When comparing Birmingham’s industrial market to other major cities in the Southeast, “The Tortoise and the Hare” comes to mind. Birmingham has had slow and steady progress — not to say that our sister cities have periods of laziness and napping. Birmingham’s current pace of activity is more the norm and thankfully the trends remain positive with 2016’s transaction numbers actually tilting in the direction of a “hare-like” pace.
Occupancy rates for the 15 million-square-foot, multi-tenant industrial market eclipsed 90 percent for the first time since 2005. We had positive absorption of over 400,000 square feet with just under 1.5 million square feet of inventory remaining. During 2016, 12 new lease transactions of 50,000 square feet and larger were completed, eight of which were automotive related. These 12 transactions compare to seven and eight in 2014 and 2015, respectively, which is a strong increase.
Jack Brown SIOR, Graham & Co.
Leases of note include 270,600 square feet to a third-party logistics provider for Mercedes-Benz; 240,240 square feet to Grupo Antolin, a Spanish-based supplier of interior parts for Mercedes-Benz; and a 225,496-square-foot lease directly with Mercedes-Benz. Much of the remaining 1.5 million square feet of inventory is Class B or lower quality, so finding suitable space has become our primary challenge.
The result of this pressure would lead one to think the next logical step would be the development of speculative space, but demand has not pushed rental rates enough to make this type of investment a risk worth considering. As one might expect, we have seen an increase in build-to-suit developments. The four announced build-to-suit projects include a 66,000-square-foot facility developed for Carroll Tire, a division of Sumitomo; a 127,000-square-foot project being constructed for Truck & Wheel Group, a Spanish-based Mercedes-Benz supplier; and American Tire Distributors leasing 100,000 square feet in a newly constructed facility. The fourth build-to-suit is a 52,000-square-foot, crane-served facility being developed for Gardner Denver Nash, an international provider of industrial vacuum pumps.
In addition to leasing activity outpacing our recent historical averages, we experienced a similar trend in industrial building sales. Our 95.2 million-square-foot, freestanding industrial market is just under 94 percent occupied. In 2016, there were 24 sales of facilities 30,000 square feet and larger. This compares to 13 in both 2014 and 2015, respectively — again a solid increase. Sales of note during the past year include the sale of a 1.03 million-square-foot property for an undisclosed manufacturing use; the 230,000-square-foot former Hibbett’s Sporting Goods facility; and a 159,700-square-foot facility to Birmingham-based International Wines. We expect owner-occupant building acquisitions in 2017 to be down from this high water mark as pricing increases and bargain acquisitions become scarce.
An area of increasing sales activity has been within the investment category, as low national cap rates continue allowing out-of-state investors to find more attractive yields in our market. Investment transactions in 2016 of interest include the acquisition of the 604,000-square-foot parts consolidation facility located adjacent to the Vance Mercedes-Benz plant. The cap rate on this transaction was 7.62 percent. Additionally, a 332,000-square-foot facility leased to Hyundai supplier Glovis was purchased by Stag Industrial, a Boston-based REIT. Torrance, Calif.-based Tuffli Co. purchased a 127,250-square-foot facility leased to Birmingham-based Motion Industries. This property was leased to Motion for 10 years and traded at a 7.4 percent cap rate. Provided cap rates remain stable, we expect the investment market to remain active as the automotive strength of our area provides a compelling narrative for national buyers.
The common theme in much of our activity has been related to the automotive industry. Alabama is home to Mercedes-Benz, Honda and Hyundai assembly plants putting the state in the top five states for production of cars and light-duty trucks. In 2016, for the second straight year, we produced over 1 million vehicles making this industry the state’s leading exporter at a value of over $9 billion. However, our economic development officials are diligently working to bring new, diverse industries to Birmingham and our state. The 2016 announcement of a $29 million development of a Birmingham manufacturing facility for Oxford Pharmaceuticals is the latest example of collaborative work between state, county and city economic development officials that expands our industrial base.
— By Jack Brown SIOR, Senior Vice President, Graham & Co. This article was originally published in the April 2017 issue of Southeast Real Estate Business.