COVER STORY, NOVEMBER 2005

NEW ORLEANS MULTIFAMILY UPDATE
As New Orleans tries to recover, the need for multifamily product is immediate.
Larry Schedler, CCIM

As the water levels in the streets and neighborhoods of New Orleans dissipate and jazz begins to once again fill the air in the French Quarter in place of military helicopters, the gem that is the city of New Orleans is wounded but certainly not dead.

In the wake of Hurricane Katrina, there are makeshift "no vacancy" signs in the windows of apartment communities throughout the Southeast. A region that previously experienced a soft multifamily market now has Katrina to thank for 100 percent occupancy rates and extensive waiting lists. Overnight, Katrina created the single largest need for housing in the history of the United States. As the New Orleans market is rebuilt and refurbished, multifamily owners can expect their occupancy rates to easily reach 100 percent, as the rates were 92.2 percent before Katrina.

Since the majority of the prior multifamily developments in New Orleans were more than 25 years old, the city will soon enter a period of concurrent multifamily development unlike anything previously witnessed. The greatest amount of need lies in eastern New Orleans, which consisted of 7,000 units developed in the mid-1970s and saw the largest number of units lost. In all, greater New Orleans is estimated to lose 15 to 20 percent of its total multifamily inventory, which consists of approximately 50,000 units.

Now one of the main barriers of entry for developers in New Orleans, the lack of land, is no longer an issue. It appears that, in the wake of Katrina, developers will have a clear canvass on which to rebuild the community, which will include new multifamily developments.

The central business district (CBD) and historic center of New Orleans remain largely intact and are desirable areas for developers. As the CBD re-opens, the desire for residents to be near their places of employment will be much greater. Previously, the desirability of urban/warehouse district living had prompted roughly 25 percent of the multifamily industry to introduce condominium conversions. This trend should continue at an even quicker pace. It is also expected, with Lake Pontchartrain to the north, the Mississippi River to the south, and wetlands to the east and west, that smaller, more vertical structures with parking on the lower levels will be developed to help New Orleans' population better handle the water's presence.

Additionally, the Northshore, including Slidell, Mandeville and Covington, Louisiana, is a very desirable area to developers that offers a well-respected public school system and convenience to employment and recreational activities. The area also boasts one of the highest household income levels in the state with a built-in inventory of qualified tenants.

Local firms, prior to Katrina, were developing five new communities. The majority of previous construction activity in greater New Orleans had been in eastern St. Tammany Parish in Slidell. During the past few years, more than 1,000 apartments have been added to this submarket. Although parts of eastern St. Tammany sustained serious destruction, most of the multifamily units will be in commerce probably within 6 to 9 months. Sizeler Properties, a publicly traded real estate investment trust based in New Orleans, and Sabre Development, a private development firm, will continue construction on Greenbriar Estates and Haborside Apartments, respectively, in Slidell. Developers will focus on this submarket during the next 12 to 18 months, as it remains strong.

In Gretna, Louisiana, Calypso Bay Apartments, which will ultimately have 280 units, has completed its first phase. This is the first new apartment development in this submarket since the 1980s and it offers luxury units with a West Indies theme. The leasing activity prior to Katrina had exceeded the supply of available units. A "windshield" inspection of the property showed it to be in good condition and the developer, Shadowlake Properties, is anticipated to move forward and complete the remaining phase.

Construction should continue at River Gardens in Uptown New Orleans, as well, which escaped Katrina with minimal damage. This is the former site of the St. Thomas housing development and it will offer 296 urban units in the historic center of New Orleans. It is being developed by HRI Properties, a local firm with a national reputation for redeveloping historically significant properties, which serve as a catalyst for urban renewal.

Also, Mandeville Lakes, which is being developed by Crosby Properties in Mandeville, Louisiana, should continue construction as anticipated outside interest to help replenish New Orleans' housing stock continues to rise.

As the rest of the world has learned, the city is situated 6 to 9 feet below sea level and, as a result, the land requires significant amounts of fill as well as pilings. Obviously, this increases the cost of construction and the rental rates that must be achieved in order to justify new developments. In order to replenish the supply of affordable units that were lost, it will be critical for the federal government to provide tax credits, HOPE V funds and insured loans. Without these incentives, the rents will not be sufficient to justify construction on a conventional basis.

The majority of developments that had been underway in greater New Orleans were targeted to the "upper end" of the market. The rents necessary to justify new construction fell within $0.95 to $1.00 or more per square foot per month. With the heighten demand after Katrina, these rents will be easily achievable and are expected to increase due to the limited supply. Overall, the average rent in New Orleans for an average unit size of 854 square feet was $660 per month or $0.77 per square foot per month. That is also expected to increase.

New Orleans is one of the most unique cities in the country.   It was, however, a city that had an old infrastructure and major barriers to entry.   The national focus on the city has served as a reminder to the country of the significance of its port and its petrochemical industries. That should provide the catalyst for the federal dollars necessary to build an adequate levee system to assure investors, insurers, lenders and employers that a catastrophe of this magnitude will not happen again. There is a saying, "whatever doesn't kill you, makes you stronger," and New Orleans will emerge a stronger, safer and more progressive community.

Larry G. Schedler, CCIM, is with Metairie, Louisiana-based Larry G. Schedler & Associates, Inc.

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