CITY HIGHLIGHT, OCTOBER 2007

NEW ORLEANS CITY HIGHLIGHTS
Larry Schedler, Rich Stone and Daniel Poulin

New Orleans Industrial Market

The total metropolitan area of New Orleans consists of approximately 53.2 million square feet industrial/warehouse space. Vacancy in the Kenner/St. Charles area, where Sealy specializes, has significantly decreased from the high of 565,000 square feet available in December 2005.  Net absorption for the entire market of New Orleans for first quarter 2007 was 511,000 square feet. Second quarter absorption was 265,000 square feet.  The total absorption for the past two quarters is lower than that reported for the last quarter of 2006. Current market rents for office/flex range from $3.75 to $12.50 net depending on the office/warehouse blend.  An area wide short-term “spike” in pricing levels appears to have stabilized. Industrial absorption’s slow trend is expected to continue as occupancy is high at this time and demand for space, particularly large buildings in the 100,000-square-foot range is dwindling.

Year to date, the market has seen extremely limited sales and leasing activity. According to NAI/Latter & Blum survey information, the total available inventory as of December 31, 2006 was 4.2 million square feet; as of September 2007, there is 4.4 square feet available including 1.9 Million square feet in the Elmwood submarket.

However, only approximately 70 percent of that space is considered viable, i.e., ready for immediate use. The remainder requires renovation/restoration prior to use, due to damage from Hurricane Katrina and will continue to be off-line for the near future.

In the months immediately following Hurricane Katrina, there was a frenzy of leasing activity that resulted in most of the modern warehousing and distribution buildings that were unscathed by the storm being quickly leased. That activity has now subsided, with more of that space reentering the marketplace over the past 9 months, but rental rates remain about 20 percent higher than pre-Katrina levels.

The only new significant construction underway is Sealy Business Center III in St. Charles Parish, a 49,800 -square-foot office/warehouse with 18’ clear ceiling height scheduled for completion in April 2008. Quoted rates for this development are $9.25 NNN.

Most of the activity this year has been on the Westbank and the Elmwood Business Park submarkets.

Heading into the fourth quarter of this year, the New Orleans industrial market will continue to exhibit an increased volume in overall market activity, with the greatest demand expected to be in spaces under 5,000 square feet and also within spaces in the 15,000-square-foot to 25,000-square-foot range. Additionally, asking rental rates should continue to remain stable, with some spikes in select areas due to the lack of supply. There is also a deepening investor demand for both properties that can be easily rehabilitated/restored or are fully occupied. Currently projections are for 3 percent rent and expense increases for 2008 budgets.

— Rich Stone of NAI Latter & Blum and Daniel Poulin of Sealy & Company contributed to this article.

New Orleans Multifamily Market

Kick an ant pile and immediately you see the ants begin to rebuild their community.  Devastate a major area with the winds and water of Hurricane Katrina and you will see the same reaction. Twenty-six months ago the metro New Orleans apartment market experienced the greatest single loss of units in the history of our country. Fast forward to the summer 2007 and you will see the rebirth of an apartment market that many assumed would never be rebuilt. 

The New Orleans apartment market has been one of demolition, rehabilitation and new construction.  Thus far, 1,800 units have been demolished with an additional 3,000 units whose fate is still unknown. 6,000 units are currently being rehabbed. 

A combination of determined owners and investors as well as a generous contribution from the federal government in the form of Low Income Housing Tax Credits, metro New Orleans is well on its way to rehabbing and rebuilding its wounded apartment portfolio. With the majority of rehabilitations underway or completed, the focus now is on new construction and adaptive re-uses.

There are more than 1,000 units that are being developed as mixed income communities utilizing Low Income Housing Tax Credits. Most notable are The Preserve (183 units) and the Crescent Club (226 units) which are mid-rise central city developments being developed by The Domain Companies of New York.  Other notable developments include a 1920’s vintage downtown office building called 200 Carondelet (190 units) which is being converted into a mixed-use project by Reliance/Carondelet Associates. National Housing Partnership Foundation is developing Walnut Square Apartments in Eastern New Orleans which will consist of 190 garden units.

Conventional developments include the 288-unit Chenier Apartments in Mandeville, Louisiana, being developed by The Park Companies of Metairie, Louisiana, and the adaptive re-use of several downtown office buildings including Union Lofts (32 units) and the Maritime Building (101 units) by local architect/developer Marcel Wisznia. The former Krauss Department Store on Historic Canal Street is being developed into 119 rental units by the KFK Group of New Orleans.

These developments along with the recently rehabbed properties will fulfill a shortage of housing that has existed in metro New Orleans for the past two years. It will also serve as a catalyst for new business to locate in the market as housing for the workforce has been a major impediment to the recovery.

Metro New Orleans has a limited amount of land in which to develop on and those areas that do are restricted by moratoriums which prohibit multi-family development. As a result, you can expect to see continued interest in the central city for new developments as well as developers searching the market for adaptive re-use opportunities. The suburbs of St. Tammany Parish will be attractive to developers who are looking to build for the upper end of the market. Workforce housing in St. Tammany Parish is scarce; however, community opposition will more than likely limit any significant affordable developments.

