By Gardner Lee
Principal and Co-Founder, Growth Capital Partners
Since Prologis sold its Birmingham holdings in the late 1990s, the industrial real estate market in the Magic City has been dominated by local investment groups, with a few national developers entering the market for either built-to-suit or specialized projects like the recent Amazon facilities. As a result, institutional investors were uncomfortable with the liquidity of this market.
Several recent acquisitions by national real estate investment groups have now broken that barrier to entry. In October 2020, Growth Capital Partners (GCP) sold 43 multi-tenant distribution properties comprising 11.7 million square feet to Exeter Property Group (one of the largest institutional owners of warehouse space in the country), including 2.6 million square feet in Birmingham.
At a recent Central Alabama Commercial Market Symposium, Sonny Culp of Graham & Co.’s Birmingham office said, “It’s not uncommon for us to see a lot of institutional-type interest coming to Alabama for these single-tenant buildings. But to see Alabama get on the map as part of a larger transaction from a portfolio buyer like Exeter with a transaction that mirrors what you see in larger cities — Atlanta, Charlotte, etc. — that speaks well for our state [in terms of] how investors are starting to look at investing in this market.”
Publicly traded STAG Industrial also recently purchased 296,000 square feet in Birmingham in December 2020 for $23.5 million. In addition, the ongoing development of multiple Amazon distribution centers has solidified Birmingham’s place as an institutionally accepted market.
John Huguenard, senior managing director at JLL, recently remarked that the sale of GCP’s portfolio to Exeter “highlights the investment community’s laser focus on acquiring institutional-quality industrial product from market-leading operators in growth markets as a defensive play in response to a changing landscape brought on by the COVID-19 pandemic.”
The Birmingham industrial real estate market has experienced a solid 95 percent occupancy rate the last five years, with strong rental rate growth averaging 3.6 percent each year. Increasing needs by national tenants have increased the demand for development. Because of continued cap rate compression in other markets, institutions and REITs are increasingly looking in mid-size markets like Birmingham for better yields. While markets such as Nashville and Charlotte are seeing cap rates in the high 4s and low 5s, Birmingham’s market is typically 75 to 100 basis points higher, hovering in the upper 5 to low 6 percent cap rate range for investment quality properties.
Bill Pradat, president of Cushman & Wakefield/EGS Commercial Real Estate, noted that a recent sale by Hall Capital, which is active in all the premier Southeastern markets, to STAG speaks well for the Birmingham market’s evolution, regardless of how strong the industrial sector has become nationally.
Clayton Moss, Hall Capital’s managing director and chief operating officer, says the city’s industrial market is a larger focus for the firm, especially compared to other asset classes, which would have to have a compelling story. Hall Capital is continuing to look in Birmingham for multi-tenant, bulk industrial distribution centers on the newer side that range from 100,000 to 300,000 square feet. A recent example of this dynamic would be Shades Creek Business Park, which sold to STAG.
Culp said investment sales and build-to-suits have been strong, and he expects to see speculative projects soon.
While it is no secret that the pandemic has accelerated many trends that were evolving in consumer spending and supply chain reconfiguration, the industrial market in Birmingham certainly reflects the impact of these growing trends, with its long-term high occupancy levels and steadily increasing rental rates. To this end, GCP reported 100 percent rent collections since the pandemic began from all properties, including the Alabama assets in the Exeter transaction, which comprised approximately 25 percent of the portfolio.
In Birmingham, while local developers are still focusing mainly on build-to-suit projects such as the recently announced Ferguson Enterprises warehouse in Avondale, the Graham & Co. Mercedes parts facility in Vance and Clayco’s Lowe’s distribution facility in Bessemer, large national companies are developing the new Amazon and FedEx projects.
In addition to the recent transactions in Birmingham, it is noteworthy that the Huntsville market also has seen over 1 million square feet of industrial development attributed to its rapid population growth and from several large new manufacturing operations in the area, most notably the Mazda Toyota Manufacturing USA plant.
While speculative development in the industrial sector has lately been focused on the larger markets or faster-growing cities in the Southeast, the lack of speculative development in the Birmingham market has driven rents up by 13 percent the last five years. If speculative development remains low, rents should continue to rise, and occupancy rates will remain at their record-high levels.
View original article in REBusinessOnline.com’s March 2021 issue of Southeast Real Estate Business.
