The New Orleans area is enjoying a new wave of optimism as a new mayor and an NBA franchise have brought hopes of a new era in politics and business. Shortly after taking office, Mayor C. Ray Nagin launched a corruption crackdown that has both transfixed and energized the community. And with the support of business leaders and the community, New Orleans attracted the Charlotte Hornets of the NBA in the spring. Against that backdrop of community optimism, real estate professionals are a bit more cautious with their enthusiasm.

Multifamily

The multifamily market has seen heavy growth over the past 2 years with several major developments coming on line. The largest developer of multifamily housing in the area is Favrot & Shane Companies, which owns over 7,000 of the approximately 38,000 units in commerce. Company President Henry Shane says that the market is currently overbuilt, but so far developers have resisted any downward pressure on rates.

“Right now I would say we’re looking at a 2-year absorption problem,” says Shane. “But with interest rates running so low, our break-even point on new developments is much lower than we budgeted for. As long as interest rates stay this low — and I don’t see anything on the horizon to kick up rates — I think most developers will be content to wait out this oversupply condition rather than cutting rental rates.”

Shane says his own company contributed to the oversupply problem, building over 700 units last year rather than their historical 250-unit output. At the same time, the 703-unit Saulet complex was coming on line in downtown New Orleans.

“We all built, and now we’re waiting for them to come,” says Shane. “But the good news is that outside of the new, higher-priced units, occupancy rates are very high.”

“Older units are running at 100 percent occupancy,” he continues. “The local economy is creating jobs that can justify $500 rents, but we just aren’t adding enough upscale jobs to absorb all of the $1,000 monthly rent apartments that have come on the market recently.”

Industrial

While faring better than the national average, the New Orleans-area industrial market has slowed significantly.

“We are definitely going through a no-growth period right now,” says NAI/Latter & Blum broker and industrial expert Al Davis. Davis, who maintains the area’s most comprehensive database of industrial activity, says the soft market is beginning to put pressure on landlords.

“We’re beginning to see a quiet return of concessions,” says Davis. “It is not advertised, but if a tenant pushes hard enough, a landlord may throw in a month’s free rent or some other accommodation.”
Elmwood continues to lead the market as the most desirable industrial location. While the area as a whole had approximately 150,000 square feet of negative absorption, Elmwood generated nearly 300,000 square feet of positive absorption. According to Davis’ statistics, two of the worst performing areas are New Orleans proper and New Orleans East, where negative absorption reached 180,000 and 31,000 square feet, respectively.

The New Orleans East industrial picture may improve dramatically over the next quarter, however. Crescent Crown Distributing LLC, which distributes Miller, Coors and Heineken beers out of warehouses in Elmwood and New Orleans, has announced plans to relocate into 500,000 square feet of space in what was once a MacFrugal’s distribution center. The center burned in 1996, and all that remains is an office component and a 1 million-square-foot slab. Crescent will build out new warehouse space on the existing slab.

As one of the most visible landmarks in New Orleans East, the revitalized MacFrugal’s site should improve the area’s image as well as its economic viability. Another bright spot for New Orleans East is the Jazzland Theme Park. After falling into bankruptcy, the park has been purchased by Six Flags, which has committed to over $20 million of improvements and provides the deep pockets and advertising muscle the park needs to become a significant tourist destination.

Investment Properties

The uncertainty of the stock market has created a booming market for investment properties in New Orleans. Local real estate appraiser Kevin Hilbert says, “There is intense demand for small income producing properties that can be managed by a private investor.”

Hilbert, president of Kevin D. Hilbert and Associates, says demand is so strong that many neighborhood strip centers and small apartment complexes never formally reach the market. Instead, says Hilbert, investors anxious to re-invest equity pulled from the market “are knocking on doors, asking if an owner will consider selling.” Many such investors, says Hilbert, are able to realize equity dividends in the 15 to 20 percent range, far more than other investment vehicles are returning.

Larger investment properties, typically 1031 exchange vehicles, are difficult to find. Rich Stone, director of NAI/Latter & Blum’s Commercial Division, says, “We are seeing a significant pent-up demand for quality investment properties. There is more money chasing nice product in New Orleans than there is nice product.”

