The "Magic City" holds special allure for investors in 2017.
Birmingham, Alabama has been known as “The Magic City” for over a century. Today, one of the most “magical” things about the city for real estate investors is the high volume of unique opportunities that the metro area and surrounding region represent. Home to the most institutional investment money in real estate for multiple quarters since 2010, Birmingham flies largely under the “headline media” radar when it comes to its housing market. However, not only are both rental and owner-occupied homes extremely affordable in this metro area, but individual investors can take advantage of the city’s increasingly effective community- and master planning “chops” and an investor-friendly infrastructure that further broadens options and potential.
Birmingham may not be a secret much longer, however. In early 2017, Forbes listed the city as first on a list of “America’s Most Affordable Cities,” while ATTOM Data Solutions (formerly RealtyTrac) named it one of 25 “Hidden Gem Single Family Rental Markets.” The city is also receiving attention thanks to the extremely strong rental market both for single- and multifamily properties. Thanks to strong employment trends that keep unemployment hovering around a nationally competitive 4.5 percent (the national average has held right around the same since the start of 2017) but that also favors citizens who tend to be long-term renters rather than owners, with the U.S. Department of Housing and Urban Development (HUD) estimating that roughly half the population rents rather than owns, Birmingham is the ideal location for passive investors hoping to purchase turnkey rental real estate. Although in recent months Birmingham has received some unwanted attention in the national media after a national study alleged that about half of its current renting population is “cost-burdened” thanks to rents that are rising while median renter income declines, a number of new multifamily developments are “going vertical” to address this issue while investors interested in single-family residential (SFR) rentals have a number of innovative investment options thanks to the metro area’s land bank.
Although Birmingham is presently of particular interest to investors hoping to own cash-flowing turnkey rentals with its top-five-ranked zip code for the “highest potential rental returns in 2017” from ATTOM Data (a whopping 78.4 percent possible), the city also has its share of wholesalers and flippers who are going strong. At the beginning of this year, ATTOM noted that the home-flipping rate for the metro Magic City was 7.4 percent. Only eight cities with a population of 1 million or more had a higher home-flip rate. Interestingly but perhaps not particularly surprisingly, although Alabama as a whole does not have heavy private equity activity in real estate or other sectors, Birmingham itself does have a small but active private equity investment sector that participates in the local real estate market as well as in other business ventures.
Built on a Strong Foundation
Birmingham boomed rapidly after its founding in 1871. Gifted with a prime location for heavy industry, ready and nearby supplies of coal, limestone, and iron ore made it a natural choice for iron and steel companies to invest. Company towns sprouted and grew together, enmeshing multiple walkable commercial districts into the fabric of the city as it grew throughout the Jones Valley. This industrial base fed a remarkable recovery after the Great Depression, and suburban growth spread up and over the surrounding mountains.
Unfortunately, darker times lay ahead for Birmingham. Its journey through the Civil Rights era was fraught with violent oppression, a legacy that the region forthrightly carries to this day. Heavy industry left throughout the 1970s and 1980s as iron and steel production declined nationwide, eroding the city’s economy. As a new century turned, however, the city regained momentum, finding new economic footing that continues to fuel a remarkable resurgence in recent years.
Strong Bones in the Valley
Birmingham retains some industrial roots, both economic and cultural. While the American Cast Iron Pipe Company and various steel-related businesses continue to operate, the city’s industrial heritage lends historic ties and authenticity to enlivened neighborhoods. The Sloss Furnaces, which made iron until 1970, are now a tourist attraction and looming backdrop to the burgeoning downtown Loft District. An enormous statue of Vulcan, the Roman god of fire and metalworking (above), surveys the City from atop Red Mountain. That statue is the largest cast-iron sculpture in the world, a regional icon, and the best skyline view around.
