New Orleans/Gulf Coast Stalls

By Christopher Hosford, Contributing EditorMore than three years after New Orleans and much of the Gulf Coast were destroyed by Hurricane Katrina, the area’s apartment industry is in a state of flux. Continuing high demand for rentals, the paucity of tax credits and public funds—combined with a constricted credit market—have brought multifamily development to a standstill.This is particularly so for new mixed-income construction, which relies on tax credit allotments from state housing financing agencies. These tax credit allocations, and the syndicators who strive to round up investors to buy them, have also vanished. “It’s tough times right now [in New Orleans],” says Robert Greer, president of Michaels Development Company, an affordable housing developer based in Marlton, NJ. “The big money is out of the tax credit program, and a lot of the investors who used to be in the marketplace don’t need tax shelters because they aren’t making any money.”Michaels Development has avoided some of the difficulty by forming its own syndication company to find investors willing to buy the tax credits it obtains. As a result, the company remains active in the New Orleans market, but for longer than it would have wished.Michaels Development is closing in on the revitalization of New Desire Village in New Orleans, an existing 97-acre public housing development involving the creation of 425 new rental single-family homes and duplexes. The project was almost complete in 2005 when it was destroyed by the hurricane. Today, 107 units are complete, with financing for 318 units in phase two being finalized.Projects put on holdBut it is precisely financing that continues to dog the area’s multifamily market, even when some government support is available. One of the highest profile developments in New Orleans, the $400 million Trump International hotel and condo tower, is on hold and awaiting financing, despite the availability of about $100 million in Gulf Opportunity Zone (GO Zone) bonds, federally supported low-interest, tax-exempt financing.”Conventional lending basically is not available for the construction of apartment projects,” says Mark Humphreys, CEO of Humphreys & Partners Architects. “Banks are asking for 30 or 40 percent equity, and nobody wants to put in that much.”Still, Humphreys also is active in the market, with three projects in the heart of New Orleans, each of which has benefited from GO Zone bonds and from financing that was in place before the markets essentially shut down in mid-2008. They include The Preserve, a mixed-income development with 183 units in the mid-city area; The Meridien, consisting of 72 affordable-housing units; and Crescent Club, with 228 units. Each project is being developed by The Domain Companies, and they are close to opening for occupancy, although much pre-lease activity has been going on, Humphreys says.”If anybody has been to New Orleans, you know you can’t put the city down,” Humphreys says. “It’s the heart and soul of Americana, a fabulous place. I see New Orleans as the new Chicago, after the fire that destroyed that city in 1871. There’s now the opportunity to redo the master plan. Its long-term potential is astronomical.”Struggling through the meltdownAccording to the “Greater New Orleans Multi-Family Report” (a survey of 114 properties consisting of almost 28,000 units, published in November 2008 by Larry G. Schedler & Associates and Madderra & Cazalot, both based in Metairie, La., just outside New Orleans), the current financial crisis and lack of credit has overwhelmed federal benefits that were available following Hurricane Katrina. “While significant apartment construction activity continues in the New Orleans metro area, it is focused exclusively on properties [that] began construction or attained commitments prior to this market meltdown,” the report states.Rental rates in the metro area have remained stable since spring 2008, with average rents of $863, and average rent per sq. ft. at $1.01. Occupancy is high, as expected in an under-supplied market with high demand from gradually returning residents. Its current rate—92 percent, down from 94 percent last spring—is attributed to an increase in inventory as new or repaired units have come online.Of the projects in New Orleans that have either recently been completed or are expected to wrap up shortly, only two are new market-rate projects. One is 930 Poydras, consisting of 250 luxury units developed by Brian Gibbs, expected to be complete toward the end of the year. The 21-story development is distinctive in the market, since most rental properties in the Central Business District/Warehouse District tend to be adaptive reuse.The other market-rate project in New Orleans is the Chenier Apartments, with 288 units developed by The Park Companies, which has been completed in Mandeville, on the north shore of Lake Pontchartrain directly across from New Orleans.Mixed-income construction is by far the most active sector in New Orleans, but these all gained their financing before tax-credit allocations dried up. They include:• Lakeside Apartments, developed by Provident Realty Advisors, with 250 units complete. This project is located in Slidell, La., near Lake Pontchartrain’s north shore.• Walnut Square Apartments, developed by Preservation Housing II, with 209 units, completed in October 2008.• 200 Carondelet, by Reliance/Carondelet Association 1, with 190 units completed last November.• The Marquis Apartments, also by Provident, with 250 units to be completed by the spring.• Rivergardens CSII, 310 units developed by Historic Restoration, to be completed by next summer.”We think the price point is strong for this type of product,” says Chris Papamichael, principal with The Domain Companies. “Obviously there was a lot of storm damage, and the supply that has been brought back hasn’t kept up with demand. But we’re starting to see money flowing again. And there are jobs flowing into the city, which is hard to say in the rest of the country. That in turn leads to strong apartment demand.”But he agrees that market-rate construction isn’t in New Orleans’s near future. “Future construction is absolutely dependent on tax credits and community development block grant funds,” Papamichael says, adding that New Orleans has relatively high construction and land costs. “The developments we’re constructing have hard costs of $170,000 per unit, and rents don’t work without subsidies.” For future projects, Papamichael notes, “We’re in a wait-and-see period right now.”Lagging reconstructionReconstruction is also lagging in New Orleans, three years after the city’s devastation. Currently, just four significant reconstruction projects are in development and underway. They are:• Hidden Lake, developed by Mitchell Companies, with 461 units.• Chenault Creek, with 584 units developed by Southwood Realty.• Pirogue Cove, with 300 units being developed by Bay Equities.• Lake Terrace Gardens, developed by Trapolin & Associates, with 183 units.Meanwhile, the desire for investors to acquire multifamily properties in New Orleans is intense. According to the Schedler & Associates/Madderra & Cazalot report, the Metro New Orleans market has experienced the transfer of some half-billion dollars worth of multifamily properties, the greatest amount in the city’s history.Leading the list was the September 2008 sale of the Saulet Apartments in New Orleans to AVR Realty, a private New York investment firm, for $97.5 million, or $138,691 per unit.Onlookers don’t expect much multifamily activity to occur in New Orleans over the next two years, despite pent-up demand. Thus, as the units already in the pipeline come online in 2009 and are absorbed, rents and occupancy rates are both likely to climb, in particular if former residents continue to trickle back to town.Still, optimism remains high, in particular with the administration change in Washington.”The optimism is that all the housing programs that went away are going to be recreated, now that we have a president and his appointed secretary of the Department of Housing and Urban Developme
nt (Shaun Donovan, New York City’s former commissioner of Housing Preservation and Development) who understand rental housing, and are eager to make it a reality, says Greer. “There are a large number of people in our industry who are celebrating.”To comment, e-mail diana.mosher@nielsen.com