CITY HIGHLIGHT, MAY 2009

BIRMINGHAM CITY HIGHLIGHTS
John Coleman and Hugo Isom

Birmingham Industrial Market

The Birmingham industrial market was much like the rest of the country in 2008. The recession reared its head in Birmingham, resulting in an overall decline in average rental rates and occupancy levels. The multi-tenant bulk distribution sector was the hardest hit, falling to 82.4 percent occupancy with a negative absorption of 206,000 square feet  compared to the previous year’s 600,000 square feet of positive absorption. Surprisingly, the service center market showed positive absorption for the second year in a row, settling at 91.7 percent occupancy for the year end.

There were no new developments completed in 2008, as landlords struggled to retain tenants and conserve cash. Other than the delivery of a 150,000-square-foot building currently under construction in Shelby County, we anticipate much of the same for 2009. Despite these challenges currently facing our market, several significant transactions completed in 2008 meant that the market was certainly not stagnant.

Brookwood Pharmaceutical, a manufacturer and leading provider of surface modification and drug delivery technologies to the healthcare industry, acquired the former Saks corporate headquarters facility in the Lakeshore corridor. This 286,000-square-foot office and warehouse will receive an additional $30 million of capital investment. It is a prime example of Birmingham’s focus to retain and attract white collar industries. Belk was also able to sell the former Saks distribution facility in Steele, Alabama. This 171,000-square-foot facility was purchased by Rainbird and will serve as its manufacturing and distribution hub for the Southeast. One significant automotive-related transaction in 2008 was Sumitomo Electronics, a Honda supplier. The company leased approximately 140,000 square feet at Moody Commerce Park.

Although 2008 presented many challenges, Birmingham’s automotive sector remains a driving force behind industrial development. Honda has recently announced that in addition to the Ridgeline, it will also begin producing the Accord from their Lincoln, Alabama, facility. By re-tooling for the sedan, the company could open the door to other sedans or luxury vehicles being produced from the same plant, thus ensuring this facility will play an integral role for years to come. Mercedes has also confirmed a $290 million expansion to their Vance, Alabama, manufacturing facility. It is widely believed that this expansion will bring Mercedes one step closer to eventually producing a traditional automobile in addition to the SUVs and current R-class vehicles it currently manufactures in the surrounding area.

Birmingham continues to redefine itself through a changing economy and seeks to diversify by focusing on new service industries as well as biotech-related companies. This trend, along with the growing automotive sectors, will provide a solid economic base for a strong recovery. 

— John Coleman is an industrial broker at Birmingham-based Graham & Co.

Firm Unveils $200 Million Mixed-Use ProjectIn Mountain Brook

Mountain Brook, Ala. — Birmingham, Ala.-based Evson, a family-owned development firm, has submitted plans to the city of Mountain Brook for the $200 million Lane Parke of Mountain Brook Village mixed-use project. The development is located 3 miles from downtown Birmingham and sits adjacent to the Birmingham Zoo and the Birmingham Botanical Gardens. Samford University and the University of Alabama Birmingham are also minutes away from the site. Lane Parke is also close to Brookwood Medical Center and three other hospitals.

When complete, Lane Parke will encompass 210,000 square feet of retail space, 45,000 square feet of office space, residential units and a 75-room hotel. The entire development will be built to LEED certification, and green spaces, walking trails and water features will be prominent throughout the property. A two-phase construction schedule will commence when plans for the project are approved by the city.

The 27-acre property will replace the 63,000-square-foot Mountain Brook Shopping Center and the 276-unit Park Lane Apartments currently housed on the Mountain Brook site. During the first phase of the project, tenants in the shopping center — including the anchor, Western Supermarkets — will be relocated to the new development. In addition to commitments from these tenants, officials would like to lease three junior anchor spaces of 10,000 square feet to 20,000 square feet before breaking ground. “We’re very optimistic that the demand is there,” says Robert Jolly of Retail Specialists, a Birmingham-based firm that will be leasing the project. “There’s just never been an opportunity for this type of development in this city.” Jolly adds that Mountain Brook perennially makes Top 10 lists of affluent communities throughout the country, but the city lacks a key feature that’s usually found in those areas. “When you compare Mountain Brook to the other 10 communities, the other 10 have a luxury retail destination and Mountain Brook does not,” he says.

