FEATURE ARTICLE, NOVEMBER 2011

STATE OF THE MARKET: ALABAMA
A look at Alabama’s commercial real estate market across the state.
Savannah Duncan

To say that Alabama has seen the worst of times would be a fair statement. During the past two years, Alabama has had more than its fair share of struggles. From the oil spill in 2010 that impacted the Gulf Coast to the tornados that touched down in Birmingham and Tuscaloosa in April this year, the commercial real estate market has some obstacles to overcome to reach pre-recession levels.

The U.S. Bureau of Labor Statistics reported that Alabama’s unemployment rate decreased slightly, from 9.9 percent in August to 9.8 percent in September. In spite of the change, it remains higher than the national average, which is 9.1 percent.

“We continue our efforts as a state to prosper and go forward,” says Scott McClain, managing broker of Huntsville-based Coldwell Banker Commercial McClain Real Estate. “We’re doing better than we have in some years, but Alabama continues to remain challenged on many fronts.”

In general, the commercial real estate market is flat in some areas while starting to slightly improve in others. The multifamily sector is leading the way. Office and retail are not experiencing a ton of activity in some cities and improving slightly in others. The trouble spot is industrial because of an abundance of available space and a lack of absorption.

“Most Alabama markets aren’t volatile, but we do have our ups and downs,” says William Silsbee, senior vice president of Grandbridge Real Estate Capital’s Birmingham office.

Part of the reason multifamily is prospering is that lending across the state for multifamily is better than for any other sector of commercial real estate. “The agencies [Fannie Mae, Freddie Mac and HUD] are very dominant on the multifamily side,” says Chad Hagwood, executive vice president of originations of Beech Street Capital’s Birmingham office. “If there is such thing as low hanging fruit in the investment and lending environment, it’s certainly multifamily.”

“Lenders are investing in real estate because the yields are there,” adds Silsbee. “That could change, but [so far] it continues to be the same.”

In Birmingham, Huntsville, Mobile, Montgomery and Tuscaloosa, there is a distinctive aspect to each city that drives the commercial real estate market. Southeast Real Estate Business magazine spoke with brokers and lenders to assess the current state of the market.  

Birmingham

In Birmingham, the multifamily and medical office markets are strong with sales and new developments occurring. Traditional office space is flat with a few small leases and sales. Some distressed retail centers have sold in Birmingham, but a lack of consumer confidence is still putting pressure on the market. Additionally, a large amount of vacancy is stalling the industrial market.

“The fundamentals in Birmingham are generally improving,” says Hagwood.

Medical office is one of Birmingham’s strongest sectors because of the presence of major hospitals in the city, including St. Vincent’s, Baptist Health System, Brookwood Medical Center, Trinity Medical Center, The University of Alabama at Birmingham Health System and Cooper Green Mercy Hospital.

“There are major hospital names with several different locations in Birmingham,” says Eric Rogers, partner of Progressive Properties’ Birmingham office. “There are a lot of opportunities to create not only a traditional doctor’s office, but also all of the other services that go with medical real estate.”

In spite of the strength of medical office, traditional office space has experienced hardly any leasing activity and few sales.

“A lot of tenants are staying put,” says Dean Nix, senior vice president of Birmingham-based Harbert Realty Services. “It’s hard to get tenants to move unless their lease is up and they know they can make a much better deal somewhere else.”

Alabama Telco Credit Union purchased the 57,000-square-foot former Habert Corp. headquarters in Riverchase in July.

One of the largest office sales this year occurred in July when Alabama Telco Credit Union purchased the 57,000-square-foot former Harbert Corp. headquarters in Riverchase. There is also talk of a single-tenant build-to-suit that Birmingham-based BBVA Compass may build to accommodate its new headquarters, says Nix.

The multifamily sector has started to have some sales, as well as new development occurring. Bo Flurry, vice president of investments and director of the national multifamily group of Marcus & Millichap’s Birmingham office, says the velocity of sales has accelerated in 2011. The majority of sales have been REO, lender-owned or short sales transactions, but there are some stabilized deals that are starting to occur.