Retail

A study by the Real Estate Research Data Center of the University of New Orleans found a strong retail market over the past year, with more than 1.1 million square feet of retail absorption. The UNO study credits the growth to the expansion of several existing retailers, along with the entry into the market of Target and Best Buy. Best Buy entered the market in 2000 with locations in Metairie and the West Bank; Target followed suit in July 2002.

“Many retailers have not entered the New Orleans market due to the natural barriers that inhibit development and expansion,” notes Lynn Leonard of NewBridge Retail Advisors. “However, the rewards for those retailers that do venture into the Big Easy are big. Due to favorable demographics and lower competitive pressures, most New Orleans stores post sales in the top 10 percent of their chains. An excellent example of this is Target, which opened at Clearview Mall in July. Of the 30 stores the chain opened that month, the Clearview store was number one in sales.”

Location continues to be a challenge for retailers entering or expanding in the New Orleans market.
“Everyone still wants to be on Veterans,” says Rick Kirschman, a retail specialist with NAI/Latter & Blum. Kirschman’s reference is to the hugely popular Metairie retail strip, where retail rates can reach as high as $35 per square foot, depending on space and location.

Stirling Properties recently completed a $60 million renovation and expansion of Clearwater Mall in Metairie. The company added a 12-screen AMC Palace Theater, a food court, two full-service restaurants and 50,000-square-feet of retail to bring the mall to a total of 625,000 square feet. In addition to Target, Bed, Bath and Beyond also signed a lease in the newly renovated center.

Target renovated and expanded the former site of Maison Blanche in Clearview Mall; Best Buy settled for a location closer to Kenner. Both chains picked Manhattan Boulevard for a West Bank location, where rates ranges from the low double digits for large space to the mid-$20s for smaller space.

“Manhattan continues to be a magnet for new retailers coming into the market,” says Kirschman. “For big box retailers, Manhattan is becoming the Veterans Boulevard of the West Bank.” In addition to Best Buy and Target, Lowe’s, Office Depot, Wal-Mart, PetsMart, Petco, Linens ‘n Things, Barnes & Noble, Cost Plus and Palace Theatres all operate Manhattan Boulevard locations.

Elmwood continues to grow as a retail center, with over 1 million square feet of retail space now in use. New to Elmwood is Cost Plus, which is moving into space vacated by Oshman’s. Wal-Mart, K-Mart, Home Depot, Linens ‘n Things, Sports Authority, Office Max, PetsMart, Palace Theatres and A-1 Appliance all have a presence in Elmwood, giving it perhaps the largest selection of national and regional retailers in the area.

Office

The office market mirrors much of the New Orleans real estate economy, with slow to slightly negative growth. Rents range from stable to slightly down, depending on the market segment.

“Downtown Class A rates have taken a small hit recently and now average from the mid-$13s to $17.50 for direct deals,” notes Duff Friend, a commercial broker with NAI/ Latter & Blum. “Downtown Class A occupancy is running just below 90 percent.”

In the downtown Class B market, Friend says occupancy levels are in the 70 percent range, with the high vacancy rate due mostly to a couple of large Class B properties with low occupancy. Rates are in the $11.50 per square foot range.

“There is a healthy demand for small blocks of office space downtown for small businesses and professionals,” says Friend. “Demand for larger blocks of space is much softer.”

The Class C market downtown has dried up over the years as many older buildings underwent conversion to hotel uses. Those Class C buildings that remain unchanged have in large part been taken out of commerce as their owners court potential redevelopers.

The University of New Orleans study reports, “Office rents in New Orleans are now among the cheapest of any major southern or western city.” The study suggests that the market may benefit by attracting new “back office” businesses to the area. Additional opportunities for growth include possible expansion by existing oil and gas firms if oil and gas exploration activity increases.

In Metairie, Class A occupancy is at 89 percent, with rental rates near $20 per square foot. Class B Metairie space is also running at or near 89 percent occupancy but at rental rates of approximately $17.50 per square foot.

Cautious optimism best reflects the mood in commercial New Orleans real estate, as prices remain steady in the face of slightly lower activity levels. A notable exception is the market for investment properties, where high demand from investors seeking to defer taxes through 1031 exchanges has dried up desirable inventory.

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


©2002 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.