CITY HIGHLIGHT, OCTOBER 2004

CRESCENT CITY REMAINS STEADY

New Orleans’ commercial real estate sectors have seen varying degrees of success over the past year. Southeast Real Estate Business asked three industry experts to comment on current trends, new leases and developments, and their overall impressions of the state of the market.

Office

The New Orleans office market has slowly recovered after being hit with large amounts of oil company space dumped onto the sublease market in recent years. However, two factors will test the strength of that recovery over the next 12 to 24 months.

One factor is that much of the sublease space that has been absorbed is approaching the end of the lease term. It remains to be seen what percentage of those sublease tenants landlords can hold onto, and at what rental rate. The other key factor is the large amount of space currently occupied by oil companies but with leases expiring between 2005 and 2006.

“The major unknown is what presence the major oil companies intend to keep in New Orleans,” says Brian Rourke, an office specialist with NAI/Latter & Blum Inc. “I think everyone expects that a significant amount of space will be coming back on the market over the next 2 years. Hopefully, any pullouts of large users we might see will be offset by the growth of smaller users entering the market.”

The market will need to hold onto a significant amount of space to keep downtown Class A occupancy rates in the current 88 percent range. However, occupancy rates are expected to remain above many markets, where the collapse of the telecom and technology industries has decimated occupancy rate. Market rents for downtown Class A space currently range from $13.50 to $15.50 per square foot.

The Class B market still has significant vacancy rates, with more space likely to come on the market over the next 2 years. Rates for Class B space currently range from $9.50 to $12.50 per square foot.

Class C space, once plentiful but undesirable, has all but disappeared from the downtown picture. Strong demand for properties for hotel and residential conversions has resulted in nearly all downtown Class C properties undergoing redevelopment.

In Metairie, the only other significant office market in the metro area, occupancy rates are slightly higher than downtown at 89.1 percent occupied. Rental rates for Class A space are much higher, however, and range from $19 to $21 per square foot. For many users, the higher cost in Metairie is more than offset by free or very inexpensive parking for employees.

For users needing more than a full floor of space, however, downtown is the only option.

“Large blocks of space are unavailable in Metairie,” says Rourke. “When an entire floor does become available somewhere, it is quickly snapped up. For the big users, downtown is the only choice.”

— Don Cooper, editor, NAI/Latter & Blum Market News and Views

Retail

The New Orleans region is a hub for tourism, international trade, university research, healthcare, maritime industries and energy/petrochemicals. New Orleans also has developed a niche in the film industry. Over the last 18 months, the New Orleans metropolitan area has seen more than $200 million in film and television production. The 10 parishes of southeast Louisiana, centered on the city of New Orleans, account for about one-third of Louisiana’s economy.

The riverfront area of New Orleans, which is comprised of land abutting the Mississippi River, is heating up from a development standpoint. Because New Orleans is surrounded by water and is considered a mature market, major parcels available in the city for development are limited. The riverfront offers ample sites and has been discussed as the future location of the expansion of the Ernest N. Morial Convention Center, among other developments. Other areas experiencing significant growth include the Westbank, Northshore and eastern St. Tammany Parish.

Jefferson Parish is one of several proposed new sites in Louisiana for the Isle of Capri Casino. Proposed plans include moving the 289-foot Crown casino from Lake Charles to a site upriver from the Huey P. Long Bridge. If the proposal is submitted, a public referendum would likely be held. If the proposal is successful, it would be the fifth casino in the New Orleans area, but the only one on the river.

A new hotel at Harrah’s New Orleans Casino is expected to open in early 2006. The $142 million, 26-story hotel will provide an additional 450 hotel rooms to the New Orleans tourism industry. As part of the project, two 19th Century-era buildings will be returned to commercial use as part of the Fulton Street retail development. Gordon Biersch Brewery Restaurant will anchor Fulton Street when it opens its 11,000-square-foot restaurant in the second half of 2004.

