Downtown Renaissance: The Rebuilding of New Orleans
- Sep 06, 2011
Marcel Wisznia firmly believes that Hurricane Katrina was a good thing for New Orleans. “New Orleans is at a unique point right now where it has become one of the chic cities for young, entrepreneurial people who want to make their mark,” says the founder of New Orleans-based Wisznia Architecture + Development.
“Where New Orleans had always been a city for brain drain, we have become one of the top cities for brain gain,” he notes, adding that he believes the hurricane did, in fact, cause this shift.
“In the aftermath of Katrina it was a pretty gloomy situation,” acknowledges Larry Schedler, CCIM, principal of Larry G. Schedler & Associates Inc., a New Orleans-based real estate firm. “[But] I think everyone has been pleasantly surprised. It lit a spark under people … It sort of rejuvenated the locals; [there’s] this metamorphosis where people are putting money in and redoing their homes. It’s been reinforced by the strides they are making in the levee protection system.”
Perhaps most notable is the rebirth of the downtown metro area. The post-Katrina boom has “really created an opportunity in the downtown market. There’s been a renaissance of people wanting to move downtown,” Schedler points out.
David Abbenante agrees. “Pre-Katrina, we had an older inventory of product on the market; it was very limited, especially in the working-class rental market. The product was very tired, especially in the city core,” says the president of HRI Management, which owns and/or manages approximately 2,400 units in the Gulf Coast.
“Post-Katrina, [the city has] been able to generate a lot of new [mixed-income] developments, and it’s created a great product in the core of the city that has become, to some degree, an economic engine that is bringing people back into the core of the city. There were no options previously,” he adds.
Meanwhile, in the suburban markets, St. Tammany Parish has been the recipient of a lot of rehabilitation, and, adds Schedler, it has become “the staging area for newer, market-rate, garden apartment communities.”
But it’s not just the market-rate communities that are benefiting; in fact, Schedler points out that the market went from having some of the nation’s worst affordable housing stock to “perhaps now [being] a showcase for affordable housing.”
An influx of new residents has resulted from the post-Katrina rebuild, and the New Orleans medical community is expected to become a major economic engine for the area, adds Abbenante. However, population does remain down from where it was pre-Katrina, though it has made gains, particularly in the Gen Y demographic, notes Schedler. Of course, he adds, “we need jobs for people to sustain themselves [to] be able to live in these market-rate properties. [If] you’re going to build this nice, shiny product, people have to be able to afford it.”
In addition, the overall rental market has expanded, as underwriting criteria has made it more difficult to buy a house. “We had an older inventory before; now people have product to choose from that they didn’t have before,” Schedler adds.
Occupancies and rents throughout New Orleans vary greatly depending on submarket. Average monthly rents for the metro as a whole are $0.99 per square foot, though some product in downtown New Orleans has asking rents of $2.00 per square foot. At the same time, average occupancy for metro New Orleans is 91 percent, a 1 percent increase from the fall 2010 Greater New Orleans Multifamily Report—put out by Madderra & Cazalot, Larry G. Schedler & Associates Inc. and The Multi-Family Advisory Group LLC—and a 3 percent increase from the spring 2010 report
“The market with the biggest challenge right now is Eastern New Orleans, which is the area that sustained the most damage in Hurricane Katrina,” says Schedler. Where it once contained 7,000 units (properties of 100 units or more), it now has just 4,000 units. And while occupancy there has improved since the storm, it is still only 85 percent. “It’s kind of a victim of the economy and the slow pace at which you’ve seen redevelopment over there,” he points out. Average rent here is $724.
Meanwhile, Algiers and Kennar are reporting occupancies of 84 percent and 81 percent, respectively. (Average monthly rents in Algiers and Kennar are $712 and $804, respectively.) Because these markets weren’t as heavily damaged in Katrina, properties initially enjoyed strong occupancies, but as new inventory entered the market, other product received complete facelifts, and people were able to return to their homes, the markets began to suffer as people moved out, recalls Schedler.
“I think that market is geographically great to downtown New Orleans; it’s close to the Federal City project that’s going on at the military base. That inventory just needs to be upgraded, rehabbed and modernized to compete in the submarkets,” notes Schedler.
Federal City is a 155-acre mixed-use redevelopment of the former Naval Support Activity New Orleans. At build-out, it is expected to comprise 1,400 housing units, 150 hotel rooms, over 1 million square feet of office space, 375,000 square feet of retail and 350,000 square feet of civil/municipal buildings. The anchor tenant of the project is the new national headquarters of the Marine Corps. Reserve, and the facility will be LEED (Leadership in Energy and Environmental Design) Silver certified.
The project, which is being developed by the New Orleans Federal Alliance (NOFA) and HRI/ECC LCC (a joint venture between Historic Properties Inc. and Environmental Chemical Corp.), broke ground in September 2008 and is expected to take approximately 15 years.
