Although located just 80 miles upriver from New Orleans, the Baton Rouge, Louisiana, real estate market shares little with its larger neighbor to the southeast. The second largest city in Louisiana, Baton Rouge's economy has many factors in its favor. The city is the center of state government. It is also the hub of the state university education system and home to both Southern University and Louisiana State University (LSU). A large petrochemical industry provides thousands of high-paying blue collar jobs. A shrewd former governor, Huey Long, built a low-hanging bridge across the Mississippi River, north of the city, assuring Baton Rouge would remain the northern-most port on the Mississippi able to handle deep-draft ships.

In January 2002, the City of Baton Rouge will begin construction on a new $55 million convention center. The project will be constructed on the riverfront at the intersection of Government Street and River Road. Funds to construct it come from a bed tax, state capital outlay and sales tax rebates from the hotels in the parish, according to Davis Rhorer, an executive at the Baton Rouge Downtown Development District.

Today, a growing gaming industry and a business travel market fueled by government and education are creating a thriving hospitality industry. It is no wonder many predict that Baton Rouge is well on the way to becoming the largest city in Louisiana. The city's 15 consecutive years of employment growth bear testimony to the resilience and diversity of Baton Rouge's economy. Against that backdrop, occupancy levels in the office, industrial and retail centers remain strong.

Job Growth

Despite a drop in government employment, Baton Rouge continues to show positive job growth. Jimmy Lyles, chairman and CEO of the Greater Baton Rouge Chamber of Commerce, says, "The metropolitan area has experienced an overall net job growth of 1,600 jobs over the last 12 months. Taken together, construction, retail trade and service sectors showed a 12-month increase of 5,600 jobs. This non-governmental 12-month job gain leads all other Louisiana metropolitan areas."

Lyles noted that a considerable amount of this private sector growth was offset by an unexplained 12-month reduction of 4,000 government jobs.

LSU economist Dr. Loren Scott predicts that 27 percent of all jobs statewide will be created in Baton Rouge during the coming year. Growth in the telecommunications and technology arenas in the city have contributed to the recent gains.

Retail

The area's oldest retail mall, Bon Marche, is under redevelopment by Winward Properties and will be renamed Bon Carr? Town Center. Overall retail occupancy in Baton Rouge stands at 88.3 percent. Older neighborhood centers have the highest vacancies and the regional vacancy rate stands at 11.5 percent. A number of big box users have entered or are in the process of entering the market. Sam's Club, Bed Bath & Beyond, Old Navy and Target have all initiated projects, and there is strong speculation that Wal-Mart will enter the mid-city area. Albertsons continues to lead the region in grocery sales.

Where initial projections were pointing toward 40 percent office and 60 percent retail, the market has reversed those projections. Nearly 100 percent of office users are telecommunication and/or technology companies, a result of the presence of major fiber optics at the site and below-market rates in the range of $8.

Office

The overall office market remains strong with 93 percent occupancy of Class A space. There has been a weakening in Class B and garden office space, due in part to previous tenants building or buying their own office space.

Rob Hebert, an office specialist with NAI/Latter & Blum, says that while Class A leasing activity has slowed in 2001, the market has maintained a state of equilibrium, with a lack of new tenants but no large spikes in vacancy.

One of the largest office construction projects in Louisiana is rising from the ground in downtown Baton Rouge. Capital Park, a major project by the state of Louisiana, will provide centralized space for state workers who are now scattered throughout Baton Rouge in leased space. Rhorer says the complex will have a dramatic impact on the downtown area.

"Capital Park represents an investment of over $135 million in buildings already completed or under construction," says Rhorer. "That includes 1 million square feet of new office construction and an additional 1 million square feet of parking. Another 500,000 square feet of parking and nearly 1 million square feet of office space are currently under design." Rhorer says that when complete, the Capital Park project will bring more than 2,000 jobs to the Baton Rouge central business district.

However, Capital Park will create vacancies across the city as buildings are completed and state workers vacate leased properties. No single area is expected to be hit particularly hard, but pockets of office vacancies may spring up around the city.

