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Multifamily Boom Undiminished

Multifamily development has been on a roll in Alabama for almost a decade.

Redevelopment of Thomas Jefferson Tower in downtown Birmingham attracted investment capital from Oregon’s Reed Realty Group.

Redevelopment of Thomas Jefferson Tower in downtown Birmingham attracted investment capital from Oregon’s Reed Realty Group.

Photo by Art Meripol

The development of apartments, condominiums and lofts — especially in downtown areas — faltered for decades in Alabama, the Southeast and beyond, but has flourished in the wake of the 2008 financial crisis and single-family housing plunge.

The multifamily trend has many drivers, including millennials and empty nesters being drawn to an urban lifestyle, fewer single-family homebuyers, historic tax credits and keen investor interest, commercial real estate experts agree.

“Investing in apartment projects is especially popular. It’s become a ‘go-to’ investment these days,” says K.C. Conway, the new director of Research & Corporate Engagement for the Alabama Center for Real Estate.

Investment in apartments is so hot that many new properties are being purchased from their original developers by other investors after construction is completed. Even older properties with perceived value are being scooped up. Embassy Group LLC, for example, in June sold Madison at Shoal Run and Mountain Lodge, both mature properties in the Birmingham area, for $41 million to New York-based Dasmen Residential.

“Investors that weren’t very interested in multifamily projects in the past are showing great interest. They are perceived as a safer harbor than some other investments,” says Chad Hagwood, senior vice president, originations, Capital One Multifamily Finance.

LIV Development, the driver behind the new LIV Parkside apartment urban infill project near Railroad Park in Birmingham, sold the 228-unit luxury complex, now named Parkside Apartments, to Chicago-based Birmingham Parkside Apartments LP for $40 million last January. In nearby Mountain Brook last year, Evson Inc. sold its 276-unit Lane Parke Apartments to JLL Income Property Trust, a non-listed real estate investment trust, for $73 million.

“It’s a common trend in the Southeast. A lot of money is being invested in apartments,” says Andrew Murray, managing director of development for LIV Development. “It was a good time for us to sell LIV Parkside, and we did. We are keeping our eye on Birmingham for future development opportunities if they present themselves.”

Birmingham, as the state’s largest city, has seen the lion’s share of urban infill and historic renovations of multifamily projects in recent years, but Huntsville, Mobile, Tuscaloosa, Montgomery and other Alabama cities are also part of the trend.

“Alabama is in an excellent position to continue to draw multifamily investment,” says Scott Reed, managing director of Reed Realty Group, the Portland, Oregon-based developer of the 96-unit Thomas Jefferson Tower apartments with retail, restaurant and ballroom space in downtown Birmingham.

Downtown Birmingham’s Pizitz Building now houses a food court and apartments.

Photo courtesy of Brasfield & Gorrie

One of the best moves Alabama has made to position itself to attract multifamily developers is to institute a historic tax credit, Reed says. The TJ Tower and Pizitz Building in Birmingham and Staples-Pake building in Mobile are among those awarded historic tax credits for multifamily projects.

“You look across the country and the states with tax credits are seeing high redevelopment levels. Those without them are not,” he says. “Not only do historic tax credits assist redevelopment for multifamily projects, but historic structures — such as the Lyric Theater in Birmingham — are refurbished to their former glory, drawing more interest downtown.”

One of the newest apartment developments being discussed for Birmingham is a $40 million, 17-story high-rise apartment project targeted for Five Points South by The Opus Group, a developer based in Rosemont, Illinois. The urban infill project would use land formerly occupied by World of Beer and Magic City Brew.

“Yes, the historic tax credits draw in multifamily investors for renovation projects, but they also draw in such new multifamily and other commercial construction as well when developers see an area going up and growing safer instead of running down,” Reed says.

The original Alabama Historic Tax Credit, in place from 2013 to 2016, generated 52 total preservation and rehabilitation projects, including 21 in Birmingham, 15 in Mobile, 6 in Tuscaloosa, and 4 in Montgomery, according to Advance Alabama, an economic development group that worked to get the tax credit renewed. The new edition of the tax credit, signed into law in May — $20 million per year from 2018 to 2022 — will give first dibs to cities and counties with 175,000 or fewer people.

“In addition to the tax credit,” says Reed, “it’s particularly fortunate that Alabama has government officials and economic development agencies such as REV Birmingham that are driving growth.”