While factories disappeared throughout the 1970s and 1980s, Birmingham grew its service-providing job sectors. In particular, education and health services flourished, anchored by the University of Alabama at Birmingham (UAB), a large research university, academic medical center, and the region’s largest employer. UAB has provided a stable and growing economic base for downtown and the Southside neighborhoods, with six hospitals and over 23,000 employees. According to the National Multifamily Housing Council, renters have an average income, nationally, of just over $55,000 and a median income, also nationally, of just over $38,000. The majority of workers in the healthcare industry tend to fall within these parameters and, given the solid industry growth in the healthcare sector, this population provides a stabilizing influence on the renting population in the area and likely sets the stage for the need for more rental options in the future.
Downtown Birmingham itself has retained an admirable number of historic buildings and quality architecture. In the last year, there have been several notable apartment conversions. The classic downtown Pizitz department store has been converted to an upscale apartment building with the city’s first trendy food hall, and the once-abandoned Thomas Jefferson Hotel now offers over a dozen floors of luxury rentals. The creation of Railroad Park [see sidebar], the city’s new gathering place, has touched off a downtown apartment boom around the UAB campus and even drawn the city’s long-lost minor league team back in from the far-out suburbs with a brand-new ballpark amidst all the new residents. All of this sets the stage to attract the ubiquitous “millennial” renter into the area thanks to walkability, a unique entertainment and arts scene, and, of course, extreme affordability relative to other areas of the country.
While downtown thrives, the city’s energies expand to other neighborhoods along the well-developed street grid as well. Of particular note is Avondale, an independent nearby city from Birmingham’s early days. A hopping commercial district and signature park have helped jump-start new businesses and renewed interest in the surrounding area of Forest Park. Just up the road from Avondale, the Woodlawn and East Lake neighborhoods are beginning to experience a similar turnaround, with new life (and new coffee shops) in their centers. Birmingham suburb Mountain Brook also deserves a mention as one of the nation’s most affluent suburbs. The area is is known for a leafy tree canopy, picturesque retail villages, and the nation’s first office park (built in 1955).
New Starts Bring Unique Opportunities for Investors
While swaths of Birmingham have not enjoyed the stability of the suburbs or the resurgence in the core, a number of local entities are taking promising steps toward at least mapping out new futures through a combination of civic, legislative, and citizen-led approaches. The city recently completed its first comprehensive plan since 1961, identifying a new vision and strategies for improving virtually every aspect of the city’s infrastructure and environment [see sidebar]. Among other things, the plan calls for an array of strategies to expand community renewal, including a coordinated system for attacking and redeveloping blighted areas, conducting a city-wide block-by-block real estate market study, and strategically focusing redevelopment activity on the city’s many walkable urban villages such as Avondale. Also in the plan: a recommendation to utilize a municipal land bank to accelerate neighborhood renewal activities. Since the debut of the comprehensive plan in 2012, the city’s housing inventory has declined steadily while home values have risen at a similar staid pace. Although overall home values have certainly not skyrocketed and, in some areas, have been a bit volatile, the overall trend has been good.
Banking on the Land Bank Authority
In accordance with that comprehensive plan, the city created the Birmingham Land Bank Authority (BLBA) in 2014. The BLBA can acquire tax deeds to properties that are five or more years delinquent in tax payments, clear the property’s title, and then resell. According to the Federal Reserve, Birmingham’s land bank has “the unique statutory ability to combine an unlimited number of properties into a single case, which should create efficiencies and economies of scale with the courts, the Department of Revenue, and title insurance companies.” According to the City of Birmingham Comprehensive Plan, 10 percent of all lots in the city are tax-delinquent (and 84 percent of those are residential properties).
Although BLBA officials originally had believed that the land bank would cater largely to individual investors ready to put serious “sweat equity” into properties with clouded titles and other blight-related issues, they found that many of the properties were purchased by local individuals and groups of citizens dedicated to ending blight in their local communities. They have effectively done so in many instances; John Colon, director of the city’s department of community development, claimed this past February that “in some communities, property values have increased 20 percent.” He added, “In other communities, they are increasing even more,” and cited “Norwood, Pratt, and Avondale” as prime examples. Colon’s numbers may be slightly overzealous, but it is undeniable that these neighborhoods are “on the rise.” Whether you opt to purchase deals though the land bank or just in areas where local communities have used it effectively, the entity serves investors as a market stabilizer and growth generator.