Whereas “no vacancy” signs and waiting lists were common place in the 12 to 18 months following Hurricane Katrina, a level of normalcy has returned to the market. Occupancy levels throughout the metro remain strong with the highest being St. Tammany Parish at 97 percent, East Jefferson at 95 percent and the Westbank of Jefferson Parish at 96 percent. The lowest levels reported are 91 percent in the Historic Center, which includes the Central Business District and the Warehouse District.

Due primarily to increased insurance costs, rental rates have risen 20 to 25 percent from where they were pre-Katrina. Average rents for one-bedroom units are $750, two-bedroom units are $952 and three-bedroom floor plans are $1,219. The highest rents reported are in the Historic Center where average rents are $1.62 per square foot or about $1,210 a month. The lowest rents reported are in Orleans Parish (East New Orleans and Algiers) where rents average .86 per square foot or about $751 a month.

Going forward, eastern New Orleans will continue to be the hotbed of rehabilitation activity.  However, the footprint of New Orleans is smaller and as a result developers will be forced to get creative with smaller development sites and designing appealing residential units in old office buildings and retail centers. Inevitably, the CBD and the Central City will be the center of activity for these developers. New Orleans is a viable apartment market and investors and developers who enter the market at this time in the history of the city should be sufficiently rewarded.

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

New Orleans Office Market

It has now been 2 years since Hurricane Katrina and the calamity to the city that was caused by the major failure of the levee system.  Ever since that event, the residents and businesses have tackled a mind-boggling array of unprecedented challenges.  While great challenges remain, the city’s business climate has become significantly more settled, thus enabling individuals and companies to move forward with their real estate decision-making.

As was expected, the area’s recovery has been fastest in the areas that suffered little or no flooding: the largely unaffected areas of East Jefferson Parish, the West Bank of Orleans and Jefferson Parishes and Uptown New Orleans. Only one Class A CBD tower still remains shuttered, and it would not be surprising to see that property back in commerce soon. In the parts of the area that did flood — mostly parts of Orleans Parish (New Orleans), the repopulation has generally been inversely proportional to the depth of the floodwaters that occurred in August 2005. In other words, the deeper the water, the slower the pace of returning residents and commerce. The overall New Orleans pre-Katrina MSA of New Orleans was approximately 1.4 million residents. Current estimates are about 1.2 Million, with most of the loss occurring in New Orleans. According to a recent estimate of population in Orleans Parish (New Orleans proper) as compiled by GCR & Associates, the July 2007 population of the city was 273,600 residents, or 60 percent of its pre-Katrina population of 455,000. GCR reports that this was 55,000 more than a year ago, with population growth consistent at about 1 percent per month during that time.

Many non-Class A downtown office buildings remain closed after Katrina with owners looking to residential conversion as an alternative but the pace of that recovery is slow, construction costs high and financing difficult.

The Post-Katrina downtown office market statistics appear to be somewhat of a paradox: higher occupancy rates but lower overall occupancy.  The explanation for this unprecedented occurrence is that there was a reduction in inventory in both Class A and B space after the storm. The 492,000-square-foot Class A Dominion Tower, next to the Superdome, suffered damage during the storm and remains shuttered, reducing total downtown Class A inventory from 9.2 million square feet to 8.7 million square feet.  Even with about 330,000 square feet of less occupancy, the occupancy rate inched upwards from 87 percent to 88 percent. Downtown Class A net absorption through the first half of 2007 was approximately negative 60,000 square feet. The status of the Dominion Tower is still uncertain — it may be reintroduced Class A market or redeveloped into an alternative use.  The property had been considered as a potential site of a new City Hall complex, but that project has not come to fruition.

The reduction in downtown Class B inventory post-Katrina was even more pronounced, from 2.03 million square feet down to 1.27 million square feet.  The two most significant properties removed from inventory are the 121,000-square-foot 800 Common Building, which is currently being redeveloped into apartments, and the 429,000-square-foot 225 Baronne Building, which will be part of a proposed $150-million conversion together with an adjacent property into 437 apartments, retail space and a 550-space garage.

Downtown Class A rates have pushed upwards by $1.50 to $2, to a range $16.50 to $18 following the storm, with the increase being entirely a function of a jump in operating expenses, particularly insurance and construction/labor.

The suburban Metairie Class A and B markets remains tight. The Class A inventory of 2 million square feet is 92.5 percent leased, and rates of $22 to $24 per square foot are now being quoted. The 1.3 million-square-foot Class B market is 91 percent leased, with rates at $16 to $19 per square foot.

High rents reported for Lakeway Center, in suburban Metairie, topped $23 per square foot. Those rents are stable from last year and that trend should continue for 2008. The trend for suburban office space has changed significantly since Hurricane Katrina. With little premium class office space available professionals anticipate increased Class B occupancy rates.

In the wake of the Blackstone’s purchase of Equity Office, an attempted pre-emptive June flip of the Blackstone-owned Lakeway Center to select buyers was dropped assumingly because top offers did not achieve Blackstone’s goals, which was probably an early precursor to the current capital markets slowdown.

— Rich Stone of NAI Latter & Blum and Daniel Poulin of Sealy & Company contributed to this article.


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