By Eliza Theiss, Associate Editor
Lately it seems that all eyes are on New Orleans (NOLA). All but washed away just eight years ago when Hurricane Katrina submerged 80 percent of the city, NOLA is showing healthy market indicators. National retailers such as Costco and Walmart are moving to the city. Hotel occupancy has returned to pre-Katrina levels as of 2012; the population is growing (albeit still down some 84,000 compared to 2005); established industries like petrochemical and shipment and freight are booming, and new ones are taking root. Just like the pleasureboats that once were ubiquitous on the Mississippi, New Orleans is moving full steam ahead. Touted as the fastest growing city in the US by Forbes magazine, “the coolest start-up city in America” by Inc. and nicknamed Hollywood South for its booming movie industry, New Orleans is garnering more and more attention on a national level.
According to the U.S. Bureau of Labor Statistics, New Orleans had a 7.9 percent unemployment rate in June 2013, up 0.1 percent since the same time last year. However, the city’s population is continually growing, with pre-Katrina residents still trickling back to the city, while others move there attracted by the growing number of jobs, especially in the petrochemical industry, biotech and IT. Other newcomers are attracted by the city’s booming movie industry which enjoys Louisiana’s film tax incentives. A growing population means a growing demand for housing. According to the U.S. Census Bureau, New Orleans had a population of 369,250 in 2012—down by more than 84,000 inhabitants compared to pre-Katrina levels.
The Big Easy state of mind
Overall the New Orleans apartment industry is showing sign of growth. According to the latest data released by New Orleans-based Larry G. Schedler & Associates, Inc., a boutique real estate firm specializing in the sale of garden apartment communities in the Gulf South, the city’s eight submarkets have an average occupancy rate of 93 percent, with most submarkets increasing their occupancy rates. Rental rates are also climbing.
On average between November 2012 and April 2013 rents have increased by $8 to $29, presenting an average rental rate of $884 per month or $1.02 per square foot. Eastern New Orleans and the submarkets of Gretna, Harvey and Terrytown experienced a drop in rental rates. However, the occupancy rates grew by four percent for Eastern New Orleans and by three percent for the submarkets. The submarket of Kenner dropped both in rental rates and occupancy, currently averaging $813 in rent and 81 percent in occupancy, the lowest in the New Orleans region, according to Cheryl Short, principal of Larry G. Schedler & Associates Inc.
Not surprisingly, the hottest submarket is the historic center. Although its vacancy rate increased to 5 percent due to an infusion of new product, its rent also rose by $24 to a current average of $1,291. The historic center’s rent hike was surpassed only by Algiers’ monthly increase of $29. Algiers, with an inventory of about 4,000 units and in close proximity to New Orleans, is expected to remain stable.
By comparison, the city’s 7 percent vacancy rate is higher than the 4.3 percent reported by Reis Inc. in the second quarter. However, the 1.18 percent rent growth is over twice the national average of 0.6 percent. Actual rents of $884 remain far lower than the national average of $1,109.73.
City limits and opportunities
The NOLA market’s stability, and a booming economy paired with historically low interest rates, promise attractive returns, attracting attention from national investors. However, many investors are confronted with the lack of available properties. “Cheryl [Short] and I have been in the multifamily business for almost 30 years and have never seen a time when we have had more interest in our market from national investors,” said Larry G. Schedler, CCIM. According to Schedler, many apartment property owners are resisting putting their assets on the market due to the cash flow they are realizing thanks to the below-market interest rate environment in the city.
With the positive indicators of the Crescent City’s apartment market, construction should be booming. Indeed, there are several high-profile projects in the works, although most are redevelopment projects, rather than ground up construction. On the other hand, New Orleans as a market for development has multiple limitations.
One of the most obvious development limitations stems from the city’s geographical location. Constrained by wetlands to both east and west, Lake Pontchartrain to the north and the Mississippi River to the south, land for development is quite limited in New Orleans, especially for the large apartment communities preferred by national investors and developers. “Additionally, most of the city is fully developed and many sub-markets in the city are historical with restrictions on development. This dynamic has created a market in which demand and supply has reached equilibrium,” Shedler adds.
A niche development opportunity in New Orleans is presented by the Historic Center’s 1925-1928 vintage office buildings, several of which have seen adaptive reuse conversion to multifamily assets, in many cases with the use of historic tax credits and LIHTCs as financing tools.
There is, however, a significant portion of land in the New Orleans area that could see significant development. Located in Jefferson Parish, an area encompassing about 9,000 acres of undeveloped land was recently opened up for development by the completion of the $1.2 billion Huey P. Long Mississippi River Bridge Widening Project. Kicked off in 2006, the project was officially given over to public use in June 2013. The longest railroad bridge in the United States—and one of the three primary Mississippi River crossings in the Greater New Orleans area—now boasts more than double its previous driving surface. The bridge is expected to attract economic growth to the area, especially the west bank of Jefferson Parish. In the short-term, multifamily development is not expected to boom, due to the lack of nearby employment opportunities. “It is, however, an area to watch particularly if industry is attracted to the abundance of land there,” Shedler emphasized.
Another area to watch is the Tulane Avenue Corridor, which is expected to see significant growth, spurred by the nearby $2 billion LSU-VA medical complex rising in nearby Mid-City—the University City Medical Center and Veterans Affair medical complex. The two projects are expected to employ thousands of skilled professionals and attract medical and biotech-related businesses to the area.
Also off Tulane Avenue is the future $1.6 billion Iberville Tremè transformation project. Although the 300-acre project is handled by the Housing Authority of New Orleans (HANO), and as such does not fall into the commercial housing category, the massive redevelopment project will spur growth in the area, creating 2,400 mixed-income housing units. The project envisions significant commercial development and extensive green building features.
Probably the most anticipated project of the year is the $200 million South Market District mixed-use retail and residential project by The Domain Cos. South Market, a transit-oriented project, will comprise 559 upscale apartments and 178,213 square feet of retail space and 1,300 parking spaces and will be developed in two phases, with phase one anticipated to open in summer 2014. The five-block development will be within a 10-minute walk of downtown New Orleans’ 9 million square feet of Class A office space.
Envisioned as a pedestrian-friendly community, the project will feature outdoor gathering spaces and street-level cafes and retail space. Humphreys & Partners Architects designed the project. Woodward Design+Build is the general contractor. TerreMark Partners, a developer of landmark retail real estate projects as well as retail niche strategy destinations, is also involved in this much-anticipated project which will seek LEED certification.
— Larry Schedler, principal, and Cheryl Short, principal, with Larry G. Schedler & Associates Inc.