SOUTHEAST SNAPSHOT, MAY 2012

Birmingham, Alabama Office Market

Pradat

Alabama’s economy made modest improvements in 2011 and continues to rebound from the damaging effects of the economic recession. While obstacles remain, we anticipate that commercial real estate will experience steady growth in 2012 as Birmingham and the state of Alabama continue to regain solid economic footing. The results of an economic cycle show up in commercial real estate at the tail end of the cycle, therefore the negative effects experienced by the Birmingham market during 2011 were primarily caused by the real estate market catching up to the business decline that occurred in 2010.

Unemployment remains a factor in the recovery process for the commercial real estate industry. The state of Alabama continued to make modest gains in employment in 2011, with the pace of those gains increasing during the second half of the year. The unemployment rate for the state was 8.1 percent, while the unemployment rate for metropolitan Birmingham was 6.8 percent, which is significantly below the national unemployment level of 8.5 percent. As the employment picture continues to improve both locally and nationally, consumer confidence should improve, as should commercial leasing and sales activity.

The Birmingham office market ended 2011 with negative absorption of 386,538 square feet, a further decrease from 2010 which ended with negative absorption of 117,561 square feet. The occupancy rate for 2011 was 87.6 percent, down slightly from 89.9 percent at the end of 2010. Rents held steady in most submarkets with an average weighted rental rate of $19.44 per square foot for the overall office market and $20.91 per square foot for Class A space.

The majority of negative absorption during 2011 took place in the central business district (CBD) which had negative absorption of 286,458 square feet. Direct occupancy for the CBD was 87.4 percent, down from 92.9 percent in 2010. The major contributor to this decrease in occupancy was the Regions Plaza building, an older, vacant 211,000-square-foot building, which was listed on the market as multi-tenant space for lease in the first quarter of 2011.

The Midtown submarket continues to maintain Birmingham’s highest occupancy rate at 91.3 percent, with 93.0 percent occupancy in Class A space. This is a slight decrease from 2010, which ended at 93.4 percent in total occupancy. The decrease in occupancy for the Midtown submarket was primarily due to several large vacancies, which occurred due to tenants vacating or downsizing their office space.

A positive for the Birmingham office market was the continued decrease in the amount of available sublease space. At year-end 2011, the amount of available sublease space in the Birmingham office market had decreased to 658,593 square feet, as compared to 810,756 square feet at year-end 2010. This brings the overall occupancy rate for the Birmingham office market — including both direct occupancy and sublease space ­— to 83.8 percent.

In addition, there has also been virtually no new office construction in the Birmingham market. While many larger markets have endured the harsh effects of overly aggressive development, the conservative approach of Birmingham’s local development community will continue to have a positive impact on overall occupancy for Birmingham’s office market.

— R. William Pradat, Jr., SIOR, is president of EGS Commercial Real Estate in Birmingham.

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