In addition to the governmental measures, citizens and business groups are pushing for change. REV Birmingham, a local economic development organization led by local corporate and community leaders, has supported downtown and neighborhood renewal efforts as well as economic development. A mix of activities supports the goal, including small business advisement, development partnerships, and tactical urbanism projects like pop-up markets and public murals.
More Magic to Come
With a recent nod from Freddie Mac for being one of the “most improving” markets in the country, projected appreciation of a steady 2.5-to-3 percent, and rising rental rates in both single- and multifamily rentals, Birmingham, Alabama, certainly appears to be far from running out of “magic.” While the city’s real estate market is unlikely to light a fire in your rental portfolio, an abundance of unique opportunities and an intensely motivated group of city planners and officials have created an environment rife with predictability. Birmingham may never boil over, but market shifts tend to come with plenty of warning, and the renting population in particular is ideally suited for investors seeking long-term cash-flowing, turnkey rentals. The magic is just waiting to happen.
Railroad Park: Transporting and Transformation
Railroad Park is one of Birmingham’s proudest recent achievements. Built on land once occupied by railroad sidings and warehouses, the park has quickly grown into the city’s civic life – and development trends. When Birmingham’s industries wound down, the area fell quiet except for the main line railroad next door. The park had been imagined by local leaders for years, but in the 2000s, the concept finally gained steam. After a false start due to difficulties acquiring property from the railroad, construction moved forward and the park opened in 2010.
The park stretches across 19 acres and four city blocks directly adjacent to the railroads upon which the city grew. Designed to embrace the frequent freight traffic on the adjacent railroad viaduct, the park offers numerous opportunities for trainspotting. The focus isn’t entirely on trains, though; Railroad Park offers a lake, wetlands, walking and jogging trails, outdoor gym equipment, a playground, and a station on the city’s bike sharing program. The park maintains a full docket of events to draw visitors, including free exercise classes, concerts by the Alabama Symphony Orchestra, and family fun days. The space draws residents from all over the city, office workers from surrounding downtown, and event-goers from all over the metropolitan area.
Developers, businesses and institutions have responded too. Railroad Park has spurred a number of major developments in the immediate area:
• The Birmingham Barons, the city’s minor-league baseball team, relocated next to Railroad Park into a new, $64 million stadium
• The Negro Southern League Museum, which documents the early African-American baseball leagues
• Several large urban apartment developments have been built, adding hundreds of new rental units and residents to the area
• New retail and restaurant offerings, including the local Good People Brewery, Starbucks, and a full-service Publix grocery store
According to the Birmingham News, as of the park’s fifth anniversary in 2015, $324.5 million in public and private investment had occurred around Railroad Park.
Fine Print: Birmingham’s Comprehensive Plan
Comprehensive plans are important tools that influence a range of issues such as land use, parks, greenspace, housing, and more. Plans typically include a detailed assessment of existing conditions in the city, maps, and strategies for future improvement.
Birmingham’s recent Comprehensive Plan is the city’s first effort since 1961. The Plan is intended to serve as a twenty-year blueprint, and was produced with lots of public involvement – it was developed with input from more than 2,300 people as well as events and public meetings. As a result, the Plan includes a collective vision for the city, where Birmingham “leads the South as a community of choice and opportunity: diverse, prosperous, sustainable, and beautiful.”
A number of strategies target housing and neighborhood renewal:
• The Plan recommends focusing “a defined portion of public investments, incentives, and programs on neighborhoods with potential ‘urban villages’ at their core.” This would focus better infrastructure and economic incentives on the numerous walkable commercial districts around the city, particularly those that have not experienced revitalization yet.
• To apply the Comprehensive Plan to target areas, the Plan recommends that the City develop a series of “framework plans” that translates broad strategies to specific issues and properties within each community. So far, framework plans have been created for five areas, with two more in progress.
• Understanding the city’s neighborhoods is a priority, with a focus on understanding markets. A detailed city-wide real estate study was recommended, and market reports were completed for five areas.
• Blight removal is addressed in several ways, including the creation of a land bank authority, which took place in 2014.
The Comprehensive Plan is available to the public at here.