vice president with Birmingham, Alabama-based Graham & Company, Inc.

Birmingham Multifamily Market

Balanced is the best word to describe the Birmingham area multifamily market during the last 7 years. For that time period, the entire new supply of product to the market has been just under 4,300 units. Currently there are only 1,428 units under construction. With an average of 712 new units per year during the last 7 years, the existing apartment stock in the market has performed well, with positive income growth and decreasing concessions. The new product is distributed throughout the entire Birmingham market causing little negative impact on any one submarket. New development in Birmingham has been restrained by a lack of quality developable sites and competition with high-density single-family builders for sites. The outlook is for the development pipeline to continue at its current modest pace with several new projects announced and underway by the end of 2007.

Birmingham has long been considered a non-institutional investor’s market. Modest employment growth, steady but not excessive development, and good apartment market fundamentals have provided owners and developers with solid returns over the last several years. Birmingham continues to be an attractive market for investors. The volume of transactions in the Birmingham market in 2006 was just more than $250 million. The constrained new supply, solid fundamentals, and continued favorable debt market have led to increasing transaction volumes. These market dynamics have attracted both national and international capital looking for better yields than in larger U.S. markets. Cap rates for Class A and B quality properties have hovered around 1 to 1.25 basis points above the long-term debt rates available in the market. The spread for Class C assets is higher, but still below historical spread levels due to the level of capital pursing acquisitions in the market.

The market fundamentals for Birmingham have continued to remain solid. According to the Rock Apartment Advisors Year-End 2006 Birmingham Apartment Survey, the Birmingham area apartment market has experienced 18 consecutive quarters of positive rent growth. The average effective rent per square foot in the market for properties built in the 1990s is 75 cents; for properties built in the 1980s, 66.9 cents; for properties built in the 1970s, 62.3 cents; and for assets built prior to the 1970s, the average effective rent per square foot is 64.9 cents. Occupancies remain steady in the mid-90s, with some softening in certain submarkets due to significant rehab activity. The overall concession level in the market has also remained steady, with fewer properties resorting to the use of concessions to maintain occupancy and rent levels.

The effect of the condo market on the Birmingham apartment market has been negligible. Birmingham mirrored the national condo craze over the last few years, albeit on a lower scale, but the condo market has now cooled to new projects and slowed on some projects that were already committed. Condo development has been primarily in the in-fill areas of Homewood and the Highland area of Birmingham. Those developments that have come out of the ground have been successful, but sales have been slower than expected. Unlike other southeastern markets, Birmingham has had very little conversion of garden-style apartment communities to condos.

— Steve Ankenbrandt is president and qualifying broker with Birmingham, Alabama-based Rock Apartment Advisors

Birmingham Retail Market

Birmingham’s retail market continues to see positive growth. Although the nation as a whole has seen a downturn in residential sales and construction, Birmingham’s residential market remains strong. The southern suburbs and Shelby County continue to lead the state in monthly home sales. As the residential market remains stable in Birmingham, new retailers continue to move in and developments that were merely plans begin to take form.

Although Colonial Properties Trust, a REIT located in Birmingham, announced last year that it would sell its retail and office components and concentrate on the multifamily market, the company will continue to develop retail properties in Birmingham and other markets. Projects include the 131,500-square-foot phase II to its Colonial Promenade Alabaster, which will include Target, JC Penny and TJ Maxx as anchors along with small shop space. Colonial Properties has also broken ground on Colonial Promenade Fultondale, which will be a Target-anchored 355,000-square-foot power center. Colonial Properties has announced plans to continue with its Target-, grocery- and cinema-anchored center in McCalla, expected to break ground sometime in 2008.

Eastwood Mall, the first enclosed mall in the Southeast was razed last year by MAP Development, to make way for a 372,000-square-foot Wal-Mart Supercenter. Additional anchors include Ross and Old Navy, with Starbucks and Chick-fil-A outparcels. The question still remains whether this development will breathe life back into the struggling Century Plaza Mall and Eastwood Festival Center.

Recent additions to the Birmingham market include Whole Foods, ALDI, Coldwater Creek, Whataburger, Red Robin, and HH Gregg. Bayer Properties completed the Whole Foods portion of its mixed-use development, Cahaba Village. HH Gregg is rumored to be backfilling vacancies and building new locations in several of the major retail submarkets.

The Birmingham hotel market is thriving with the announcement of several new developments, and existing hotels are redeveloping to keep up with what seems to be rapid growth. SoHo Square developer, Cypress Partners, is bringing a new boutique hotel to the former Homewood City Hall site. A Marriot brand has purchased land sites on Highway 150 in Hoover and within the Colonnade at the intersection of Highway 459 and Highway 280. Colonial Properties plans to bring a first-class hotel to its Colonial Brookwood Mall. A Residence Inn by Marriott now under construction will increase rooms around the University of Alabama at Birmingham and the central business district. There are rumors of an additional first-class hotel in the area as well. Two historic hotels, the Tutwiler and Pickwick Hotels, are undergoing major renovations in the downtown Birmingham area.

Looking ahead, Birmingham’s retail market trends will be competition in the grocery sector and a turn from the retail power center to the mixed-use in-fill development. Grocers such as Publix, Wal-Mart Neighborhood Centers, and ALDI are expanding in the market while Southern Family Foods, Bruno’s/Bi-Lo, and Winn Dixie wait to see what their futures hold. With a lack of available power center sites, mixed-use projects, such as Cahaba Village, Hallman Hill and 29Seven, will become more prevalent in the marketplace. The growing loft community in the downtown area should spur a push for retailers to enter the central business district.

— David L. Ashford, Jr., CCIM, is with Birmingham, Alabama-based Southpace Properties Inc.


©2007 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.