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Occupancy rates up in local office sector

Pradat says good news for office market, particularly in the Central Business District

Birmingham Business Journal - November 16, 2007
by Lauren B. Cooper

Editor's Note: The following is a transcript of a recent real estate roundtable discussion, mediated by Birmingham Business Journal real estate reporter Lauren B. Cooper. The participants were Steve Ankenbrandt, Sonny Culp, Bill Pradat and Glenn Ponder. Responses were edited for clarity and grammar.

COOPER: How is the office market in general?

BILL PRADAT: The office market - and I think probably all of us in this business want to come tell the good news when there's good news, but it is - it's truly really great news.

It's the most vibrant that I can remember it since I've been in the business, which has been a long time. Year-to-date, there's been absorption of almost 750,000 square feet.

COOPER: Wow.

PRADAT: And I can remember when 300,000 (square) feet of net absorption was a great year. And that's just through the first three quarters. The market is 92 percent leased. The real story has been the CBD.

And really, sometimes it's like the stars are aligned and things work in your favor. CBD is at 91 percent. There's been 250,000 (square) feet of Class A space absorbed downtown.

Now, there have been two things that have happened to drive that - well, really, the big thing is the Regions move.

You heard about the consolidation. But what they did is they took five floors in the Regions/Harbert building, and then they also made the decision, I guess, to keep - I know y'all have reported this, to take the old Regions building, which would have been a price point great location, not a great building alternative, and make that into a hotel.

STEVE ANKENBRANDT: Is that off the market?

PRADAT: It's off the market. And then they absorbed the space in the nicest building in the market with a great credit tenant. And then in the suburbs, there's just been a lot of leasing.

And the suburbs have absorbed almost 400,000 (square) feet total. But on the Class A, which is one of the things we really like to track, about 281,000 (square) feet. And then midtown, which we define as the foot of Red Mountain to Lakeshore Parkway, which is really popular.

Because the Birmingham mind set - and I think Sonny would agree with this because we live in similar areas, is you need to be about 10 minutes from your home with your office. And it's been like that since the '80s, and I'm not sure it will ever totally change, particularly where the decision makers live.

So that said, the midtown market absorbed 225,000 (square) feet. And even Hoover, Riverchase had a big positive move, which isn't a great office corridor. That's viewed more as a retail corridor. I think Keith would agree with that.

Chase Corporate Center hit a big lease, about an 80,000-square-foot lease. So what that means is overall the market is very vibrant, but what it also means is there's no new construction on the board right now.

So we have a real tight market. And one of the things that we do and Sonny (Culp)'s firm does - is we do a lot of tenant representation. So it means you've got to really be creative in finding - and it could be sublease space. You've got to really be creative in taking care of your client's needs.

From the landlord perspective, it's great. And rents are moving up. I just hope the landlords have long memories and not short memories, because what goes up also comes down. Kind of a couple of the significant events, I mentioned downtown with Regions, that was huge.

In the suburbs, in MeadowBrook, there was a building that was going to become vacant from a Washington National lease, the big engineering firm, and they made a single-tenant lease to backfill it.

Colonial - and this is the most phenomenal thing, or one of the most - they developed a building on spec. They got a lead tenant in Johnston Barton Proctor & Rose LLP. They got a second tenant in Sonat. They moved not all of their folks in there because it was full, so they opened a spec building in Birmingham, 100 percent leased at market rent. And that's phenomenal. That was an absolute home run.

They probably had a minimum of a one-year lease up at CO pro forma, and it may be as much as two. And that will get to another topic in just a minute. And then Infinity, they have that River Village sitting there, and it's a decent two-story kind of walk-up space, and all of a sudden Infinity needs a back office operation, so they take another 115,000 (square) feet off the market, so -

ANKENBRANDT: Where is River Village?

PRADAT: Over there near Liberty Park ... You remember where that old River Market Deli was?

ANKENBRANDT: Yeah. Sitting there in all of that?

PRADAT: Yeah. So that was empty, because that's where Vesta had been.

ANKENBRANDT: Okay.

PRADAT: So all of a sudden you take a negative and it becomes positive. And then the HealthSouth situation where everybody kind of feared the worst, HealthSouth is going to keep part of that building, so that takes some of that off the market. And, frankly, that's going to really create one of the opportunities going forward, because they will have some space to lease.

So what it's going to lead to, I think, is pretty evident. There's going to be some spec development for the first time other than the one Colonial building. I think you will probably see Colonial do another building at Brookwood.

Again, an infield location, close to home, all the amenities, structured parking. You don't pay for parking. You don't have the occupational tax.

ANKENBRANDT: What will they do, over at the convenient center?

PRADAT: They will mow that down.

ANKENBRANDT: It's almost empty, isn't it?

PRADAT: Yeah. It's ongoing. Homewood Place, there's been a site that's been for a while right by the pumping station.

That's 85,000 (square) feet of building. I feel pretty sure that will come out of the ground this year. And I think Colonial, or someone, will do a building in the suburbs for the first time.

There's a lot of scuttlebutt out there and some things getting pretty far down the road. The Mountain Brook Inn site has been in play for a while, and that could easily happen. And then downtown, The Grove that's talking about doing the mixed-use hotel and mellow bar, about a 127,000 (square) feet.

And then you hear about this - seems like a plethora of hotels now, which is great for particularly downtown. But I think, again, there have been probably three or four announced and you know how that goes.

There may be a couple - it will be interesting to see what actually happens. But that's a positive. A couple of the negatives, HealthSouth will definitely bring some space back on the market. But with the suburb's absorption, that's probably not a bad thing. It's probably a great time to have some space right now. And then the other thing that hasn't been talked about much is AT&T's acquisition of BellSouth, BellSouth and the two red roof buildings there at the Colonnade, which is still perceived as a wonderful suburban location.

There's a tremendous consolidation going on. You've got to think at some point something will happen there, which would be a lot of supply, potentially, who knows? The other thing that's been interesting that's happened in Birmingham, and you kind of mentioned earlier about institutional investors, nobody has even realized this, Colonial recapitalized their whole portfolio, so they sold all of their office buildings, in essence, to their new partnership.

So there's a lot of good comps out there now. And I looked at them. They've got, I would say, market prices. I think they still traded at a discount to replacement cost. But it kind of goes back to what Steve said earlier, Birmingham is not perceived as an institutional investment great town.

Now, that said, in '06, one thing that was interesting is that both the Colonial Bank building, the building on the Shades Valley site, and the Chase Corporate Center were bought by institutional investors, which I think is healthy.

And then the one that's going to really sort of turn everything upside down is - and I think (the BBJ) has already reported, the Regions/Harbert building, which is now 100 percent leased, is on the market, marketed by CB Richard Ellis, with one of their national teams, and it should trade at a real premium, except given the new environment which we are in. It's going to be real interesting to see what that does with cap rates.

See the complete interview on the Birmingham Business Journal website.

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