SOUTHEAST SNAPSHOT, OCTOBER 2010

Birmingham Industrial Market

Birmingham’s multi-tenant industrial market has seen modest activity in 2010, primarily due to the difficult economic conditions and extremely tight credit markets. Direct occupancy is currently at 80.5 percent — roughly twice the national average. With the continued marketing of sublease space, overall occupancy is around 75.8 percent. Birmingham’s current industrial market ranks 62nd most vacant out of 63 markets tracked by Cushman and Wakefield. These occupancy rates reflect the difficulty in today’s economy in this market.

Some of the challenges are due to contractions in the construction industry, particularly for suppliers in that industry. There have also been consolidations among automotive suppliers. However, the fallout from this industry segment did not affect the Birmingham area as harshly as anticipated.

Other reasons for the lack of activity in the industrial market come from issues sparked by the current economic downturn. When a buyer gains the confidence to enter the market, there is typically a significant delta between the buyer’s bidding price and the seller’s asking price. Sellers are hoping to recover their initial investment in the real estate and purchasers are looking for bargains. This circumstance, along with the financing difficulties and the fact that most companies have excess capacity in their current real estate infrastructure, is contributing to the lack of deal velocity in Birmingham.

While the lack of transactions paint a challenging picture for landlords in Birmingham’s industrial market, tenants should view this time as a unique opportunity to secure their long-term space needs at a significantly reduced price. We are seeing the return of incentives to the marketplace for both tenants and tenant representatives. Free rent, reduced rates and premium fees are being offered by several landlords as they work aggressively to secure new tenants and renew existing ones.

In Birmingham and throughout Alabama there is very little development activity. Speculative industrial development is non-existent and is likely to remain that way for the foreseeable future. The economy, financing and lack of demand are all contributing to this deficiency. Until existing space is absorbed and the overall rate of occupancy climbs from its current mark of 75 percent to closer to 90 percent, industrial speculative development is not anticipated.

The only development that could occur will be from build–to-suit projects or the possibility of a developer leveraging a build-to-suit opportunity to construct a small percentage of additional speculative space. However, in this environment, even that is unlikely given the amount of available space currently in the market.

Historically, industrial development in Birmingham has been accomplished primarily by local developers. At one time, Pannatoni VanValkenburg and Trammel Crow each had a limited development presence in Birmingham. Overall, the Magic City has traditionally been developed by local developers who know it best and who have delivered product to the market at a measured pace. It will be these developers who will begin to expand the market as occupancy increases. Given the size of the Birmingham industrial market and the lack of a presence of national developers, the opportunities which will exist will be recognized and acted upon by these local entrepreneurs.

When the market does begin to turn, the areas for development in Central Alabama will continue to be around the perimeter of Birmingham. North and east of Birmingham are challenged by difficult topography and offer little activity that might entice a developer to incur risk. In south and southwest Birmingham, there are market influences that will lead a developer to these areas.

The southern submarket of Birmingham will continue to develop because of its access to Interstate 65 (Birmingham’s primary north-to-south interstate corridor), the availability of relatively level land (although the supply is limited), a favorable business tax structure and the current demographics. Abundant warehouse and distribution space is available today in this submarket, but, as the market heals because of the reasons mentioned above, the area will begin to experience new development activity.

The southwest submarket will experience renewed focus not only because of the activity of automotive suppliers, but also the construction of Norfolk Southern’s intermodal facility. The 2012 completion of this facility will bring distribution and manufacturing companies seeking lower shipping costs. Constructing this facility is a game changing event for the city’s warehousing and distribution market.

As we meet with companies in Birmingham, our conversations are beginning to include dialogue about growth. Whether it is increasing inventory, taking on additional product lines or having created efficiencies that are now resulting in positive bottom line results, there seems to be a level of assurance building. Companies are gaining confidence, but hesitancy remains for significant moves. Surviving companies are looking to renew their leases or lease different space to accommodate changes made within the company or take advantage of opportunities in the market to reduce lease costs. Although Birmingham continues to experience challenges due to the economy and its political condition, the area’s broad distribution base, diversified economy and central geographic location to the Southeast continue to make our city a desirable and viable market for continued growth in distribution and warehousing.

— Mark D. Byers, SIOR, is an Executive Vice President with Birmingham, Alabama-based EGS Commercial Real Estate, Inc.

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