“There is talk of a couple of projects in town that should get underway in 2012,” says Flurry. “Once the properties are built, they will lease up because the Class A market in Birmingham is doing well. Developers are saying the lenders are opening up and the equity is there.”

The accessibility to capital on the multifamily side has been one of the factors sparking new development in Birmingham.

On the retail side, Flurry says sales are occurring on opposite ends of the spectrum with distressed sales of high-quality assets trading at healthy prices. There is some development, but it’s mostly small, niche retailers or restaurants, which are actually strong performers in Birmingham.

“If you drive through any of the big developments in Birmingham on a Friday night, they are packed,” says Rogers. “High-end restaurants may be suffering, but middle-of-the-road restaurants that have a great product are doing well. We have an increased demand for [those kinds of restaurants].”

Hagwood says part of the problem is people just aren’t spending money. “Retail numbers are a direct reflection of the stagnant economy and high unemployment rate,” he says.

The sector that is still struggling the most in Birmingham is industrial. Around the time the recession hit, there was some industrial development that came on line in Birmingham that has remained empty. However, factors like Mercedes’ recent announcement that it would invest $2 million in its Alabama plant between Tuscaloosa and Birmingham should help to fuel the industrial sector.

“The industrial market is experiencing vacancy around 20 percent,” says Mark Byers, executive vice president of Birmingham-based EGS Commercial Real Estate, a Cushman & Wakefield Alliance member.

Looking ahead, Nix anticipates that the commercial real estate market will continue at the same pace for the next 6 to 12 months, unless the city is able to attract new businesses.

“We don’t see a lot of dips, but we don’t see a lot of peaks either,” says Nix. “We’re fairly steady, but we could certainly use an influx of new businesses into this market.”

Byers adds, “There are some good deals in the pipeline and it seems like we’re going to have a better next 12 months than the past 12 months.”

Huntsville

The commercial real estate market in Huntsville differs from the rest of the state because of the Base Closure and Realignment (BRAC) initiative, which moved 4,700 direct military and civilian government workers and embedded contractors to Huntsville, where Redstone Arsenal, one of the U.S. army bases, is located. As a result, most commercial sectors are holding steady and even improving slightly with signs of potential growth in coming years.

“In Huntsville, we are accustomed to having a vigorous and successful economy,” says McClain. “That’s been dampened in this great recession. However, when we visit our colleagues and other markets in the Southeast, it is exceedingly clear that Huntsville is doing much better than most other places in the country.”

Huntsville has a large presence in the defense industry, so federal spending drives its economy, says Bart Smith, managing broker of Graham & Co.’s Huntsville office. “We are in a wait-and-see mode,” he says.

BRAC relocations, which were completed in September of this year, have added thousands of jobs to Huntsville, and McClain anticipates an additional 10,000 new jobs will be created within the coming months.

“Huntsville is still showing signs of growth whereas [other cities] are struggling because of Redstone Arsenal and BRAC,” says Douglas McCullough, vice president of brokerage operations at NAI Chase Commercial’s Huntsville office. “All of the army’s material command has been moved to Huntsville, so that has insulated us.”

As a result, there has been a slight uptick in office and multifamily activity during the past three months. “Deals are happening, but the deal time seems to have grown exponentially in length,” McCullough says. “Occupancy rates are beginning to bubble up a little bit.”

Some office development is underway, but the only new development CoStar noted as being completed in the last 12 to 18 months was a 12,522-square-foot medical office building.

A rendering of the proposed retail space for the 4.6 million-square-foot Redstone Gateway in Huntsville.

There is a large office property under construction adjacent to Redstone Arsenal, although a firm full completion date has not been announced. Corporate Office Properties Trust of Maryland formed a joint venture with Jim Wilson & Associates in March 2010 to develop Redstone Gateway, a large office park that will feature 4.6 million square feet of office space, plus retail space and a hotel. The federal government, which owns the land, has signed a long-term lease with the joint venture.

