State of the State's Real Estate
Montgomery shows a relatively stable vacancy rate in the office sector, including a downtown market led by government-tenant buildings like the Retirement System of Alabama-financed Center for Commerce, shown above.
Although Alabama’s commercial real estate sector still has a long way to go to fully recover from the recession, it has seen steady if slow advances within the past year, real estate watchers observe. The state’s commercial outlook is following the national trend of less than robust growth but continued improvement in vacancy rates.
The forecast for the coming year is also hopeful. “The commercial real estate market in Alabama can anticipate more of the same in 2014: a consistent path of gradual improvement across most property types,” says Grayson Glaze, executive director of the Alabama Center for Real Estate at the University of Alabama.
Glaze’s relatively positive view is mirrored by commercial real estate professionals including Douglas McCullough, vice president - brokerage for NAI Chase Commercial, although McCullough worries that the recovery is still vulnerable to potential national upheavals, such as federal budget battles.
“We’re cautiously optimistic. 2013 is turning out to be a better year than the last couple of years,” McCullough says. “Over the last couple of years, the transaction life cycle grew from a three to six month norm to a six- to 12-month or longer cycle. I’m happy to see the market gain some momentum and life cycles shorten. I see the market turning the corner. We now see deals that actually close, and our pipeline continues to grow.”
The National Association of Realtors forecasts a 0.2 percentage point decline in the national office market vacancy rate from the third quarter of this year to the third quarter of 2014, down from 15.7 percent. Birmingham was noted by NAR for its relatively low office vacancy rate of 12.4 percent during the third quarter.
Carter Burwell, vice president at Jones Lang LaSalle, points to Birmingham’s “new energy downtown” with several redevelopment projects planned. But he would like to see improvements in vacancy rates within the Highway 280/459 area, which is following the national trend of lagging suburban submarkets.
While Huntsville is still the strongest office market in the state, Burwell notes that the area is experiencing new weakness because of defense industry cuts in the wake of federal budget woes.
Montgomery and Mobile continue with a relatively stable vacancy rate.
“Overall, the office sector in Alabama has a much more positive outlook moving into 2014 compared to the previous four or five years,” Burwell says. “The office market has begun the healing process after years of stagnant demand and declining rental rates. It’s still a tenant friendly market, but landlord confidence is building.
Business confidence is up and CEOs are hiring people and reinvesting in R&D and technology and are beginning to commit to longer term real estate decisions. This is providing stability and momentum as we move into the 2014 office market.”
The NAR predicts a smaller improvement for retail vacancies across the nation, expected to improve by 0.6 points by the third quarter next year, down from 10.6 percent.
John Bemis, executive vice president retail at Jones Lang LaSalle, also notes the overall improvement in Alabama’s retail market. “Huntsville is leading the way, with Mobile fast improving, as well,” he says. “Birmingham is moving in a positive direction, with net absorption and rental rates beginning to climb. Montgomery is lagging only slightly behind Birmingham but appears to have turned the corner. The secondary markets continue to struggle and will not see improvement until late 2014.”
Among the few new retail projects planned in Alabama is the 178,000-square-foot Lane Parke development in Mountain Brook, which might open as soon as 2016.
Glaze predicts e-commerce will continue to affect Alabama’s retail market. “Big box retailers will continue to fill right size space configurations, while at the same time increasing the size and reach of their customer fulfillment centers. With the retail development pipeline across Alabama a slow-go at best, existing occupancy and rental rates are anticipated to trend positively in 2014. Smaller centers and a push into more urban settings are other trends to watch for as the market moves forward.”
Mobile’s downtown office market — dominated by three high-rises financed by the Retirement Systems of Alabama — enjoys a relatively stable vacancy rate, like RSA-dominated downtown Montgomery.
The NAR forecasts industrial vacancies will decrease by 0.6 points nationally, from 9.3 to 8.7 percent from third quarter to third quarter. Alabama also will see a slight improvement, Glaze predicts. “Modest but favorable expectations for Alabama’s industrial property sector are in store for 2014,” he says. “There will be limited new product, more positive absorption, and continued gradual improvement in rental rates.”
Multifamily vacancy rates, at a low of 3.9 percent nationally, will edge up just 0.1 percentage point from third quarter to third quarter, NAR predicts. “It comes as no surprise that the multifamily market has been the most favored property type not only across Alabama but the nation, as well,” Glaze says. “Demand drivers such as employment growth, household formation and shift in renter profile demographics, in most cases, support the recent spike in supply but a degree of overbuilding in some markets across the state during the next couple of years should not come as a surprise.”
Looking farther into the future for commercial real estate, NAI Chase Commercial’s McCullough predicts some possible bumps in the road, as well as new opportunities to pick up foreclosure properties, saying “2016 and 2017 are thought to be times of additional troubled financial commercial markets, due to many commercial loans set for refinance during that time period.”
“This will mean opportunities for those poised to take advantage of REO (real estate owned) properties and for those servicing that part of the commercial real estate industry.”
Kathy Hagood is a freelance writer for Business Alabama. She lives in Homewood.