Chad Thomas Hagwood, Capital One Multifamily Finance
Work on the $66 million renovation of the historic Pizitz Building in downtown commenced in March, which will add 143 apartments to the market in fall 2016, and the newly dubbed 20 Midtown project is finally underway. This mixed-use project, featuring a Publix and a Starbucks, will have at least 122 apartments when completed. Construction has also started on the $22 million renovation of the Thomas Jefferson Tower, another mixed-use project that will yield 96 apartments. These projects join the 236-unit Venue at the Ballpark, which broke ground last year and promises views over the outfield fence into Regions Field.
The cranes are also busy east of the expressway in Lakeview. Work there has started on the 67-unit Iron City Lofts and is slated to begin later this spring on the 260-unit Metropolitan Apartments.
Testing the Millennial Market
Taken together, these developments highlight a number of facts about the multifamily market in Birmingham. The vast majority of apartments in the area are in the suburbs, however, the common denominator for many new Birmingham multifamily developments is their location in the greater downtown area. Equally important is their upscale approach, with amenities like Pilates and yoga rooms, electrical vehicle connections and secure bike storage designed to appeal to professional Millennials.
These new apartments will command a premium on rents — up to $1,200 per square foot, compared to average rents in Birmingham in the $800 per square foot range. The size of this disparity suggests a potential strategy for investors outside the downtown area. If these properties successfully command this premium, they may seek to bridge the gap by repositioning established properties as Millennial communities.
The Best Laid Plans
Finally, the downtown apartment activity highlights the ever-present speed bumps along the way. Several developments on the rise now took nearly a decade, while others have stalled completely. Bayer Properties purchased the Pizitz Building more than 10 years ago with the original intention of converting it to offices. Plans to transform the former Booker T. Washington Building into a mixed-use property with 32 apartments have generated more heat than light, and the building is now up for sale.
At issue is the robustness of the Birmingham economy. Forbes recently named Birmingham “America’s Most Affordable City,” citing prices lower than the national average for items like groceries, transportation and healthcare, but these low-costs have yet to generate an influx of new renters. Birmingham had just a modest 0.6 percent increase in population in 2014.
Indeed, the flip side of these low prices is that they can be seen as an indicator of unexceptional economic activity. Employment grew by just 0.5 percent in 2014; at this rate it will be several years before Birmingham achieves its pre-recession job levels. But even though vacancy rates are higher than other markets, operators have been able to sustain steady rent growth of between 2 percent to 3 percent range over the last few years.
A Vote of Confidence
In the last 12 months, the constant drumbeat of new announcements from downtown developers has quieted down as existing projects work their way through the pipeline. Clearly, the development community is taking a wait-and-see attitude, tracking how quickly and at what rents the new units are absorbed.
In the meantime, other investors are betting on Birmingham. The city has experienced high levels of deal activity for the last 24 months, with owners taking advantage of elevated prices to put their properties on the market and an influx of out-of-town purchasers supplementing local investors. There’s also been a steady growth of refinancing as prepayment penalties on high-interest pre-recession loans burn off. And both new and existing investors are, in fact, pursuing a value-added strategy as a way to maximize their cap rates. They believe that if a property is repositioned correctly there is still room for rent growth.
In effect, investors are acting on their belief that there remains ample opportunity in Birmingham for experienced operators — and if the downtown experiment works out as planned, we would expect to see even more activity, both downtown and around the metropolitan area, in 2015 and beyond.
Although many of the conditions described above are particular to Birmingham, it is certainly not the only market facing higher prices and gradually higher interest rates in the future. These conditions underscore the importance of working with lenders that know the market, understand the available programs and take the time to match these programs with the borrowers’ business plans. And more than ever, investors need lenders that can act proactively to time the transaction to meet their needs.
— By Chad Thomas Hagwood, Senior Vice President, Capital One Multifamily Finance. The article originally appeared in the April 2015 issue of Southeast Real Estate Business.