The retail and industrial sectors also have remained steady in Huntsville because of the increase in jobs. “Retail does well when people have jobs and our unemployment rate is still at a manageable level, so retail has been steady,” says Smith. “The industrial sector has also benefitted from some BRAC-related activity that is backfilling some of the automotive space we lost. We’ve had some contractors take those buildings, so that helps.”

A rendering of the 18-acre Constellation, a mixed-use development in Huntsville.

There are additional projects in the pipeline that bode well for the future of Huntsville. Constellation, an 18-acre, mixed-use development, opened a new 149-room SpringHill Suites by Marriott in June this year. Upon completion, the property will contain two hotels as well as office, retail, restaurant and possibly residential space, says McClain, who is the developer for the project. Another Marriott is expected to break ground on the site in January 2012, and McClain anticipates either a restaurant or some retail space will be close behind.

Another positive sign for the city moving forward is the federal administration’s recent approval of the heavy lift rocket, which will be built at the Marshall Space Flight Center in Huntsville.

“It bodes very well for Huntsville’s economy where the rocket will be designed,” says McClain.

With these couple of projects in the pipeline, Smith anticipates steady growth during the coming year.

Mobile

In Mobile, being a port city has been the main driver of the commercial real estate market. The office and industrial sectors are recording some leasing and REO sales, but as a whole activity has been relatively flat.

“Smaller, light industrial and office leasing has been slow, but there has been some activity,” says Adam Metcalfe, vice president of Mobile-based Metcalfe & Co. “Retail is struggling and multifamily is pretty good. There are people buying bank-owned properties, but that’s really all the sales and leasing activity we are seeing.”

Waterfront industrial properties are thriving because of ship building, and some steel-related industries have relocated to Mobile because of the ThyssenKrupp steel plant, says Metcalfe.

One of the largest office lease transactions to occur in the last year took place in August 2010 when BankTrust signed a 72,000-square-foot lease at the 284,000-square-foot GM Building, which was renamed the RSA-BankTrust Building following the transaction.

“BankTrust’s lease was great for Mobile and great for that office building,” says John Toomey, president of Mobile-based John Toomey & Co. “We have some other deals that we’re working on right now. [The office market] is not as good as it used to be, but the phone is ringing.”

In spite of the office leasing activity that’s occurring, Toomey says three office buildings have gone into foreclosure in Mobile during the last six months because the owner didn’t want to refinance and occupancy was down.

“We just don’t have the absorption to replace tenants who are closing up shop in town,” he says. “We’re having to make deals to attract new tenants and keep old tenants.”

Matt White, president of Mobile-based White-Spunner & Associates, says retail occupancy has been favorable. Of the 1 million square feet of retail space his company manages and leases, 80 percent is filled. An empty big box accounts for 10 percent of the remaining 20 percent, and White anticipates it will fill within a year and a half.

The retail market in Mobile echoes some of the trends in other cities in that the majority of sales have been REO. Earlier this year a group of local investors purchased the bank-owned, 43,000-square-foot The Commons of Orange Beach, located on Canal Road and Highway 161, for $3.4 million.

During the coming year, Mobile’s retail and industrial market are poised for some growth.

Toomey believes the industrial sector will be a strong asset to Mobile in the future. “Ship building is strong because we are a port city, and we are big in railroads and shipping,” he says. “There’s opportunity down the road [with these industries] that hopefully we’ll capitalize on.”

White also adds that there are some out-of-town developers starting to look at doing some big-box retail developments in Mobile.

Montgomery

In Montgomery, the state capital, the office and multifamily sectors are performing well, with retail and industrial still struggling to bring in new tenants.

“Multifamily is performing well because of the uncertainty of the residential housing market, low consumer confidence, high unemployment rates and the inability of consumers to qualify for mortgages,” says Jim Wilson, III, CEO of Montgomery-based Jim Wilson & Associates.

As a result, developers are starting to look at developing some new multifamily properties.

