CITY HIGHLIGHT, MAY 2011

BIRMINGHAM CITY HIGHLIGHTS
Bill Pradat, Bryan A. Holt & Rich Vanchina

Birmingham Office Market

Birmingham’s office market experienced modest activity in 2010 and is continuing to show signs of a gradual recovery in 2011.  Direct occupancy for Birmingham’s office market is currently 89.1 percent. With the continued marketing of sublease space, overall occupancy is around 84.6 percent.  Rental rates have held steady in most office submarkets with an average weighted rental rate of $19.25 per square foot for the overall Birmingham market and $21.24 per square foot for Class A space.

Birmingham’s Central Business
District (CBD) and Midtown submarkets have historically fared better than Birmingham’s suburban submarkets and continue to maintain the highest occupancy rates in the market, particularly in Class A space.

The CBD has remained stable throughout the recent recession and currently has an overall occupancy rate of 91.5 percent and 93.2 percent occupancy in Class A space.

The Midtown submarket has consistently demonstrated a high level of demand among potential office tenants, which is confirmed by an overall occupancy rate of 91.6 percent and 92.4 percent occupancy in Class A space. Available space in the Midtown submarket is in high demand due to its prime location between the CBD and Birmingham’s suburban markets as well as the proximity to preferential living areas.

While all of Birmingham’s suburban submarkets have softened in recent years, the 280/Southern submarket has been the most impacted due to the amount of available sublease space.  Direct occupancy for the 280/Southern submarket is currently 88.9 percent. The overall occupancy for this submarket, factoring in available sublease space, is 77.6 percent.  The amount of sublease space in the market has also impacted rental rates, continuing to push rents lower. The average rental rate for the 280/Southern submarket is $21.27  per square foot, a decrease from $21.78  per square foot in the first quarter of 2010. These conditions have created an opportune time for tenants to negotiate favorable lease terms from landlords at a lower rental rate.

Occupancy increased in the Hoover/Riverchase and Vulcan/Oxmoor submarkets from year-end 2010 to the first quarter of 2011, with occupancy rates of 83.9 percent and 76.2 percent, up from 82.5 percent and 75.4 percent, respectively. These submarkets have primarily been affected by several under-utilized existing office properties, which are typically older, Class B buildings. Over the long-term, this region’s continued residential and retail growth should translate into positive office growth.

While there is currently no development activity taking place in
Birmingham’s office market, it is possible one or two new buildings will be developed in 2011 or 2012 in the Midtown submarket. At present, there are several spec office buildings being marketed. However, due to the current restrictions on financing, a significant amount of pre-leasing must take place before any project can be started.

The Birmingham market is beginning to see improvements in both consumer confidence and consumer spending. As economic conditions continue to improve, banks will become more active in lending. We anticipate these market conditions will lead to a gradual increase in office leasing activity throughout 2011.

—   Bill Pradat is president of Birmingham, Ala.-based EGS Commercial Real Estate

Birmingham Retail Market

It’s not 2006 by any means, and the developers in town (there are still a few remaining) may not feel so bearish, but most area retail brokers will tell you things are positive for Birmingham. Xcelligent estimates a 7.7 percent vacancy rate, considerably better than the third quarter of 2009 when area experts had it pegged at just over 11 percent. The bankruptcies of just a handful of chains left a 1.1 million-square-foot hole in some of the metro’s best retail corridors. Slowly but surely we are climbing out of that hole.

Colonial Properties is planning a two-story Target at Colonial
Brookwood Village as part of the redevelopment of a portion of this multi-use project. Beyond that, power center development as we have known it in Birmingham is not going to return anytime soon. Since 1986, there have only been two significant retail developments not anchored by Wal-Mart or Target. Those days are over as both discount brands reached their market saturation point.

In November 2010, Daniel Corp. opened Grand River, a 300,000-square-foot outlet center near the Bass Pro Shops in Leeds, east of the
Birmingham CBD. The project has been well received and plans are underway for a second phase. The market point is underserved for restaurants, but we believe traditional retail will be slow to come to this area.