Even with the recession hurting retail sales, officials at Evson say this is the right time to move forward with the project. “Birmingham has proven that first-to-market retailers can succeed,” says Phil Martin, who is working closely with Evson on the project. Retailers like Saks Fifth Avenue and PF Chang’s initially were wary of entering the Birmingham market. “They have said Birmingham doesn’t have the draw that they need, but they’re all doing well.”

Evson’s strong standing in the community also means lenders hard hit by the recession may look favorably upon the project. After all, Evson has owned the Lane Parke site for more than half a century. “The family looks at this as not just another center,” Martin says. “This is where they’ve been for 50 years. This location is very special. This is the legacy.”

— Jon Ross

Birmingham Retail Market

The University of Alabama at Birmingham continues to be the most powerful and stable economic engine in North Central Alabama. The university offers the community high-paying jobs as both faculty and staff employees and an affordable and beneficial educational opportunity, while drawing patients and visitors to its world-class medical center from throughout the region, and in many instances, from all over the globe.

Approximately 12 years ago, Alabama embarked on a program to entice automotive manufacturers to the state. That program paid off first with Mercedes, then with Honda and Hyundai, which are all located in central Alabama.

Birmingham is at the center of this automotive triangle. With tens of thousands of jobs associated with the industry, Birmingham has been able to continue its manufacturing tradition with higher pay than the old iron and steel jobs of the city’s past. Despite the pressure on the automotive sector from the current economic downturn, Alabama-based manufacturers appear well-positioned to weather the storm and return to profitability. That bodes well for Birmingham, and that bodes well for Birmingham’s retail.

On February 5, 2009, Birmingham-based Bruno’s Supermarkets declared Chapter 11 Bankruptcy. Locally, the move surprised no one, but it did bring finality to the demise of the once powerful and iconic grocer. Although for most observers the demise appears to be yet another example of the inability of private equity firms, in this case Lone Star Funds from Dallas, to operate a highly nuanced business such as a grocery store, the reality for Birmingham is that some 4,000 jobs are imperiled and likely lost.

For different reasons, two Birmingham retail developers, Colonial Properties Trust and AIG Baker, are now largely out of the retail development business. For Colonial, the move is a response to Wall Street’s demand that the once diversified REIT become a multi-family portfolio manager and developer. This is the developer that is largely responsible for Target’s deployment in North Central Alabama. Colonial has also added approximately 3 million square feet of retail to the Birmingham market in the past 4 years. The credit default swap fiasco which swamped AIG has also killed AIG Baker’s equity partner. The community is watching carefully to see how this once powerful development juggernaut responds to its current financial setback. The likelihood is that Birmingham has lost its two most prolific retail developers.

As this article goes to press, General Growth Properties has declared Chapter 11 bankruptcy. The situation with GGP is of some significance to Birmingham because of its involvement in two area malls, Riverchase Galleria (co-owned with Jim Wilson and Associates of Montgomery, Alabama), which is not included in the bankruptcy filing, and Century Plaza. The former is a dynamic, super-regional mall at Interstate 459 and U.S. 31. The latter, located at the intersection of Interstate 20 and Oporto Madrid Boulevard, is largely dark; its remaining anchor, Sears, has announced plans to close this year. The health of the owner has a bearing on the continued well-being of the performing mall and the redevelopment of the non-performing one — both of immediate concern to local elected officials, neighborhood leaders, and of course, the affected retailers.

The current takeaway from a cursory look at Birmingham should be that this mid-market city of 1 million people has terrific economic anchors in education and medicine as well as potential in finance and manufacturing; however, the latter two are heavily dependent on a general economic recovery. With February numbers in, Birmingham’s unemployment is at 8 percent, double from a year ago. Overall retail market vacancy, although a difficult number to quantify, is at approximately 9 percent. That number could move toward 11 to 12 percent before a recovery can bring it back down to the relatively stable 6 percent of a year ago. Supposing such a recovery materializes in the next year, Birmingham should maintain a healthy retail environment fueled by a solid economic base. In the interim, significant downward pressure is being brought to bear on retailers and landlords, and that pressure only increases with mounting job losses and falling consumer confidence. The only safe refuge appears to be necessity retail, such as grocery anchored centers and deep-discount centers. The only seemingly bullet-proof retailer is Wal-Mart. No surprise there.

— Hugo Isom is a partner in The Shopping Center Group’s Birmingham office.

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