Car Makers Find Their Home
In Alabama's Birmingham

Once known as the Pittsburgh of the South because of its strong ties to the steel industry, the Birmingham region's more diversified economy and growing auto sector is stoking demand for industrial properties.

A burst of warehouse construction comes as Alabama's auto industry produced nearly a half million cars and light trucks last year, less than 10 years after Mercedes-Benz manufactured the state's first autos in 1997, according to the Economic Development Partnership of Alabama. Since then, Honda and Hyundai have located plants in the state. Both the Mercedes and Honda plants are just outside the seven-county Birmingham metro area.

Last year, Graham & Co. built a 518,000-square-foot warehouse for Mercedes-Benz on former farmland in Vance, Ala.

The warehouse boom is well-timed, helping to offset an office market weakened in part by consolidation in the region's banking industry. Vacancies ticked up to 15.9% in the downtown office submarket at year-end 2005 from 13.6% in 2004, though average rents also rose slightly over the period, while the suburban Midtown submarket remained tight at about 5.9%, according to Eason, Graham & Sandner Inc., a Birmingham-based real-estate brokerage and development company.

After acquiring Birmingham-based SouthTrust Corp. in 2004, Wachovia Corp., based in Charlotte, N.C., is selling two Birmingham buildings. In 2004 the banks also slashed the space leased by about half in the recently renamed Wachovia Tower. Some brokers say more consolidation could follow last month's announcement that Birmingham-based Regions Financial Corp. agreed to take over hometown rival AmSouth Bancorp, though a Regions spokeswoman says the company doesn't expect the transaction to have a significant impact on Birmingham real estate.

To be sure, the Birmingham area's comparatively lower-priced office market also has drawn interest from a handful of institutional investors. TIAA-CREF last year purchased the seven-building Inverness Center complex in a deal valued at about $92.7 million, or about $100 a square foot. That's well below the average price of $189 a square foot paid for offices nationally last year, according to Real Capital Analytics of New York.

For now, the economy of the Birmingham area -- with more than one million people in the foothills of the Appalachian mountains -- appears to be holding its own. The unemployment rate stood at 2.9% in April, the fourth-lowest of the U.S.'s large metropolitan areas, and employment levels rose by 1.2% in April from the year-earlier period, just below the national rate of 1.4%, according to the Bureau of Labor Statistics. Sam Addy, a research economist with the Center for Business and Economic Research at the University of Alabama, credits the area's strong manufacturing, retail and healthcare sectors.

Brisk demand from regional distributors of a variety of goods and auto-parts manufacturers has increased the pace at which tenants are leasing industrial space from the historical rate, according to Mark Byers, vice president of industrial leasing for Eason, Graham and Sandner. Last year Birmingham-based Graham & Co. completed a 518,000-square-foot build-to-suit warehouse for Mercedes-Benz next to the auto manufacturer's assembly plant in Tuscaloosa County.

In the closer-in counties of Jefferson and Shelby, an estimated 1.4 million square feet of new speculative industrial space -- about half of it preleased -- is expected to be completed this year, Mr. Byers estimates. That represents about 12% of those two counties' existing space at the end of 2005. While the market is robust for now, Mr. Byers says if demand slows, "we've got a few pretty bumpy years ahead" as the new space is leased.

Though the region isn't nearly as reliant on autos as it was on steel, some investors are nonetheless wary of Birmingham's new industrial star. Wells Real Estate Funds of Atlanta already owns two suburban office buildings and is looking to buy more, but isn't now considering industrial properties because of concern about the market's exposure to auto-making. "We just don't like markets dominated by one industry," says David Steinwedell, Wells' chief investment officer. "You're just subject to more risk."

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