Birmingham Construction Surge Gives Tenants Bargaining Power

Commercial development is picking up speed in the Birmingham market, but there’s even more action in the industrial sector, says a CoStar Group report.

Atlanta-based development company Third & Urban recently revealed plans to turn an abandoned warehouse in downtown Birmingham into a mixed-use site for commercial space and apartments. The warehouse, just blocks from Railroad Park, sold for $3.9 million last summer.

It’s the sort of movement that’s now regularly tracked by CoStar Group, a $1 billion research company headquartered in Washington, D.C. Brad Raber, an Atlanta-based CoStar analyst, says the Magic City is moving up in the $17 trillion commercial real estate industry. His findings include:

  • Birmingham office construction, which lagged the national trend for five years, is now back to historical averages, generating vacancies that give tenants more negotiating power.
  • On the residential side, Birmingham rent is vastly more affordable than most places, averaging just over $875 per month. Income growth has easily outpaced rent growth since 2014.
  • New class A buildings are offering concessions — up to half a month’s rent — to better compete with existing properties due to a building surge.

“Birmingham is a really interesting market right now, ” says Raber. “The best story is in the industrial market. Birmingham has really never seen vacancy this low. We’re starting to see a lot of action from national tenants coming into the metro. That’s also brought in a lot of investors who see a really tight market in Birmingham, a lot of good deals available.”

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Alabama’s historic rehabilitation tax credits have led to many pre-war office buildings in downtown Birmingham being converted to multifamily units, greatly increasing the city’s cool factor, Raber says. “I was born and raised in Atlanta, and, unfortunately, we’ve knocked over most of our old buildings. I’m really optimistic that as the momentum gains on the multifamily side that it’s a more desirable place for higher-end businesses to reclaim the city center.”

The flip side of all that development, Raber says, is a vacancy rate for multifamily housing being at 9 percent now in Birmingham, while the national average is closer to 6.5 percent.

“We’re seeing some of first properties really push, say, two dollars a square foot, which was pretty much unheard of even a few years ago in Birmingham.”

For that to improve, Birmingham will have to attract and retain more high-end growth drivers in the job market, such as technology and medical innovation companies that pay top wages to employees more inclined to rent than buy.

There’s also the millennial factor, the analyst says. Studio apartments didn’t much exist in Birmingham until recently, when developers began targeting the millennial demographic, a group willing to pay a higher price for the right location, even if it has a smaller bedroom.

“Birmingham is really holding its own in terms of showing both restraint on the capital side and not doing the overbuilding that comparable metros like Nashville have done. I’m really bullish on this metro, ” Raber says.

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