Meanwhile, the submarkets with the strongest occupancies are Harahan/River Ridge (96 percent), Historic Center (95 percent), Metairie (94 percent) and St. Tammany Parish (92 percent).
In the aftermath of Hurricane Katrina, many of the outlying neighborhoods didn’t have dirt to develop, and/or development was met with neighborhood resistance, recalls Schedler. Consequently, developers began to target Central City and other neighborhoods in downtown New Orleans.
“You’ve seen a renaissance in downtown New Orleans,” reports Schedler, pointing out that the city was full of older office buildings that were converted to multifamily. “There’s not a lot of funding out there for hotels, so with all the dollars that came in, it was natural for multifamily.”
In addition, New Orleans has become “cool” again, points out Abbenante. “People used to live out in the suburbs to get away from downtown; now [downtown] is where you want to be.”
The highest rents are being achieved in the Historic Center and the downtown Mid-City area, where the average monthly rent is $1,211 per month and product is 95 percent occupied.
Meanwhile, suburban development has been concentrated in St. Tammany Parish, where there is available land, and which, Schedler notes, is the highest-income parish in the state. With occupancies at 92 percent, the neighborhood’s average rent is $963 per month. However, of all the submarkets surveyed in the report, St. Tammany Parish had the highest amount of concessions.
Currently six market-rate properties, totaling 770 units, are being developed or are in initial lease-up in the New Orleans metro area, according to the most recent Greater New Orleans Multifamily Report.
Three developments are in western St. Tammany, including the 140-unit Abita View in Covington; 58 units that Crosby Development is adding to Mandeville Lake in Mandeville; and the 240-unit Brewster Commons at River Chase, also in Mandeville. New properties in the Historic Center include two properties being developed by Wisznia & Associates—the 105-unit Maritime and the 155-unit Saratoga Lofts (see photos above)—and one property developed by Sean Cummings and T.J. Iarocci, known as the National Rice Mill Lofts, which is 67 units located on the riverfront in Bywater.
The Maritime, originally built in 1893 as an office building, was converted into a mixed-use development and opened its doors at the beginning of the year. The Saratoga, which sits about three blocks from the Maritime, is a mid-20th century office building that was originally built in 1956. Asking rents for both communities are averaging $2.25 per square foot a month—20 percent higher than the average of downtown New Orleans. The Maritime, however, is 85 percent occupied and was leased 50 percent faster than what underwriters had anticipated, reports Wisznia.
“The trend for urban dwelling is certainly part of the success. It really is a paradigm shift overall in where and how people want to live today,” he notes.
Meanwhile, the national economy, combined with the fact that 25 percent of the inventory in New Orleans traded hands in the three years following Hurricane Katrina, led to a slowdown in transactions during 2010. The fourth quarter, however, saw the market begin to heat up, and the first sale of 2011 was the 264-unit Stonebridge Manor in Gretna, a 1980s vintage deal sold to a private California investment group.
Investor demand is picking up, though, reports Schedler, with a mix of buyers coming from around the country, including the Northeast and West Coast.
Abbenante has observed that an influx of investors entered the market shortly after Katrina—and they have done remarkably well. However, he doesn’t see any new investors coming to the market if they haven’t already done so.
Cap rates, on true numbers, reports Schedler, are about 7.25 percent to 7.5 percent on 1990s vintage product. Older properties typically trade in the upper-8 percent range to 9 percent.
The future of New Orleans
The future of New Orleans looks bright, according to industry experts. “New Orleans has not been as affected by the downturn in the economy over the last two years in the same way as most of the rest of the country has,” points out Wisznia. “We are still in recovery from Hurricane Katrina because the recovery was so late in starting. … We still have a significant amount of recovery work that’s in progress … so that has buffered us from the recession.”
The New Orleans metro area is beginning to stabilize and absorb the inventory that was delivered post-Hurricane Katrina, says Schedler. And while there was a big building boom following Katrina, federal dollars have slowed down and the market has seen a pullback from FHA’s 221(d)(4) program.
As a result of the hurricane, affordable housing in New Orleans has gone from being some of the worst in the nation to some of the best, reports Schedler. And, points out Wisznia, “today we have probably the most progressive public educational system in the country” which is making the metro more competitive with other major metro areas.
The question, of course, is whether those educated in the system will stay. “We have to be competitive as a community,” asserts Wisznia. “We have to offer them something to make them want to stay here and contribute,” adding that the green construction industry, for example, has begun to take shape throughout the metro.
Additionally, the Greater New Orleans Bioscience Economic District, which is comprised of 1,500 acres that span the Downtown and Mid-City areas, is currently under development, and its anticipation “has been the catalyst for development in downtown, the Warehouse District and Central City,” notes Schedler. “I think that’s why you see a lot of people have lots of plans for downtown. The more rooftops you have, the more you can justify having restaurants stay open, the more you can justify having [a nightlife].”