Reed credits millennials for driving much of the urban redevelopment trend across the Southeast and beyond. First the artists move downtown because the rents are cheap, he says. Then younger residents start moving downtown to take advantage of the art scene and the live-walk-work lifestyle. Then the development of apartments, restaurants and retail follows. Not only millennials, but empty nesters gravitate to downtown areas. It can even work for hip, young small families. “Finally in the urban development life cycle you get to condo sales and development, which is farther down the line for Birmingham and other Alabama cities,” Reed says.

How long will the multifamily market boom continue in Alabama? Commercial real estate experts say that depends on how long the demand for additional apartments, lofts and condos continues.

“One area of concern is that most projects are targeting the luxury market, and the demand for luxury properties does have a limit,” Conway says. “With high land and construction costs, developers often feel forced to target the luxury market to be able to make any profit. That has left out a lot of millennials who don’t make high salaries and others who can’t afford high rents.”

Some urban areas outside of Alabama, which have experienced rent resistance and lower demand for luxury properties, have seen the rise of successful new projects targeting the “micro-unit” market, Conway says. Small apartments of 500 square feet and less allow developers to cover land and development costs.

“As developers feel the squeeze of rent resistance and a ceiling on the demand for luxury apartments, they may turn to higher density so they can get the return on their investment. We really need more of that to fill the great need for affordable apartments that isn’t being met,” he says.

Such small apartments were called “studio apartments” or “efficiencies” in the past, Conway says. The Urban Land Institute has followed the micro-unit trend across the country in recent years, and its research has shown high market demand and high profitability per square foot in a number of urban markets.

“Technologies developed in the tiny house movement, such as moveable walls, are enabling more creative design and better use of space in micro-units,” Conway says. “Millennials are used to the amenities provided in newly developed student housing and often don’t care so much how big their apartment is, just where it is and that they can afford their own place instead of living with their parents.”

The alternative to developing affordable apartments likely is maxing out the investment potential of multifamily dwellings, says Conway, whose impressive resume includes serving as a subject matter expert for the Federal Reserve, chief economist for Colliers International and senior vice president of credit risk management for SunTrust.

“Historically we tend to keep overdoing in certain areas and then at some point face a market correction,” he says.

Major projects kick off in Mobile, Huntsville, Tuscaloosa & Montgomery

While Birmingham is the largest, hottest market in Alabama for the recent development spurt in apartments, lofts and condos, other metropolitan areas across the state are seeing significant growth in multifamily development.

Meridian at The Port, downtown Mobile’s single largest downtown residential development in more than 50 years, broke ground in August. The $51 million project by development partners Leaf River Group and Bristol Development Group will feature 267 luxury apartments. The development is expected to help boost downtown revitalization efforts.

“This is very big news for Mobile,” says Chad Hagwood, senior vice president, originations, Capital One Multifamily Finance.

Among Mobile’s historic redevelopment is the Staples-Pake Building, originally built in the 1850s, used by a cotton broker and then a bank, but now offering 15 loft-style apartments, as well as retail and office space.

“Mobile, Huntsville, Tuscaloosa, Montgomery and other Alabama cities, in addition to Birmingham, are seeing the development of some impressive multifamily projects,” says K.C. Conway, director of Research & Corporate Engagement for the Alabama Center for Real Estate.

Huntsville’s new Twickenham Square multiuse development features the 246-unit Artisan at Twickenham Square luxury apartments, in addition to a Publix, Homewood Suites hotel, restaurants, retail and office space. Montgomery has added a number of apartment units through the refurbishment of downtown buildings, including in the Lower Dexter Avenue area. And Tuscaloosa has seen a burst of modern multifamily and other development following its catastrophic tornado in 2011. “Tuscaloosa has seen rapid redevelopment,” Conway says. “And now several luxury condominium projects are planned for near Bryant-Denny Stadium.”

Hagwood points out that investors are looking at all of Alabama’s midsize cities for potential projects. “This is a great time for borrowers and investors. Financing terms are very friendly,” Hagwood says. “There’s a great deal of investment being made in urban markets across the Southeast.”

When it comes to multifamily development, Alabama still has more to come, says Scott Reed, managing director of Reed Realty Group, the Portland, Oregon-based developer of the Thomas Jefferson Tower apartments in downtown Birmingham.

Reed’s company keeps tabs on markets across the country to tap into great development opportunities. “Alabama has just rounded first base when it comes to the redevelopment and revitalization of its cities,” Reed says. “Government officials and economic development agencies are all pulling together to encourage successful redevelopment. Your state has a bright future.”

Kathy Hagood is a freelance contributor to Business Alabama. She is based in Homewood.

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