Birmingham’s renaissance has been underway for several years now, but it has taken some time for the rest of the world to find out. This year they started paying attention.
The opening of Railroad Park, Regions Field, the Iron City event venue and now the recently restored Lyric Theatre have made it clear that there are intriguing things going on in downtown Birmingham. Lonely Planet, the respected travel information source, included Birmingham in its “2016 Best in the U.S.” list, asking, “Could Birmingham be the coolest city in the South?” Food media giant Zagat named Birmingham “America’s No. 1 Next Hot Food City” and the Travel Channel chose Birmingham to its list of “11 Next Great Destinations.”
Foodies and fashionistas are not the only groups showing interest in Birmingham. Multifamily investors have been building new developments and acquiring and repositioning existing properties over the past few years. This activity reflects national trends — investors looking for alternatives to top-tier markets and Millennials gravitating to an affordable urban core. Nonetheless, with its burgeoning downtown food and arts scene, Birmingham has earned a second look.
Strong Year for Downtown
Developers liked what they saw and acted accordingly. In 2014 and 2015, plans for thousands of new units were set in motion, and many of these projects have been completed in recent months or are expected to be completed later this year.
Already entering or about to enter the market are the 236-unit Venue at the Ballpark, the 70-unit Iron City Lofts and the 224-unit LIV Parkside. The 36-unit Phase I of 20 Midtown, developed by RGS Properties and Scott Bryant & Co., opened earlier this year, and the 80-unit Phase II is expected to welcome renters in May. Bayer Properties is scheduled to unveil the renovated Pizitz Building, with 145 apartments, office space and a public urban market, in late 2016.
Chad Thomas Hagwood,
Capital One Multifamily Finance
These five projects together account for almost 800 new units of the 1,300 that real estate research firm Reis expects to be delivered in Birmingham during the year.
Absorbing this many units may prove to be an ambitious goal for Birmingham. It’s clear that many developers have begun to hit the pause button, and the only developer expected to break ground downtown in 2016 is the Texas-based Bomasada Group, which plans to start on the 251-unit Metropolitan in Lakeside later this year. Altogether, Reis projects only 380 units entering the market in 2017 and later.
Cause for Cautious Optimism
The signs are good that the downtown multifamily experiment will succeed. Although the city’s economic performance is not optimal, there’s a reshuffling of the Birmingham economy that bodes well for the future of downtown. In 2015, jobs moved from steel and manufacturing to professional and business services, whose employees fit the demographic for the downtown units. Ironically, standout job growth in the construction sector — some 12.3 percent last year — was fueled primarily by multifamily development downtown.
Pent-up demand — thanks to the delivery of only 52 units in 2015 — also points to the success of the downtown multifamily experiment. Reis projects new household formation will support the absorption of 667 units per year over the next two years. Unsatisfied demand from last year and Millennials moving into center city should boost the leasing pace for the new downtown apartments. Vacancy levels may rise slightly this year, but are likely to recover lost ground by the first quarter of 2017.
In fact, developers are likely to feel heartened enough to start planning another modest round of construction, beginning in 2017 and 2018. Firms including Infinity Property & Casualty, Grey Construction and Lewis Communications are also building headquarters downtown, and many of these workers are likely to want to live nearby.
Valuations Will Remain High
This could be a very good year for existing owners. The big cities have been flooded with cash, and smaller investors and high-net-worth families in particular have turned to secondary and tertiary markets for the kind of cap rates they require.
But here, too, the valuations are beginning to creep up. Birmingham sellers are seeking — and receiving — top dollar for their properties. As long as primary markets remain hot, tertiary markets like Birmingham will continue to see a boost in activity.
Big Picture for Birmingham
Birmingham is a fair representation of secondary multifamily markets throughout the Southeast. It’s a stable market, rent growth is expected to maintain the 2 percent pace it’s kept over the last five years and the vacancy rate should continue at approximately 6.7 percent for the market as a whole.
At the same time, Birmingham is a market in flux and one that is impacted by activity in primary cities. A small increase in interest rates, for instance, can have big reverberations.
As a result, it makes good sense to partner with lenders that are positioned to understand the connections between large and small markets, and have a wide range of financing options at their fingertips. Most importantly, investors need lenders that have the insight to structure their transactions in ways that best advance borrowers’ business plans and the flexibility to time their transactions to the borrowers’ needs.
— By Chad Thomas Hagwood, Senior Vice President, Capital One Multifamily Finance. This article originally appeared in the April 2016 issue of Southeast Real Estate Business.