Tourism, meanwhile, is picking up. According to the New Orleans Convention & Visitors Bureau, the number of annual visitors to the city increased from 3.7 million in 2006 to 7.5 million in 2009. And from January 2010 to May 2010, New Orleans was the number-one destination in the country for REVPAR (revenue per available room) growth.
“The hospitality industry is on fire,” says Abbenante. “[It’s] one of the strongest growth markets in the country, and you have a lot of people who want to work in that, and folks that support that industry, as far as workers in hospitality, now have opportunities for good apartments in the core of the city.”
Jobs are still needed, however, as there were 85,000 hospitality jobs pre-Katrina, in August 2005; as of August 2010, there were 70,000. But in January 2010, the city announced a plan for the industry, with a goal of attracting 13.7 million annual visitors by 2018. If New Orleans meets the goals, the benefits through 2018 will include: $11 billion in direct spending, 33,000 additional jobs with an average salary of $33,000 a year and $700 million in tax revenue, according to the New Orleans Convention & Visitors Bureau.
There are, however, some questions that remain unanswered. For example, will there be any long-term effects from last year’s BP oil spill? Schedler isn’t sure. “There have been gains downtown in some properties … because the courthouse is within walking distance to most of these places [but] what the long-term effects of that are, I don’t know.”
Abbenante believes the oil spill has brought a lot of people to the market that have chosen to either stay or return to New Orleans because they see potential job opportunities. “If you are here, depending on what you are doing, there is so much going on with rebuild[ing] the city, the schools, the medical community, that if you’re even here for a short-term period, it may turn into something longer.”
Another bright spot in the Gulf
Mobile, Ala. is the bright spot of the Gulf Coast, according to Stephen Ankenbrandt, founder of Birmingham, Ala.-based Rock Apartment Advisors. “The pipeline has been completed and absorbed,” he says. “There are a few new deals that are under construction, but the market is healthy.”
The market, explains Ankenbrandt, has a diversified manufacturing base, which has been helped along by ThyssenKrupp’s new $5 billion, 2,700-employee steel mill.
“You have a healthy dynamic with an economy that hasn’t been [focused on] tourism or casinos,” points out Ankenbrandt.
Mobile is, however, bookended by two struggling markets, he adds, which is partially due to last year’s Deepwater Horizon oil spill. “Mobile was insulated because [it doesn’t have] tourism. Any coastal market that had tourism … had tremendous distress.”
Pensacola and the Mississippi coast, meanwhile, had been heavily focused on tourism. “Mississippi, post-Katrina, built like crazy. And then the jobs went away and you had a glut of supply that collapsed rental rates,” acknowledges Ankenbrandt.
Meanwhile, Pensacola, Fla. “is a tale of two markets,” says Ankenbrandt. The south side of the market has been harder hit than the area north of I-10.
Pensacola, in particular, took the oil spill hard, as tourism is a large employment driver there. But there doesn’t appear to be much, if any, of a negative long-term effect from the spill. “The reports this year are that tourism traffic has returned full force,” notes Ankenbrandt. “People are going back down there for vacation. Last summer, a lot of people were avoiding that area.”
In Mobile, B deals in A locations are currently trading for a 7 percent to 7.25 percent cap rate, while A deals are likely to achieve a sub-7 cap. Meanwhile, Class C deals are trading at 10 percent.
“There’s a recognition by the market that [with] older, 1970s product there’s risk, so that’s where a lot of distress in our markets have been,” points out Ankenbrandt.
“For a few years in our markets there was compression between classes; that widened over the last two years and it’s still wide today. There’s not a compression of cap rates where A and C sell fairly close to one another; the market assigns risk,” says Ankenbrandt.
Meanwhile, Ankenbrandt recently closed a lender-driven deal in Mississippi, where the buyer “recognized it was a nice Class A asset. He paid sub-6 cap—but he was buying a rent roll that he was confident he could improve fairly dramatically without doing a lot of work.
“We have seen that cap rate scenario,” he adds, “where you’re buying a suppressed rent roll with the expectation that the market is going to carry you out of it.”
He adds that deals in Mississippi post-Katrina sold in the mid-$90,000s, with rents between $0.90 and $0.95 cents per square foot. Today, rents are closer to $0.60 per square foot, and prices on a unit basis are in the mid-$50,000 to $60,000 range.
In Pensacola, Ankenbrandt has seen some Class A lender-drive transactions with cap rates in the 6 percent range. “You’ve got people evaluating deals based on replacement cost … and [if] it’s a fairly new deal [they’re] willing to take the risk, even though it might be aggressive on an economic basis.”