One exception to the equilibrium in the office market is the Sherwood Forest area. Community Coffee, a substantial presence in Baton Rouge, built a new facility, putting 25,000 square feet of lease space on the market. Nearby corporate consolidations placed another 30,000 square feet on the market. All told, nearly 60,000 square feet of office vacancies exist in the Sherwood Forest area.

Industrial

The industrial market remains in balance with a 4 percent vacancy factor. Notably absent in the market is the availability of large bulk industrial space; almost all existing bulk space is leased, albeit much of it for short term, by chemical and petrochemical users. Demand in the small office/warehouse (2,000 to 10,000 square feet) sector remains strong and is approaching 100 percent occupancy. Land sales for these warehouse developments are more than $4 per square foot and continue to escalate slowly. Some industrial demand has shifted south to Ascension Parish due to more affordable unimproved property, in the range of $2 per square foot.

The Mississippi River, a barrier for many years to the west, is no longer a limiting factor in development. Lower land prices in the west Baton Rouge area, now in the $1 per square foot range, are luring many industrial users to the west bank of the river. These lower land prices, coupled with lower taxes, ease of development and accessibility, have spurred construction of almost 1 million square feet of warehouse/distribution space in west Baton Rouge during the past 12 months. Another 800,000 square feet is planned for 2002.

Investment Sales

Several years of rising prices for investment properties have prompted many investors to take advantage of IRS Section 1031 property exchanges to defer their tax liability upon sale. But bargain properties to exchange into are hard to come by in Baton Rouge.

That's the view of Austin Earhart, an NAI/Latter & Blum commercial specialist in Baton Rouge, who recently brokered several investment sales in the capital city.

"Baton Rouge continues to be a high-demand market for investment properties," said Earhart. "This strong demand, coupled with a shortage of suitable investment vehicles and rising prices, is leading to the re-development of many older areas."

Investors continue to demand higher yields from projects, while sellers are seeking to maximize profit. Expect investment activity to remain flat for the near term. Eventually, says Earhart, "if investment properties are not generating sufficient cash, either investors will walk away or values will have to be adjusted to meet investor expectations. Over the next 12 months, I expect that prices throughout the area may soften to accommodate those pressures."

Multifamily

Apartment construction has boomed in the latter half of the 1990s, with nearly 20 new communities and over 3,500 apartments constructed since 1995. During the same period, as many as 750 out-of-service units have been refurbished and restored to service.

The trend toward more apartments seems certain to continue for the foreseeable future, with seven communities totaling nearly 1,600 units scheduled to come on line between 2001 and the end of 2003. The largest of the new communities is the 433-unit Southgate Towers, a project by the Baton Rouge-based R.W. Day Company. Planned for Nicholson Drive south of LSU, this high-rise, luxury development is slated to open in 2002. Lakeside Apartments, another luxury development planned for the Millerville Road area, will place an additional 396 units on the market.

While vacancy rates had remained fairly constant despite the construction, the market is now feeling the effects of the building boom. Linda Jackson, a vice president with Latter & Blum Property Management, says the hardest hit area is near the LSU campus, where significant vacancy rates -- once unheard of -- are suddenly the norm.

"We've gone from very low vacancy rates near LSU to very high vacancy rates for the fall 2001 semester," says Jackson, "and numerous properties experienced 25 to 30 percent in vacancy." Jackson attributes the drop-off to a large number of new units in the area. In addition, more than 200 units went on the market for sale as townhomes and have sold out. An additional number of townhome units for sale are being built on Burbank and will further impact the LSU market.

The number of apartments for seniors and assisted living units have also increased significantly. Ten new facilities or expansions representing more than 500 new units aimed at seniors have come on the market in the past 4 years. Despite the new construction, waiting lists and medium to high occupancy levels are common. Jackson notes, however, that the typical retirement resident is getting older and less independent. As the market gets more competitive, she says, "it is only the facilities that are well managed, offer numerous amenities and have the service packages required for aging in place that will succeed. The food service and professional staff will also play a key role in the success of retirement facilities in coming years."

Don Cooper is the editor of NAI/Latter & Blum Market News and Views.

©2001 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.