When The New York Times has something positive to say about Birmingham, you know something really good is in the works — and that’s exactly what happened last August. The paper ran an article entitled “A Return to Downtown Birmingham” that highlighted Railroad Park, Regions Field, the new Westin Hotel and the renovation of Lyric Theatre. It quoted David Fleming, CEO of REV Birmingham, calling attention to the public enthusiasm that’s driving the revitalization. “There’s a feeling that [the downtown] is back, and that wasn’t true 10 years ago,” he said. This past March, Livability.com added to the buzz by ranking Birmingham 10th in the nation in its ranking of downtowns in small- and mid-sized cities.
Developers Betting Big
As a result, there’s a question that’s now on the minds of many apartment investors: Is the sky the limit for downtown Birmingham? It’s too early to tell, but an increasing number of developers are placing their bets on the Magic City.
At the end of April, the Bristol Development Group announced plans to build 250 high-end apartments downtown, joining such local companies as Harbert Realty, Watts Realty, KRE Development Holdings, RGS Properties and Scott Bryant & Co. that have about 900 apartments on the drawing board. Two major out-of-town concerns, Inland American Communities and the Bosamada Group, also have projects in the works totaling 500 apartments. And this doesn’t include several hundred apartments planned through renovation and conversion projects like the Pizitz building, Thomas Jefferson Tower, Parisian and Leer Tower.
In the meantime, construction is underway on the approximately 300-unit LIV Parkside development across from Railroad Park and University Flats near the University of Alabama Birmingham. In a sign that developers are taking a forward-looking view of the future of downtown Birmingham, most of these projects — planned and in construction — are mixed-use. The project on the corner of Third Avenue South and 20th Street will even feature a Publix. This will be the first time that downtown inhabitants will have a grocery store in recent memory.
Sources of Market Growth
While time will tell if Birmingham’s revitalization has legs over the long term, there is an element to that question that’s more immediate, especially for apartment investors considering entering the Birmingham market or expanding their holdings: Will this new capacity bring new renters to the city or will it simply draw on renters who currently live in other submarkets?
Right now, supply and demand are fairly well balanced in our market as a whole, and the average occupancy rate is 93 percent. There are two factors that argue for this balance to continue. One is cultural and demographic. The EcoBoomers are less interested in ownership than any other generation, and they have shown a preference for living close to work and putting a premium on amenities. As they enter their twenties, they have driven the development of downtown areas nationwide, and they could be a force in Birmingham. After all, for some it would be a relatively easy transition from the UAB campus to downtown.
The second factor is economic. Given the mix of apartment, retail, and office space scheduled for the coming two years, it’s possible that the downtown could soon achieve critical mass. As it does so, it will begin to generate jobs that will, in turn, fuel more development, as well as higher occupancy across Birmingham.
Many Options for Investors
In the meantime, it’s a good time to own Birmingham-area apartments. Interest rates remain at historic lows, giving existing owners the opportunity to refinance as a way to take money out, increase cash flow or upgrade. Both the solid market fundamentals and the buzz generated by downtown development have begun to attract out-of-state buyers. The increased competition has lowered cap rates as it has pushed the price per unit noticeably higher, but the constant stream of properties coming on the market has moderated the price increases to a degree. In addition, capital is readily available to apartment investors. Banks, insurance companies and CMBS lenders are all active, and the agencies have certainly become more aggressive as competition heats up.
But the key to a successful refinance or acquisition depends, as ever, on finding a knowledgeable lender: one who knows the Birmingham market, is willing to take the time to get to know an investor’s business and is able to present the various available options. With continued great ideas and good partnerships, there are plenty opportunities yet to be captured in Birmingham.
— Chad Thomas Hagwood, Senior Vice President of Originations, Capital One Multifamily Finance’s Birmingham office. This article originally appeared in the August 2014 issue of Southeast Real Estate Business.