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2Q COMMENTARY

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INDEPENDENCE PLAZA

For the past couple of months Shannon Waltchack has been busy reeling a big fish into our boat, Independence Plaza— aka the Regions Tower—in downtown Homewood. This $15 million purchase is a larger deal than we’ve targeted in the past. Oftentimes, the bigger deals can be easier to acquire and operate than the smaller ones. You find better debt options, deeper onsite management infrastructure, and more favorable economies of scale. Over the next 12 months you’ll see us going after larger deals here in Alabama in A+ locations.  We think this is the right time in the cycle to be adding trophy properties and pairing them with long-term, fixed-rate debt. 

One of our brokers, Scott Hinkle, found this off-market deal for us. In January, Scott and Tim flew to New York to meet with the owner. Despite emails, texts, Skype calls, and other forms of video conferencing, you just can’t replace an old-fashioned face-to-face meeting. As you probably know, we’ve been intentionally growing the brokerage division of our company the past few years and it’s extremely exciting to see real fruit from that expansion. Way to go, Scott! 

RETAIL SHOPPING CENTER TRENDS 

After digesting the 2013 annual reports from the top REITs in the United States, I wanted to highlight the following trends: 

1. Less Bank Branches, More ATMs: Banks are quickly recognizing that bank branches are less important now, given the use of new technology like remote capture deposits on your cell phone. Bank of America will have reduced their branch count by 10% by the end of this year. Kimco’s (NYSE: KIM) COO Conor Flynn had this to say: ‘Bank branches have been on a target list (to reduce) for awhile, of understanding that they are going to (use) more ATMs and less tellers. A lot of the banks have been putting private wealth management into the bank branches to try and create more value. But they are still reducing the amount of branches across the country.’ 

 2. ‘Medtail’: As the number of medical consumers grows through an increasing and aging population, the demand for medical facilities also grows. The cost to build a ground-up MOB is now $225+ per square foot. It oftentimes makes more financial and logistical sense to simply retrofit an empty box in a shopping center. For instance, in Grosse Point, Michigan, St. John Providence Health System converted a former Borders store and Ace Hardware into an MOB. And closer to home, Vanderbilt University Medical Center took the entire upper story of 100 Oaks Mall, Nashville’s first enclosed mall. In addition to MOBs occupying retail space, we’re finding more compounding pharmacies, medical testing facilities, and medi-spa type tenants interested in our own centers. 

3. BEYOND OMNICHANNEL-ing: If you follow retailing, you’ve undoubtedly heard the term ‘OmniChannel’. It basically means selling across multiple channels (online, in store, mobile, etc.), and doing it really well. It has a been a word referring to retailers, but now some large mall and shopping center owners are seeing themselves as OmniChannel-ers, too. Case in point, Simon Properties, General Growth, Macerich, and Westfield all have invested in ‘deliv’ which will provide same- day delivery from their malls. Now an online shopper can visit a retailer’s website, and by clicking on the same-day delivery button, the items will be delivered to the customer from the local mall. Essentially, the mall adds another channel to sell goods to customers, increasing their tenant’s sales and hopefully growing rents overtime. We live in interesting times. 

ARE THEY BUILDING TOO MANY APARTMENTS IN BIRMINGHAM’S CBD? 

That’s a question I am hearing more and more. 

And my answer is “no,” I don’t think you can out build the demand for urban apartments in today’s world. But I do think you can out build the demand for high- rent apartments. You see, in order to make a decent return on new construction, mid-rise apartments, you need to achieve rents of $1.20-1.40 per square foot, per month. To put that number in perspective, 90% of Birmingham’s entire apartment stock is rented at less than $1.00 PSF.

But as Jeffery Bayer like to say, ‘Birmingham is not Mars,’ meaning that we are no different than other large cities. Elsewhere, you can see the same trend happening and people asking the same questions we’re asking in Birmingham. 

Just last week, Joseph Sollazzo, an economist with CoStar Group wrote the following: 

‘Seattle is in the midst of an apartment boom unlike anything it has ever seen, with almost 23,000 units expected to be added to the Seattle Downtown submarket over the next five years, over 65% of metro wide deliveries. Many of those new units will be too expensive for the metro’s average renter.’ 

Sound familiar? 

I think by 2016 we’ll know for certain the answer to the question. But in the meantime, I’m going to enjoy seeing a bunch of cranes working in downtown again!

Derek Waltchack

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Over the next 12 months you’ll see us going after larger deals here in Alabama in A+ locations. We think this is the right time in the cycle to be adding trophy properties and pairing them with long-term, fixed-rate debt.

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by Suzanne Echols
04.28.2014