Weathering the Storms

In the wake of the BP oil spill, the Gulf Coast continues to make headlines daily, leaving behind a number of open-ended questions about its long-term effects on employment and housing in the region.

“I don’t think we’ve seen the oil spill impact thoroughly yet; it’s not so much what the oil spill has done, but what will be a great threat is the [drilling] moratorium. It puts out of work tens of thousands of people,” says James P. McNamara, president and CEO of the Greater New Orleans Biosciences Economic Development District (GNOBEDD), a 1,500-acre economic development district created by the State of Louisiana in 2005.

And the area could use an employment boost. The New Orleans-Metairie-Kenner, La. metro area reported an 8.2 percent unemployment rate in June 2010, a 1.2 percent increase from the month prior, according to the U.S. Bureau of Labor Statistics while unemployment in Mobile, Ala. was 10.9 percent and the Pensacola-Ferry Pass-Brent, Fla. metro area reported a 10.5 percent unemployment rate.

In addition to the loss of jobs from the drilling freeze, global security giant Northrop Grumman Corp. recently announced that it will close its Avondale shipyard, which employs about 5,000 people and provides another 5,000 supporting jobs, in 2013. This news is at once detrimental to the city’s employment base, though it can be viewed positively, points out McNamara, who notes that the abandoned facility may provide New Orleans with a prime piece of real estate, either for the marine industry or as additional port space.

“We can weather that storm,” he says optimistically, “partly because of the emerging bioscience sector,” which is expected to increase the demand for apartment living in Central City by at least 20 percent over the next four years.

The new $2.5 billion Tulane/LSU hospital is expected to add 6,000 jobs, and a new $90 million cancer center and a $60 million biotech incubator, both of which are about 50 percent complete, will add hundreds of new jobs.

“We’ve seen a lot of change in the market since Katrina, and it’s turned out to be a strong market … because it moved in a different direction than other markets,” notes Matt Schwartz, principal of The Domain Companies, which has developed three mixed-use, mixed income projects in the District, including the 183-unit Preserve, the 72-unit Meridian and the 228-unit Crescent Club. The projects were financed using Go-Zone housing tax credits, Go-Zone tax incentives, Community Development Block Grant Funds and IDB taxable bonds. “We’ve had substantial momentum generated by recovery and economic projects brought about, in part, by additional resources allocated to the area following Katrina,” he notes.

Market fundamentals

Average occupancy in the New Orleans metro area is currently 88 percent, with higher vacancies in Algiers, Kenner and East New Orleans, the latter of which was heavily affected by Hurricane Katrina, reports Larry Schedler, CCIM, principal of Larry G. Schedler & Associates Inc., a Metairie, La.-based multifamily brokerage and advisory firm. Meanwhile, Jefferson Parish—which has a moratorium on development—Central City and downtown New Orleans have higher occupancies and more stabilized units.

The market currently has eight properties, totaling nearly 1,300 units, under construction, 75 percent of which are market-rate and 25 percent of which are mixed-income affordable tax credit communities. (While the most stability seems to stem from affordable housing—many of which have reported 100 percent occupancies—“we have to be cautious not to overbuild the affordable market so that it starts affecting the conventional apartments that are rehabbed,” cautions Schedler.) In addition, much of the construction is focused in the Historic Center of New Orleans, rather than in the suburbs, where development has historically been focused.

While concessions continue to be offered throughout the Gulf region, they are starting to burn off slightly. Consequently, rents throughout the area have remained essentially flat, though Stephen Ankenbrandt, founder, Rock Apartment Advisors, a Birmingham, Ala.-based commercial real estate firm focused on multifamily investment sales and services, predicts that the economic recovery will push coastal rents up between 3 percent and 5 percent in the next year.

Much of the Florida Panhandle has suffered from the collapse of the construction markets, especially as they related to condominiums and coastal housing, reports Ankenbrandt. “As those markets dried up, a lot of people who occupied rental housing—who were construction workers—left.”

