Birmingham Landlords Prepare as Workforce Transitions Back to the Office

by John Nelson

While the Birmingham market never fluctuates too heavily in either direction, it typically remains relatively stable compared to national trends. Such has been the case with the effects of COVID-19.

Birmingham is well-positioned for a return to the office, thanks in large part to our economy’s heavy makeup of local and regional businesses. Most smaller businesses have been in the office for some time, while large national enterprises still wrestle with what normal operations will look like moving forward.

General market information
Birmingham saw some positive absorption in 2021, with the occupancy rate holding steady at 81 percent, around the historical average. Birmingham comprises approximately 20 million square feet of office space with five main submarkets.

Philip Currie, J.H. Berry & Gilbert Inc.

Midtown, comprising mostly mid-size, Class A office buildings, remains the strongest submarket with an occupancy rate over 92 percent and rental rates in the mid to high $20s per square foot ($24.12 per square foot average).

The Central Business District has seen companies leave for suburban submarkets like Midtown and Highway 280/Interstate 459, however the occupancy rate of 78 percent has remained relatively stable over the past couple of years, with rents in the low to mid $20s per square foot ($21.07 per square foot average).

COVID affecting lease terms
The unpredictability of 2020 and 2021 prompted many companies to opt for short-term renewals, which we are now seeing roll back around. This has caused an uptick in activity at the beginning of the year and companies are starting to make decisions based on long-term goals, which we believe will be reflected in the deal flow for 2022 and beyond. Rental rates are drifting up, which is mostly attributed to rising construction costs and increasing operating expenses.

However, we are seeing landlords more willing to enter shorter terms leases with higher tenant improvement (TI) costs than in previous years as they take a chance on tenants growing within their buildings, or leaving with nice, leasable space after they vacate.

We are seeing an increase in quality subleases on the market, as some larger companies are scaling back their footprints. This could bode well for Birmingham’s flourishing tech and startup scene as these companies are typically looking for flexible deal terms due to growth and space that requires little to no buildout to justify shorter lease terms. Developers are focusing more on the needs and desires of these startup and tech firms with new Birmingham developments that boast design features that are ideal for these types of companies.

Development activity
2222 Arlington, slated for completion at the end of the year, will bring 55,000 square feet of cutting-edge office product to Birmingham. Other new construction projects in Midtown include 740 Shades Creek Parkway that will bring 30,000 square feet of Class A office space to the submarket in 2022, along with Steel Ridge Center, consisting of 34,000 square feet that was completed in 2021.

Demolition has begun on Southtown Court, an 80-year-old housing project on the southside that is set to be completely redeveloped with offices, restaurants, shops and housing units. Once complete, the project will bring 850,000 square feet of office and commercial space to the market.

The Hardwick, a 110-year-old building that historically served as a steel processing plant, is being redeveloped into a mixed-use hub featuring up to 60,000 square feet of Class A office and restaurant/retail space along the Rotary Trail.

Sales remain steady
Investment sales remain steady as we saw Blue Lake Center, a 166,000-square-foot office building, trade for $116 per square foot in the fourth quarter of 2021. Acton Ridge, a 59,000-square-foot building, was purchased by a local investor for $137 per square foot.

Fairway Investments and Pope & Land Real Estate acquired Brookwood Office Center in a $55 million deal in conjunction with the acquisition of Brookwood Village Mall, with plans to redevelop the mall into a vibrant mixed-use project. The site is situated in Midtown on the other side of the road from the 740 Shades Creek Parkway development site. This will be a project to keep an eye on in the coming months as plans progress.

— By Philip Currie, SIOR, CCIM, President, J.H. Berry & Gilbert Inc. This article was originally published in the March 2022 issue of Southeast Real Estate Business.

J.H. Berry & Gilbert Inc. closely monitors the transaction volume and data points of the evolving commercial real estate market in Central Alabama to help clients make the most strategic, informed decisions. Birmingham maintains its standing as the largest commercial real estate market in the state, with exciting developments on the horizon. If you have any questions about the status of Birmingham or additional Alabama office markets or would like to speak further about your specific needs, please contact the J.H. Berry office brokerage team. Our experts are excited for what 2022 has in store.

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