CITY HIGHLIGHT, OCTOBER 2006

NEW ORLEANS CITY HIGHLIGHTS
Richard P. Stone and Larry G. Schedler

New Orleans Office & Industrial Market

After the most tumultuous year ever experienced by an American city in modern times, Louisiana’s adapted recovery theme of Recover, Rebuild, Rebirth rings true for the area’s economy and for the spirit of the people of New Orleans. While the pace of recovery has at times seemed slow, the progress that has occurred during the past 12 months has exceeded the most optimistic of projections that were made in the weeks immediately following Hurricane Katrina. An enormous rebuilding task remains ahead, but the city’s business climate has become significantly more settled and predictable, thus enabling individuals and companies to move forward with their real estate decision-making.

The downtown office market has displayed surprising resilience considering that numerous buildings there experienced some level of wind or water damage. Downtown Class A occupancies are currently at 91 percent, up from pre-Katrina levels of about 89 percent. Some of this improvement occurred due of the shuttering of the damaged 492,000-square-foot Dominion Tower adjacent to the Superdome, and Dominion’s subsequent absorption of 100,000 square feet of space in the nearby 1250 Poydras Street building. The city hopes to make Dominion Tower the new City Hall, part of an ambitious redevelopment project now under discussion.

Downtown Class A rates have held steady in the $15 to $18 range for a full-service lease. Increased insurance rates and increased overall operating expenses should keep upward pressure on rates during the next year. There are very few Class B options downtown, as several more buildings have been shut down for expected conversion into residential use, the most significant being the 422,000-square-foot 225 Baronne Building. Chevron, which occupies 325,000 square feet downtown, has announced that it will be moving to the New Orleans north shore where the company purchased 20 acres for construction of a new office building.

Suburban occupancies and rates are also firm, with Class A buildings in Metairie commanding more than $22 per square foot with occupancies close to 92 percent. Metairie does offer Class B alternatives in the $17 to $19 range, with occupancies currently at 91 percent.

Industrial space remains tight throughout the metropolitan area, with rental rates having increased by about 20 percent post-Katrina. The current occupancy rate is 94 percent, with most of the area’s available space being in larger specialized buildings that cannot be reconfigured to meet the demand for the smaller users. Demand is especially acute for 5,000 to 15,000-square-foot spaces. Lack of available developable land and high construction costs will limit new construction. Significant demand for industrial space that will be associated the area’s reconstruction should keep rates firm and occupancies low into the foreseeable future.

— Richard Stone is vice president, director of commercial sales and leasing with New Orleans-based NAI/Latter & Blum, Inc.

New Orleans Retail Market

The suburban market, which experienced far less of the catastrophic damage from Hurricane Katrina, has rebounded significantly. Lowe’s Home Improvement Warehouse has recently opened two locations on Jefferson Highway and Elysian Fields Avenue, and The Home Depot is planning to open three new locations including a smaller version of its store in a former flooded Winn Dixie on Carrollton Avenue. The big box discounters and home improvement centers are doing a brisk business in stores in or near areas that were mostly unaffected by storm or flood damage, with same store sales in some instances up from 15 percent to 30 percent during last year.

The major malls on the east bank of Jefferson Parish are back in operation but not all the merchants are back. Macy's has decided not to reopen its downtown store and no timeline has been established for reopening its store in The Esplanade Mall in Kenner. Dillards has recently reopened its store in the 950,000-square-foot Oakwood Center on the Westbank, joining Sears, which had reopened earlier. Many of the high-end shops of downtown's Canal Place Shopping Center have reopened and Saks Fifth Avenue, which suffered extensive fire damage, will reopen there on November 17. Riverwalk reopened in November albeit with much fewer stores. Most of the discount and big box retailers are up and running, and have slowly been extending their hours of operation.            

The most significant projects that have been announced are all located in the suburban Northshore area of Covington. A $200 million, 1.1 million-square-foot lifestyle center, the Colonial Pinnacle Nord du Lac, has received its initial Parish approvals and permits. The major development will also include a Wal-Mart Supercenter and a Sam’s Club. Lowe’s Home Improvement Warehouse, Hibbets and Best Buy will anchor phase two of the Stirling Covington Center, with completion scheduled for last month. In neighboring Tangipahoa Parish, the 431,000-square-foot Hammond Square Mall in Hammond, Louisiana, was recently purchased by Palace Properties, who plans to commence a major redevelopment of that property.

— Richard Stone is vice president, with  New Orleans-based NAI/Latter & Blum, Inc.

New Orleans Multifamily Market

The Esplanade at City Park sold for $46 million to New York-based RCP/Longview.

Currently, the market that has emerged has a smaller inventory. What was once a market of 48,000 units is now a market of 36,000 to 40,000 units (pending on how many additional properties are rehabbed). The apartment market will shrink even further as higher rent units, particularly in the warehouse district and the Northshore, make the transition from rentals to condominiums.

Despite the damage to the market, the city still has a major barrier to entry — a lack of land in which to develop, particularly land for work force housing. Since Hurricane Katrina the footprint of the city has shrunk. The affected areas were either single-family neighborhoods or areas that will only support development at heights above the base flood elevations (BFE). This translates to higher construction costs and the necessity for higher rents. Since the greatest impact on our apartment market was to our affordable market, the majority of activity will be in bringing affordable units to the market.

The federal government has responded to this call by increasing the allocation of Low Income Housing Tax Credits (LIHTC’s) by almost ten times. From $1.80 per capita to an additional $18.00 per capita, this allocation translates to $2.5 billion of new housing developments. Additionally, the allocation of tax-exempt bonds has been increased to $7.9 billion and will be available to private developers. As a result, the majority of development interest in the market has been from tax credit developers. The list of companies pursuing these credits reads like a who’s who of tax credit developers. Those who are fortunate enough to be awarded credits will be able to develop properties with as little as 20 to 30 percent debt. However, due to the scarcity of land and the uncertainty regarding the ground elevations of some areas, developers are resorting to more urban locations and adaptive reuses of other properties, such as office buildings.

Perhaps the greatest frontier will be residential development in the central business district. Many of the older office developments had mechanical systems in their basements, and, as a result of flooding, their office tenants relocated to newer buildings. These historic assets will present an opportunity to be converted to residential use, both rentals and condominiums. Downtown rental developments that have recently been completed or are in their pre-development phase include:  the 108-unit luxury 925 Common Street, the 155-unit Saratoga Building, the 112-unit Maritime Building, the 278-unit The Ice House, the 200-unit American Bank Building, the 160-unit NOPSI Building, the 33-unit Western Union Building and 99-unit Latter & Blum Building.

Rental rates in the market have increased 20 to 30 percent and insurance premiums and deductibles have increased 300 to 500 percent. Despite these challenges; however, investor demand for multifamily assets has never been stronger. A recent notable sales is The Esplanade at City Park, a seven-story, 443-unit, mid-rise which sold in August for $46 million to RCP/Longview of New York. Other sales include the $6 million acquisition by the Feil Organization of the 120-unit Belle Oaks Apartments and Tulane University’s acquisition of the 116-unit Papillion. Sales even include heavily damaged properties such as the 350-unit Lakewind East Apartments, which sold to Triangle Real Estate for $5 million.

The rehabilitation of the New Orleans apartment market is in full swing and those investors/developers who have accepted the challenge should have a foothold in a market that will offer significant upside.

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


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