Why do CBD tower office buildings have large vacancies in Birmingham?

Why do CBD tower office buildings have large vacancies in Birmingham?

As you prepare for landing at Birmingham-Shuttlesworth, do you look down with pride at our small but mighty skyline? What about driving over the Red Mountain Expressway, and catching the sunset through the skyscrapers? Our collection of tower buildings makes up our downtown identity, setting us apart from other anchor cities with a splash of metropolitan charm.

As the Central Business District grows more vibrant with residential units, restaurants and activity, it seems peculiar that the buildings with the highest vacancy rates are by far our iconic tower buildings.

In Q2 of 2017, the Xceligent Market Report states that the office vacancy rate in Birmingham is 14.5%, which decreased from 14.8% in Q1. It doesn’t seem like much, but compared to other peer cities like, Nashville, whose office vacancy rate was 6.2% at the end of the year*, it’s high enough to wonder what is making so many of these spaces sit empty. Job growth is the biggest economic trigger that would secure the high occupancy, ‘ow vacancy results that our city is after. But is the office market moving away from traditional tower buildings in search for something new?

“Birmingham towers were [once fully] occupied by the banks and their accompanying lawyers,” explains SW Partner Tim Blair. “With bank consolidation in the last decade, the square footage once occupied by the banks and their lawyers has decreased. All this adds up to a surplus of space that is basically a commodity – and commodities compete to differentiate themselves,” Blair said.

It’s important to note that none of the buildings with vacancy issues has undergone any major capital improvements to increase activity in the past few decades. A great example of rebirth is Financial Center. The landlord took an older asset in the CBD and attracted a new generation of tenants with impressive capital improvements. It’s currently 85-88% leased.

Co-working concepts like WeWork, Regus and Forge are redefining how companies look at office space. These options make it more affordable to get up and running quickly and not get pigeon-holed into long lease agreements. They also eliminate the need for tenants to spend time on contracting janitorial services, office supplies, meeting spaces, IT, and sometimes even human resources. We continue to monitor the trends of collaborative offices and nontraditional, smaller suites. Office tenants are more willing than ever to forgo conventional office space to devote more energy and power to efficiency and retaining/attracting talent. Technology is the catalyst behind all of this, as usual.

Let’s go through the three largest examples of vacant towers in Birmingham:

Wells Fargo Tower – 29% vacant

Built in 1986, this building has gone through a few identity crises. SouthTrust was the tower’s namesake from its inception through 2005. Wachovia took the naming rights until 2010 when it was renamed as the Wells Fargo Tower. The building has a gorgeous lobby and incredible floor to ceiling windows throughout, with a big-city feel. The number one problem facing this building is parking. The ratio is 0.41, which means for every 1,000 SF, there are 0.41 parking spaces. If this building was to fill up, where would these people park? We are a driving city, without the parking infrastructure to absorb the traffic that would fill this building. As we all know ridesharing and alternative commuting is on the rise. Maybe this transportation evolution will aid the tower and attract new occupants.

Regions-Harbert Plaza – 38.7% vacant

This building recently lost their major tenant, Regions Bank, which moved its staff into the Regions Tower. This Landlord has recently presented a plan to pump capital improvement money into the property, very little has occurred since it was built in 1989. In larger markets these improvements happen more frequently, avoiding sky rocketing vacancy levels.

AT&T City Center – 100% vacant

City Center, which once housed 2,000 AT&T employees, has gradually become vacant the past few years. AT&T moved its operations to 1876 Data Drive in Hoover. According to SW broker David Spencer, the building is now being pitched as a mixed-use redevelopment project with opportunities for hotel, office and condos with some retail on the ground floor.

There’s no question that these spaces are patiently waiting for a large user with their sights set on downtown Birmingham. These users are few and far between, and as you can imagine things will get competitive.

Derek Waltchack thinks that the economic engine has relocated from the Financial District to Southside/UAB. “That’s our future. And just like watching a football game, you want to have a seat close to the action,” says Waltchack.

There are plenty of other successful towers in Birmingham. For example, the Regions Center is at full occupancy, as Regions Bank is the largest employer in the city and state. The John A. Hand Building is a mixed-use property, fully occupied with both office and residential tenants.

David Spencer predicts that the towers mentioned above will become occupied once they are repositioned with the appropriate amount of capital. “People like the views and being located within a CBD environment. Parking will play a lesser a role as fewer people drive to work in the future. The amount of product within the CBD/Southside/Parkside is drying up rather quickly. Tenants will go back to leasing space at the Regions Harbert, Wells Fargo Tower, etc,” said Spencer.

Amazon recently announced that they will be adding another headquarters with up to 50,000 jobs. Birmingham is actively campaigning for this opportunity, and we think that these prominently located buildings and could be a desirable fit for Amazon. Anything can happen.