A water park is proposed to be located next to Zephyr Field. Although there are five water parks within 90 minutes of New Orleans, the development is part of the master plan for Six Flags theme park. Jazzland Theme Park was recently acquired by Six Flags, the largest theme park operator in the world. The revised lease agreement calls for the investment of $25 million in improvements to be completed before the end of the 2005 season.

Winn-Dixie is the leading grocer in New Orleans, with 33 stores and a 32 percent market share, followed by Wal-Mart Supercenter (9 stores, 21 percent share), A&P (18 stores, 19 percent share), Save-A-Lot (7 stores, 3 percent share) and all others (71 stores, 25 percent share). The market total for grocers in 2003 was $2 billion. Retailers active in the New Orleans market have included Target, Academy Sports, PetsMart, Lowe’s, Bed Bath & Beyond, Whole Foods and Wal-Mart.

Wal-Mart Supercenter has opened a new location on Tchoupitoulas Street in an area that was once a public housing complex. After overcoming lawsuits, critics and months of objections by preservationists, the 200,000-square-foot store was built in a designated historical district. The opening marked one of the chain’s few urban stores. Riverwood Shopping Center, located at Airline Highway and U.S. 51, has been revitalized with new retail shops after the opening of a new Home Depot store last year.

In April, CA New Plan Venture Fund acquired Marrero Shopping Center, a 69,259-square-foot shopping center located in Marrero for approximately $3.7 million. Plans include redevelopment with the expansion of its Winn-Dixie anchor. Investors in the $500,000 to $3 million range are most active in New Orleans, which currently has limited supply.

— Lynn Leonard, NewBridge Retail Advisors

Industrial

The New Orleans industrial market is characterized by the seemingly contradictory characteristics of a lack of supply along with a lack of demand. Al Davis, an industrial broker with NAI/Latter & Blum Inc., says, “The limited supply has helped to keep vacancy rates steady, but it makes it difficult for end users to find just the right space, with just the right facilities, transportation options and amenities to meet their particular needs.”

At the same time, says Davis, there is not sufficient demand for warehouse space to justify the construction of new spec space. Despite occasional ups and downs, these two factors have served to keep the market from slipping into decline but at the same time also have hindered growth.

Most of the activity that is taking place involves transactions under 25,000 square feet. According to figures compiled by the University of New Orleans (UNO) Real Estate Research Data Center, 62 percent of last year’s industrial transactions involved less than 10,000 square feet and 81 percent involved less than 25,000 square feet.

Cocie Rathborne, president of Rathborne Properties, a major industrial property owner, confirms UNO’s findings.

“Our company owns and manages over 1 million square feet in Harvey and Elmwood,” said Rathborne. “Last year, we had no transactions over 10,000 square feet.”

The most significant change in the warehouse market is the lack of available land in Elmwood, the premier industrial area in New Orleans for the past 20 years. Rathborne’s company has long been the major owner of developable land in Elmwood. Rathborne and his partners are now finalizing the construction of 50 industrial lots in the 12,000-square-foot range. Beyond that development, the only remaining vacant land in Elmwood is either small-sized lots scattered throughout the park or not for sale.

The forecast for 2005 remains much the same. Until some significant outside factors change either the supply or the demand side of the equation, local experts expect to see the industrial market remain in a state of balance with continued slow pressure on supply.

— Don Cooper, editor, NAI/Latter & Blum Market News and Views

MAJOR INDUSTRIAL DEVELOPMENTS Folgers constructed a 692,000-square-foot coffee packaging and storage facility in Lacombe, Louisiana, in St. Tammany Parish. The company then expanded its New Orleans East roasting facility into space vacated when storage was moved to Hammond. Glazer Companies — Glazer has started site work on a 190,000-square-foot, state-of-the-art expansion to its existing facility in Riverbend. This will essentially double its space in Riverbend. FedEx — FedEx has doubled its space by moving its facility from Jefferson Highway to James Business Park Distribution Park # 1. FedEx now occupies 90,000 square feet. The move also brings James Distribution Center #1 to 100 percent occupancy. This building contains 250,000 square feet and was constructed as spec space in 2001. Randa Corporation — This move came about as a result of the efforts to keep Wembley Tie from moving to Mississippi. Because of the efforts of the state, St. Charles Parish and numerous others, Randa Corporation decided to locate its 165,000-square-foot corporate headquarters in the James Business Park on 9.7 acres of land.

