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A coming storm?

The Birmingham Business Journal - October 24, 2008
by Lauren B. Cooper

Overall occupancy rates in Birmingham’s office market have slightly fluctuated throughout the year, but brokers say the local market remains healthy and is still ripe for new office buildings, despite uncertainty in the financial market.

EGS Commercial Real Estate Inc., a member of the national Cushman & Wakefield Alliance, reported overall occupancy in Birmingham at 92.8 percent in Birmingham in the third quarter, down from 93 percent in the second quarter.

But while the market remains healthy, those in the local commercial real estate industry say the next six to 12 months will be the true test, as more sublease space could come on the market as companies downsize their operations – which could shift the dynamics.

“(Having) big blocks of space in the form of sublease is a fly in the ointment,” said R. William Pradat, executive vice president at EGS.

“You could have one big sublease and tilt the market upside down. We’re fortunate thus far. We’ve dodged a lot of bullets.”

While there are some blocks of space on the market available for sublease, Pradat said it currently is at a manageable level, but anticipates other blocks to pop up in the coming year.

Average rental rates dipped throughout 2008, but landed higher than where it was at the end of 2007, the third quarter report showed.

The average rental rate in Birmingham was $20.96 per square foot in the third quarter, compared to $20.99 in second quarter and $18.06 in fourth quarter 2007.

“The best thing we have going is there’s not a lot of cranes in the air and a not a lot of available inventory,” Pradat said. “With every negative there’s a positive.”

While rising rents and tighter occupancy is good for the market, it doesn’t leave much option for the end user, he said.

Thus, new inventory could help ease some of that restriction for tenants.

At least five major office projects were announced to come out of the ground this year and only a few are currently under construction.

Bayer Properties LLC is putting 50,000 square feet of office space at The Summit, along with 50,000 square feet of additional retail space, and ServisFirst Bank is building its new headquarters on Shades Creek Parkway, with some space for lease.

Any future speculative building will be tightened by bank lenders wanting to lower their risk, said Blake Crowe, a broker with Birmingham’s Southpace Properties Inc.

That will mean a higher percentage of occupants – with good credit – will have to be signed on before construction can start on any new building.

“It’ll be interesting to see how it will affect us six to 12 months down the road,” said Crowe. “There’s always a lag time.”

And as a result, sales in commercial real estate have certainly slowed, he said.

To make up, brokers are getting more creative and offering more lease-to-own options, while waiting for banks to relax their standards, he said.

But sellers are still unrealistic about the value of their property, holding out for what they would’ve gotten a year ago from a buyer, said Crowe.

“Investors are having a hard time getting deals financed, even at moderate risk, and distressed sellers are stuck because the investor is stuck,” he said.

EGS’s Pradat points out that while Birmingham’s office market is mainly unchanged from this time last year, other markets around the country aren’t faring so well, especially those metropolitan areas hit hardest by the financial crisis.

One of the biggest news stories is Manhattan’s office market, which saw a two-year low occupancy rate of 92.6 percent in the third quarter, which slipped throughout the year from 94.3 percent in fourth quarter 2007. Rental rates in the Big Apple held steady at almost $73 per square foot.

That office market saw a 72 percent increase in sublease space in the third quarter, making up 23 percent of the market, said the report.

Atlanta’s office market tightened slightly in the third quarter to 84 percent occupancy from 83.3 percent in the second quarter.

Charlotte, N.C., saw an uptick in its office market, with an 89 percent occupancy rate in the second quarter of this year, compared to 88.8 percent in the first quarter and 88.2 percent in fourth quarter 2007.

The third quarter report was not available. Many have predicted that the pending sale of Charlotte-based Wachovia to Wells Fargo could cost the city some jobs.

Jacksonville, Fla., saw a decrease of 1.1 percent in occupancy to 84.4 percent in the second quarter, compared to the same time last year, according to Cushman & Wakefield.

Read the full story on the The Birmingham Business Journal website.

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