Good Times

By Philip Shea, Associate Editor

Much like the rhythm and culture of the Big Easy itself, the Gulf Coast’s response to the recent economic downturn in New Orleans and surrounding multifamily markets has been unique. While other parts of the country have just begun seeing marked recovery in this sector, apartment demand in the Gulf Coast has been gaining steam for some time.

“When the entire nation started suffering job losses, this area was still in a recovery mode and we were actually creating jobs when most of the country was losing them,” says Mark Madderra, principal at commercial mortgage banking firm Madderra & Cazalot. “So we have really not followed necessarily the same path as most of the cities in the country.”

Indeed, the most recent market report on New Orleans from Hendricks & Partners shows the March 2012 unemployment rate at 7.0 percent—well below the 8.4 percent seen nationwide at the same time. Notes Gregg Cordaro, associate partner at Hendricks & Partners: “Occupancy is about 7.5 percent in New Orleans now, and last year it was around 9 percent, so that market is improving a little bit.”

Furthermore, the nature of multifamily stock in this region could be conducive to accelerated demand in the coming years, as renting here may be even more of a bargain than in other parts of the country.

“The one element that’s a little bit different in our market has to do with affordable housing,” notes Madderra. “In the aftermath of [Hurricane] Katrina, the housing stock that was most dramatically impacted was actually affordable housing stock, and we have now finished rebuilding on the order of about 6,000 or 7,000 new or newly refurbished affordable housing units using tax credits in other programs.”

Yet Steve Ankenbrandt, president of Rock Apartment Advisors, states that while many submarkets in New Orleans have seen a resurgence post-recession and post-Katrina, many areas are still blighted from the 2005 hurricane and may never fully return to their former status.

“New Orleans and the areas that are healthy and have rebounded from Katrina are full, as full as you can be, and rents have been steadily increasing,” says Ankenbrandt. “There is a lot of product in areas that haven’t come back, but I don’t think they will come back.”

In fact, much of the continued woes in struggling markets may be due to the surge in affordable stock to which Madderra referred. According to Hendricks & Partners, while rents in submarkets east of downtown and I-10 are posting average rents as low as $715 per month, vacancies there are still at 13 percent—far higher than the 5 percent range seen in the more central markets with new affordable housing units.

“What you find is that some of the older, more affordable apartment submarkets are the ones that were most adversely affected by this new inventory of affordable units coming online,” says Madderra. “The newer affordable units that were using tax credits were able to favorably compete against the existing inventory, so it had much more of an impact on the C apartments than it may have had on even the A-quality apartments.”

As might be expected, the submarket performing strongest is the downtown area. As the historic and tourist-heavy center of the city has been revitalized—with new renovation projects abounding—young professionals have a new magnet for residency in the Big Easy.

“Many of those projects that have been done have utilized historic tax credits, and they get by far the highest rents in the region and also have the highest occupancies, and there seems to be a significant demand,” says Madderra.

In terms of particular projects that are drawing interest, Madderra notes one unusually expansive renovation that is likely to generate intense demand and further rejuvenate the Central Business District in New Orleans.

“There’s one big one that I think is on everyone’s radar screen,” says Madderra. “One of the principal historic structures in downtown New Orleans is the Hibernia Bank Building. This is a beautiful historic structure that has a domed roof that has literally been a part of the skyline forever and that everyone recognizes. It’s projected to be 175 units, which for a historic structure is huge, but this is a huge building.”

Yet with respect to the overall local economy, post-Katrina redevelopment in other sectors is likely to buoy multifamily and related industries for some time to come. Madderra notes a particular upcoming project that will produce sizeable employment opportunities and no doubt lead to higher absorption of key product.

“I would say that the biggest economic driver for the region over the next decade is going to be the redevelopment of the hospital complex here,” says Madderra. “In the aftermath of Katrina, we actually lost the VA hospital and the charity hospital—which was one of the largest charity hospitals in the nation. Those two hospitals are now currently under re-construction in a more central area of the city where they have the ability to expand dramatically.”

The Mississippi Gulf Coast has experienced a slower, more complicated post-Katrina/recession recovery—but things are beginning to look up. Ryan Griffin, senior vice president of Rock Apartment Advisors, notes that while the onset of the recession hit this area considerably hard, recent data shows fair gains in occupancies and shrinking concessions.

“The middle of 2010 was the worst on the Gulf Coast of Mississippi, and you saw occupancies in the mid 80’s with concessions of anywhere from two to three months,” says Griffin. “Today, we’re probably in the low 90’s occupancy—I would say approximately 92 percent across the Gulf Coast of Mississippi—and there’s roughly one month of concession built in.”

One of the greatest factors behind reduced occupancy in recent years was an overbuilding of multifamily product that took place in the wake of Katrina. In an effort to revitalize the region’s housing, tax credits were allocated to construct more affordable housing units. Yet due to the nature of the multifamily construction pipeline, this product did not come online until years later—at the height of the Great Recession.

“You had an enormous amount of new product that came online, roughly adding 25 percent to the total supply over a 12- to 24-month period of time, so the market really was hurting,” says Griffin. “There weren’t a whole lot of demand drivers and there was a lot of new supply.”

Yet as the nation continues its slow recovery from the recent recession, the Mississippi Gulf Coast is seeing bright spots that could positively impact its multifamily market despite an oversaturated inventory.

“The good news going forward is casinos are back; the casino revenues are back to pre-recession levels; there are two casinos that just came online; and the military seems to have continued to weather five rounds of cuts,” says Griffin.

Griffin further notes the sizeable economic impact that the military has had on the region and warns against the federal government doing anything that might jeopardize this job engine.

“It’s going to be very difficult for Washington to come in and create a man-made disaster by consolidating or moving those bases, which are really the base of employment on the Mississippi Gulf Coast,” says Griffin.

A little over 40 miles away, the city of Mobile, Ala. shows a wholly different track record. While the Mississippi Gulf Coast was experiencing reduced occupancy and an excess of inventory, Mobile was witnessing steady demand and a healthy level of absorption of existing product.

“Mobile didn’t go through the overbuilding that Mississippi did,” says Ankenbrandt at Rock Apartment Advisors. “Occupancies were high post-storm, and they remained high until about 2010 when the economy really hit them like it did the rest of the country.”

Ankenbrandt goes on to describe the type of economy the city has and what makes it distinguishable from New Orleans and cities like Gulfport and Biloxi.

“It’s different from Mississippi in that it’s not casino- or military-driven; it’s also not tourism or oil,” says Ankenbrandt. “It’s shipbuilding. There’s manufacturing, there’s the port—New Orleans and Mobile are two of the larger ports on the Gulf—and then there’s the manufacturing base. There’s a huge steel plant that was built north of Mobile that employed 3,500 people over the past three years.”