Birmingham’s Multifamily Market Is Battling Uncertainty, Still Poised for Growth

by John Nelson

When we wrote about the Birmingham multifamily market last year, the main trends were job growth and in-migration to not only the Birmingham market, but the Sun Belt as a whole. The growth was described as “unprecedented,” which it certainly was, and investor optimism could not have been higher as cap rates plummeted and property performance continued to thrive. 

Craig Hey, Cushman & Wakefield

Since then, the 10-year Treasury yield has risen nearly 200 basis points, inflation experienced nearly 6.5 percent growth last year and there was a more cautious optimism going into the fourth quarter of 2022. But what if we are not hitting a stopping point, rather moving back into a cycle of normalcy? Amongst the many major indicators for 2023, the common theme appears to be uncertainty. 

Many notable factors such as debt and rising insurance costs have been a sounding board for this skepticism in the market. 2021 and 2022 proved to be nothing short of record-breaking in the multifamily sector. For Birmingham, our outlook is that the solid foundation it has built over the past few years, and the post-pandemic recovery boom it experienced, will show that the city is still poised for growth and has been fortunate to not have been overbuilt. 

When assessing how the Birmingham metropolitan statistical area (MSA) stacks up against this uncertainty, one key factor for optimism surrounding Birmingham lies in the job market that contributes to the multifamily growth. With such a diverse economy comprising a wide range of industries including healthcare, finance and manufacturing, Birmingham has the diversification to weather any most market conditions that may arise. In recent years, Birmingham has seen growth within the technology sector too, which has helped attract young professionals into the city. 

In 2023, job growth is expected to continue, with projections indicating that the current MSA employers could add over 4,000 jobs through the end of the year. This growth in employment is likely to lead to increased demand for multifamily assets, as more people seek housing options within the metro area. In tune with this, some local executives are also bullish on the surge of repurposed commercial to multifamily assets we will see this year. The Birmingham MSA cost of living for housing index still sits 16 percent lower than the national average, which adds to the desirability of the area.

For Birmingham and many other secondary markets in the Sun Belt, the last few months has brought back a re-exposure to seasonality. Prior to 2020, annual cycle rental income seasonality would be a talking point for nearly all markets across the region. 

The spring and summer months across the Southern states typically bring a spike in renters on the move, signing new leases and allowing properties to push market rents to match their local demand, followed by a stagnation in the cycle for the gloomier winter months. 

However, during the majority of 2020 to 2022, in an economy that proved to be anything but normal, we did not experience this seasonality in the multifamily space, only trends that continued to push toward growth and record-setting milestones. Many critics continue to argue that rents are slowing in the Sun Belt, but this is to be expected after seeing double-digit rent increase in the first half of 2022. Effective rents have been strong even with a lower trajectory of growth as they return to normal levels, and many landlords have pulled market rents in. We’re starting to see, however, those same landlords slowly test the market again by edging those market rents back up. 

Regionally, the market continues to show metrics that are beating the national average. Looking back to 2022, the Sun Belt surpassed the national average in rate of new leases, and even showed an upward trajectory moving into 2023. Additionally, the Sun Belt holds lower figures in both delinquency and concessions compared to the national average, showing that the market still has the ability to attract quality tenants even with the uptick in volume. This reinforces that the region still holds the title as a premier multifamily space.

Investors continue to view Birmingham as a highly resilient economy and multifamily investment locale. While many groups’ targeted metrics for returns have changed, due in its share to the macro reasons discussed, the pool of interested parties has not diminished and interest in the Birmingham, and Sun Belt, space remains high. We see this as a steady path forward until investor sentiment has fully thawed from the changing economy. 

— By Craig Hey, vice chair, Cushman & Wakefield. This article was originally published in the March 2023 issue of Southeast Real Estate Business.

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