Job Growth, Limited Deliveries Elevate Birmingham Apartment Market’s Outlook
Urban submarkets have largely carried the Birmingham multifamily market’s recovery. However, going forward investors will look to capitalize on greater yields in suburban submarkets. Despite rising rents, absorption continues to climb and concessions are falling off. Greater absorption metrics will be a recurring theme this year as rising construction costs and tightening access to capital constrain new development.
Birmingham’s economy added 8,000 net jobs year-over-year as of December 2016, growing at an accelerated rate of 1.6 percent. Further, unemployment remains low at 5.4 percent. Industries such as transportation, education, healthcare, government, and finance are at the forefront of job growth in the market, accounting for 75 percent of the net jobs added. Moody’s projects that the metro will add more than 24,000 net jobs through 2020, expanding by approximately 4.7 percent.
Recent expansion announcements in the market reaffirm this trend, including the Project Sunrise deal that will create 746 manufacturing jobs via a $120 million investment in the former Meadowcraft facility. Another needle-moving deal is Mercedes-Benz U.S. International’s $1.3 billion plant expansion in Vance, which has resulted in automotive suppliers growing their footprint in the market. For instance, Eissmann Group Automotive recently added 200 jobs in nearby Pell City.
The Chamber of Commerce of West Alabama also projects that automotive suppliers in Tuscaloosa County will add 2,400 jobs by 2018, including Lear Operations Corp. in Vance.
Rents on the Rise
Bolstered by the metro’s consistent economic gains over 2016, asking multifamily rents in Birmingham increased by 1.6 percent from the fourth quarter of 2015 to the first quarter of 2016, reaching a historical peak of $827 per unit. Projections bode well with an estimated 5.7 percent increase during the next three years, according to Reis. Vacancy is at an average of 5.5 percent — a 460 basis-point decrease from the market’s peak in 2009 — and is expected to hover in the low 6 percent range during the next couple of years.
The higher cost of living downtown, especially in newly delivered product, is pushing traditional urban renters out to the suburbs. With the walkability trend now expanding beyond downtown to Grandview and Patchwork Farms, renters can have the same access to walkable retail and restaurants without the high cost of living. Additionally, suburban product typically offers amenities like dog parks, green space and large pools, which can’t be accommodated downtown.
Deliveries, Concerns to Ease
Approximately 1,000 market-rate units delivered in Birmingham in 2016. Fewer than 1,000 are currently under construction with the majority concentrated in the CBD. There are less than 700 multifamily units planned and 900 are proposed, which pales in comparison to the 5,100 additional renter households that are projected for the metro during the next five years.
As with any city, there are more barriers to entry for new construction in the urban submarkets. Construction costs are higher downtown because developers have to build parking structures and use more concrete. It costs approximately 50 percent more in construction costs to deliver units in the city, resulting in rents that are 50 percent higher. Birmingham, however, also has extraordinarily high barriers to entry in the suburbs, including the cities of Mountain Brook, Homewood, Vestavia Hills and Hoover due to lack of zoned multifamily land.
Multifamily developers are experiencing lower percent loan-to-cost (LTC) maximums, therefore making it harder to finance these deals. What once was a standard 75 percent LTC rate has now decreased to the 60 to 65 percent range. In place of banks, joint venture equity, preferred equity and mezzanine loans have stepped in to provide gap financing. In addition, national developers with 10 to 12 deals in the pipeline are starting to hit their limit on how much multifamily debt they can sustain. This will impact the level of construction going forward, and some developments that are set to start beyond 2018 might not come to fruition. Ultimately, the organic constraints on new development — such as construction costs and tightening financing — help ease fears of a multifamily bubble.
Strong Investment Sales
Birmingham’s sales volume in 2016 for deals $2.5 million or greater totaled nearly $615 million, according to Real Capital Analytics. Private capital dominated investment in 2014, 2015 and 2016, comprising 76 percent to 94 percent of investment volume. A marked change occurred in 2016 with 22 percent of investment sales involving cross-border capital investment. This trend diverges from prior years, as cross-border capital investment in Birmingham has historically been 2 percent or less. Foreign investors have been hot on downtown, especially Canadian pension funds.
Two notable downtown sales included Venue at the Ballpark and University House, which were part of a $1.27 billion portfolio purchased by a partnership between Scion Communities Investors, Canada Pension Plan Investment Board (CPPIB) and GIC, a private sovereign wealth fund wholly owned by the Government of Singapore.
Birmingham’s diverse submarkets are becoming even more defined with their own unique character as development is booming in the metro and becoming more neighborhood-specific.
Avondale is a vibrant submarket located east of downtown Birmingham along First Avenue North and Fourth Avenue South. Developers are reshaping this neighborhood with projects such as Avondale Works, a $10 million, 70,000-square-foot office campus rising out of the site of an old industrial property. With developments like this, the neighborhood is currently shifting from its established reputation as an entertainment district to an employment node in its own right.
Golden Bell Capital’s Box Row, for example, is being constructed on the site of the former Star Motel on Third Avenue. Box Row’s shipping container design will offer a particular appeal for its future retailers. In October, the developer expanded plans to include office space, which follows a larger trend of increased demand for boutique workspace.
Perhaps the most notable announcement in Avondale recently is the relocation of 650 UAB Health System employees to a newly renovated, 189,900-square-foot facility at 720 39th St. N.. The concentration of these high-paying jobs in this neighborhood have positive implications for multifamily assets in the area.
Downtown Birmingham has been a hub of development for several years with too many projects to detail here. The historic preservation of the Pizitz building offers housing, offices and a food hall with a chef incubator, and 20 Midtown’s Publix opened in early February of this year, enhancing downtown’s quality of life. FLS Properties’ Pearl mixed-use development will offer 26 Class A apartments above ground-floor retail on North Old Woodward Avenue. Finally, the $20 million Federal Reserve building renovation with 85,000 square feet of office and restaurant space is complete and has breathed new life into a building that had been vacant for more than 15 years.
Birmingham’s resistance to cookie-cutter development in the CBD and beyond will generate greater returns in the long run, as unique offerings are likely to compel office, retail, and residential tenants to pay a premium in order to locate in their submarket of choice. The impact is already apparent as Central Birmingham’s rents increased by 5.1 percent over the past year, surpassing rent growth rates in the metro, the region and the nation.
There are several positive signs that the Birmingham multifamily market will have a strong 2017. The Financial Times reported that the U.S. steel industry, which has a salient impact on Birmingham, will grow in 2017 with an estimated 4.4 percent increase in crude output due to rising prices, a backlash against imports, anticipated reduction of Chinese steel production, and a rise in demand from the construction and energy industries. Additionally, the latest Alabama Business Confidence Index (ABCI) survey surpassed 60 for the first time since 2006 and confidence in Birmingham grew the most among the state’s metros.
These fundamentals should translate into continued job growth and a positive economic environment, which means the multifamily market should have another strong year.
— By Jimmy Adams, Executive Managing Director and Kristina Garcia, Senior Marketing Specialist of Cushman & Wakefield. This article was originally published in the April 2017 issue of Southeast Real Estate Business.