Commercial real estate markets in Northwest Alabama are presenting a mixed picture, with the office sector in Huntsville and Decatur facing challenges while the retail sector in Florence-Muscle Shoals shows significant strength. A new analysis from the Federal Reserve Bank of Atlanta highlights how local economic drivers, such as university growth and population shifts, are creating distinct outcomes for different property types across the region.
Key Takeaways
- Northwest Alabama's commercial real estate markets are not uniform; office and retail sectors are on different paths.
- Huntsville's office market is struggling with high vacancy rates after a construction boom, despite strong population growth.
- The Florence-Muscle Shoals retail market is thriving, largely driven by a 50% enrollment increase at the University of North Alabama over the past decade.
- Data from the Atlanta Fed's Commercial Real Estate Market Index (CREMI) shows Huntsville's office market performing below its long-term average, while Florence's retail market is significantly above it.
Huntsville Office Market Navigates Headwinds
Huntsville, a city known for its aerospace and defense industries, has experienced remarkable population growth. According to data from the Chicago Fed, the city's population expanded by 23.7% between 2008 and 2023, far outpacing the national average of 9.7%.
This growth, however, has not fully insulated its commercial office market from broader economic pressures. The Atlanta Fed's Commercial Real Estate Market Index (CREMI) provides a standardized look at market performance relative to its historical average, where zero represents the baseline.
From Strength to Strain
Between 2021 and 2022, both Huntsville and the neighboring city of Decatur saw their office markets perform above their long-term averages. This strength was supported by low interest rates and healthy net operating income for property owners.
However, beginning in 2023, a combination of rapidly rising interest rates, increased vacancies due to hybrid work models, and inflationary pressures began to weigh on the sector. These factors caused the CREMI scores for both cities to decline. Huntsville's score returned to its long-term average in the first quarter of 2023, followed by Decatur in early 2024.
A Market Under Pressure
By the first quarter of 2025, Huntsville's office market hit a low point with a CREMI score of -1.9, nearly two standard deviations below its historical average. While it has since improved to -1.5 in the second quarter of 2025, it remains in negative territory.
Supply and Occupancy Challenges
A key factor contributing to Huntsville's weaker performance has been a significant increase in new office supply. The market saw 650,000 square feet of new office space delivered in 2020, followed by another 590,000 square feet in 2023. This influx of inventory has put downward pressure on occupancy rates as the market works to absorb the new space.
Data from CoStar shows that Huntsville's office occupancy rate fell from a high of 95.3% in the second quarter of 2020 to 89.3% by the first quarter of 2025. While recent data suggests a modest recovery, the market continues to face the dual challenges of absorbing new supply and adapting to post-pandemic work arrangements.
Florence Retail Sector Thrives on University Growth
In contrast to the office market's struggles, the retail sector in the Florence-Muscle Shoals area, known as "the Shoals," is experiencing a period of robust growth. This positive momentum is closely tied to the expansion of the University of North Alabama (UNA).
The University Effect
The University of North Alabama has become a primary economic engine for the Florence-Muscle Shoals region. In the fall of 2024, the university's enrollment reached 10,600 students, marking a 50% increase over the last ten years. This growth was fueled by new programs in high-demand fields like technology and nursing, investments in financial aid, and an elevated athletics profile after moving to Division I.
The university's expansion has had a direct and positive impact on the local retail market. New infrastructure, including a new stadium and additional student housing, has increased the on-campus and surrounding population, driving demand for goods and services.
Strong Performance Metrics
The strength is reflected in the CREMI data. For the second quarter of 2025, the retail sector in Florence-Muscle Shoals recorded a strong CREMI score of 1.76, indicating performance well above its long-term average.
Looking back over the past decade, which aligns with UNA's growth period, the area's retail CREMI score has been positive in eight of the ten years. The momentum has been particularly strong over the last three years, consistently exceeding the median performance tracked by the index.
"Increased enrollment leads to an increased need for retail, and we see these higher-than-average trends commonly in college towns," said Raleigh Green, vice president at Bank Independent in Sheffield, Alabama. He noted that Florence also serves as a regional shopping destination for residents of smaller towns in Alabama, Mississippi, and Tennessee.
Green also pointed to tourism as another contributing factor. "Florence/Muscle Shoals is closer to the Tennessee and Mississippi borders, allowing it to capture residents of those states for tourism easier than Decatur," he explained. "These tourists further feed into their retail market."
A Tale of Two Sectors
The analysis of Northwest Alabama's commercial real estate landscape underscores how localized factors can lead to vastly different outcomes even within the same geographic region. The findings are part of a broader effort by the Atlanta Fed to understand regional economic conditions, which included a recent visit by President Raphael Bostic to Red Bay, Alabama, home to major employers like Tiffin Motor Homes.
While Huntsville's office sector adapts to new supply and changing work habits, the retail market in Florence-Muscle Shoals demonstrates the powerful economic impact of a growing educational institution. These diverging trends highlight the complex dynamics shaping local economies across the country.