“Five hundred apartment units are being considered downtown,” says Jerome Moore, president of Montgomery-based Coldwell Banker Commercial Moore Company Realty.

Office leasing and sales are on the rise, although the majority of the sales are REO and the leases are primarily tenants moving from Class B to Class A properties. 

“There’s still a rush to quality in the office market,” says Moore. “Landlords are taking Class A properties and reducing their price to attract tenants from Class B properties. Tenants will always choose Class A properties over the rest of the product. There is high vacancy in Class C properties.”

Grant Sullivan, co-owner of Montgomery-based Sullivan & Wills Real Estate, says investors have been buying distressed properties with plans to hold them until the market starts to rebound. This trend is occurring with office and industrial properties. 

Although office and multifamily are seeing some activity, retail has still been relatively slow. “Retail is struggling due to internet sales, tightness of personal credit, and downsizing and bankruptcies [of big boxes] such as Linens ‘N Things and Circuit City, which have not been replaced in the market,” says Wilson, III.

Landlords are searching for creative solutions to absorb the empty big box space, says Moore. Retail leasing in Montgomery is a tenant’s market, and the leasing deals have reflected that, adds, Wilson III.

Hyundai is investing $173 million in its Hyundai Motor Manufacturing Alabama plant in Montegomery to expand the facility to produce the 1.8 liter Nu engine. Photo courtesy of Carol M. Highsmith.

In addition to the 500 multifamily units proposed for downtown, 50,000 square feet of retail space is planned as well, including a grocery store, which Moore says the area needs.

Despite a flat industrial market at the moment, Hyundai announced in May of this year that it is investing $173 million in its Hyundai Motor Manufacturing Alabama plant to expand the facility in order to product the 1.8 liter Nu engine, which will create 214 new jobs. Production at the plant is scheduled to begin in March 2012.

“Although the industrial sector is soft, Montgomery is poised for great growth,” says Moore.

Tuscaloosa

Tuscaloosa’s commercial real estate market this year has been affected by two factors, the tornados in April and growing enrollment at the University of Alabama. The multifamily sector continues to be a strong performer, while other types of commercial real estate are experiencing some short-term absorption. 

“With [student enrollment] higher than 30,000 students, multifamily projects keep coming on line,” says Robert Shaw, commercial broker at Tuscaloosa-based Hamner Real Estate. “With the tornados and some of the supply taken out, that has accelerated even more.”

Approximately 2,000 beds are either under construction or in the development pipeline right now, says Sam Brewer, principal of Progressive Properties’ Tuscaloosa office. “We have a lot of out-of-town developers coming in to do Class A, 300- to 500-unit garden-style developments,” Brewer says.

The retail and industrial sectors were greatly affected by the tornados. Several warehouses and retail properties were destroyed, leaving many companies and retailers looking for space to operate while they rebuild.

“Companies are filling up space short-term,” says Shaw. “They might want to go back to where they were. After operating somewhere for 9 months to a year, they might decide to stay where they are.” 

Shaw says he is starting to see some national retailers that currently don’t have a presence in the market look at space in Tuscaloosa.

Rogers adds, “There is high demand for what vacant space we have left in our retail buildings.”

Although office developments remained mostly untouched by the storm, Shaw says he has closed a few office deals during the last three months. A couple of years ago, four tenants moved out of the 100,000-square-foot Bank of Tuscaloosa Plaza office complex, which drove up the vacancy rate in Tuscaloosa. However, Shaw says some of it is starting to be absorbed, which should help the market improve.

Another plus for Tuscaloosa is that student enrollment should continue to climb. Roger anticipates that enrollment will reach more than 35,000 students during the next 10 years.

Looking Ahead

Although the commercial real estate market in Alabama is relatively flat at the moment, there are some positive signs that it will eventually recover from the recession.

“The core markets are very different,” says Silsbee. “Not any one city is looking for the same thing to grow.”

Still, each market would benefit by job growth, consumer confidence and a stabilized economy on a national and local level to help boost real estate fundamentals overall.

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