Thankfully, there are positive signs in retail outside the realm of new development. Small shop rents are ticking up for second-generation space in many sub-markets because healthy chains are expanding again and there are no new projects on the drawing board. Casual dining chains were the first category to hit the skids but they are sniffing around the market again too. Lack of new power center development is making those sites hard to come by. We are seeing franchisee activity picking up in all categories. Franchisors are offering multi-unit discounts, many times to unemployed or underemployed people who want to return to the job market as entrepreneurs.

The darling of Birmingham retail is The Summit, a lifestyle center developed by Bayer Properties at US 280 and I-459. The project never seems to stop reinventing itself. After completing Phase VI in 2011 and adding the likes of Flip Burger, Chuy’s and Juicy Couture, Bayer followed up by signing a Toys “R” Us/Babies “R” Us combo for the former Bruno’s box. At a recent local CREW event, Libby Lassiter, executive vice president of retail and leasing for Bayer, reported the company has seen a 270 percent increase in deal flow over last year.

Publix supermarkets continues to develop stores, but that pace has to slow as it is running out of sites with 18 stores. It is likely Wal-Mart’s Neighborhood Market concept will add new units and Winn Dixie may also bring its new “fresh and local” strategy to existing units in the Birmingham area.

If you are a nomad developer looking for greener pastures, bring a new anchor tenant with you to
Birmingham or keep wandering. For the rest of the retail professionals in the Birmingham-Hoover Metro Area, 2011 looks like the best thing we’ve seen in quite some time.

—   Bryan A. Holt, CCIM, is a principal with Birmingham, Ala.-based Southpace Properties, Inc

Birmingham Industrial Market

Occupancy rates of industrial real estate declined slightly in the Birmingham market last year, but 2011 appears to have us on the rebound. Leasing activity in 2010 mostly consisted of renewals, with just a few new tenants entering the market. The overall occupancy rate of the 16 million square feet of multi-tenant industrial space still continues to hover around 80 percent, but recent activity in the market suggests that absorption rates will rise this year. The high vacancy rates did create a slight downward pressure on asking rents in 2010, but space was not discounted as deeply as one would have expected. Also, a large portion of sublease space was removed from the market in 2010, which was good news for landlords.

Three major developments that will positively affect Birmingham’s industrial brokerage community will be completed in the Southwest submarket over the next 12 to 18 months. The first is Norfolk Southern
Railroad, which is scheduled to open a 316 acre, $112 million intermodal hub in McCalla in 2012. Delivery of this project should positively affect occupancy rates in existing distribution buildings, as well as provide a spark for new industrial development in the Southwest submarket. Also, Mercedes announced it will move production of its popular C-Class sedan for North American markets, to the Vance plant. The expansion will require a $290 million investment and create approximately 1,000 new jobs by 2014. This project should attract additional Mercedes suppliers, as well as trigger expansions for the ones currently in the market. Finally, Dollar General is building a 1 million-square-foot distribution facility to service its retail stores in Alabama, Mississippi, Georgia and the Florida panhandle. This $60 million development validates Birmingham as a great place to do business to other large corporations contemplating a move to the area.  These new developments can be attributed to the fact that
Alabama has long been recognized as having one of the most favorable business climates in the country, due to its reasonable state and local taxes, workforce skills, transportation and utility infrastructure. Also, the combination of available space and strategic central location, make Birmingham a prime spot for facility expansion or relocation.

Leasing activity in the first quarter of 2011 strongly suggests that the Birmingham market is headed towards recovery. In fact, according to
Xcelligent’s first quarter market report, year-to-date, Birmingham has already absorbed over 300,000 square feet of vacant industrial space. The road to a full recovery will still be a long and arduous process, but the local brokerage community is encouraged by the leasing activity that has occurred
Birmingham’s industrial market already in 2011. In the foreseeable future, Birmingham will likely remain a tenant’s market, but landlords are slowly but surely regaining the negotiating leverage they had in past years.

— Rich Vanchina, CCIM, SIOR, is a principal with Birmingham, Ala.-based Southpace Properties, Inc

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