Multifamily

“Steady as she goes” is probably the best way to describe the current status of the metro New Orleans apartment market. The unique geography of the Crescent City has restrained development and kept the inventory of 48,000 units in sync with demand. As a result, the city enjoys a current occupancy level of 94 percent with very few locations available for future development.

The trend in multifamily development over the past year has been focused on suburban developments, primarily north of Lake Pontchartrain in St. Tammany Parish, a community that boasts the highest income levels in the state and until recently only a modest amount of professionally run apartment communities. Currently there are eight properties that are in various phases of development. These projects will add 1,738 units to the market, five of which are being developed in St. Tammany Parish.

On the shore of Lake Pontchartrain in eastern St. Tammany, Gros Development of Houston is developing 234 units at Villa du Lac. Additionally, New Orleans-based Sabre Development is developing 168 units at Harborside Apartments. Both of these developments will offer residents waterfront locations with boat slips, elevators, stainless steel appliances and direct access garages. In the north quadrant of east St. Tammany, Sizeler Property Investors, a publicly traded real estate investment trust based in Kenner, Louisiana, has developed Greenbriar Estates, a 144-unit community near Northshore Square Mall.

Development is nearing completion in western St. Tammany Parish in Covington, Louisiana, on The Park at Covington, a 264-unit development by the Campbell Companies of Baton Rouge. In nearby Mandeville, 136 units are ready for occupancy at Mandeville Lakes, which is being developed by New Orleans-based Crosby Development. Both of these communities will target upper-income residents and offer high levels of unit amenities and features.

Also under construction is Calypso Bay Apartments, which is being developed by New Orleans-based Shadowlake Management. Calypso Bay will provide 280 super premium units to the Gretna submarket, which has not seen a new multifamily development in more than 20 years. The Favrot and Shane Companies of Metairie has recently completed the Palmetto Creek Apartments in River Ridge, which will add 216 units to a submarket that has virtually no remaining prospects for additional units.

The “frontier” to watch is the downtown/uptown submarket. Currently this infill location is the site of River Garden Apartments, which will consist of 296 units on the former site of the St. Thomas Public Housing Development. The property is being developed in a mixed-use setting anchored by an urban Wal-Mart. The project is the residential component of a tax incentive financing and will require that 20 percent of the units are set aside for low and moderate income residents.

In the next 12 to 18 months, infill locations in the downtown/uptown sections of the city will be where developers set their sights. The trend in the nearby warehouse district from rentals to condominium regimes will create a continued demand for apartment units in this historic corridor. We can expect some ground-up developments but also redevelopments of older office buildings in the central business district. This submarket is conveniently located near the financial district, the medical corridor, Loyola, Tulane and Xavier Universities, and the historic St. Charles Avenue.

Just as the focus in the past has been on the higher-income “lifestyle resident,” I would expect this trend to continue. Average rental rates will not support the cost of new construction. The moderate-income market is being adequately serviced by the rehabilitation of the older, existing inventory.

The average rental rate in metro New Orleans is $662, which calculates to $0.78 per square foot. Average rents range from $443 for studio units to $1,031 for three-bedroom floor plans. The average occupancy rate for metro New Orleans is 94.5 percent.

The restraints that the geography of metro New Orleans have on new construction have created a franchise of sorts to developers and investors. Although all markets are susceptible to peaks and valleys, New Orleans has been, and should continue to be, a stable market.

— Larry Schedler, CCIM, Larry G. Schedler & Associates, Inc.

©2004 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.