At the same time, Pensacola and Panama City, whose economies are heavily driven by tourism, were hard hit this summer as a result of the oil spill. As Ankenbrandt points out, the lack of tourism filters down into other sectors, primarily affecting renters. And, while development in the region has slowed considerably, the GO Zone (Gulf Opportunity Zone) had encouraged new construction following Hurricane Katrina, making the coast, including Foley, Gulf Shores and Orange Beach, Ala.  somewhat softer as tourism came to a standstill.

Coastal Mississippi, which had planned for a number of new casinos, also experienced a construction job meltdown, leaving in its wake a number of supply issues, particularly as a result of government programs. “They have enough affordable units over there—they need to take a pause and let these units absorb and not kill the incentive for the private sector to come in and renovate,” adds Schedler. At the same time, rents are down 20 percent to 30 percent from their 2007 peak—and Ankenbrandt doesn’t expect these numbers to ever recover.

Meanwhile, Mobile, Ala. remains strong, according to Ankenbrandt. In the past six months, the MSA saw a 5 percent increase in occupancies, into the mid-90 percent range, averaging approximately 95 percent. “It’s the star [in the region], and it has a little bit of insulation from tourism,” Ankenbrandt notes, which he attributes to the fact that it’s a port city and is considered to be a “dynamic job-growth city,” with about 1,000 jobs added this past June alone. In addition, the widening of the Panama Canal is expected to make the city boom.

Sales and development opportunities

While the majority, if not all, of the subsidies for the redevelopment of New Orleans have already been allocated, there is a possibility that the program could be extended, notes Schwartz, who believes that there’s more opportunity for development in the Biosciences corridor, though. “If everything moves forward, and the city is successful in building up that industry, there will be demand” for housing, he adds.

Meanwhile, sales volume in New Orleans slowed considerably in the fourth quarter of 2009, according to Schedler, who points out that in the aftermath of Hurricane Katrina, roughly 25 percent of the market traded hands.

At the same time, Ankenbrandt reports that a number of non-performing assets, bid up as a result of aggressive purchasers planning condo conversion, particularly on the Florida coast, will crop up along the Gulf region during the later part of the year. Despite this, he believes Coastal Mississippi will be a good place to own since it has already taken its hits—and survived. And the new international airport in West Bay is expected to bring easy access to Pensacola and Panama City.

That being said, however, 2010 looks more promising for New Orleans, though Schedler believes that most of the conveyances won’t take place until the end of the year. Cap rates are between 50 and 100 bps higher than they were two years ago, reports Schedler, adding that New Orleans properties typically range in the 7 percent to 8 percent range. However, the market has a strong barrier-to-entry, which Schedler believes will prove to be an enormous attraction to investors.

Meanwhile, the Mobile, Ala. transaction market is starting to stir, according to Ankenbrandt, who notes, “there are some owners, because of the performance of the market and [the fact that] things are stable, that have an interest in selling.” Values in this market “have held their own,” though cap rates are about 50 to 75 bps higher than they were in 2007. Class A deals are trading between a 6.5 percent and 7 percent cap, Class B product is between 7 and 7.5, and Class C is about 7.5 to 8. “On in-place income, I think that’s realistic,” Ankenbrandt notes. “In a soft market, they are buying with the opportunity to heal.”

A questionable future

Though the federal government’s moratorium on drilling is being challenged, it remains to be seen how the oil spill will impact the job market—and how it will affect the Gulf region in the big picture.

“We think the drilling will prevail … I think investors are going to take note of that and maybe they’ll price things differently, but I don’t think a prudent investor believes they’ll stop drilling in the long-term,” Schedler predicts.

“The other side of the equation is—and I don’t know if this has been decided yet—but if the litigation for the BP thing is in Louisiana, it’ll be done in New Orleans,” he adds. “That [would be] a tremendous boom for downtown apartments. … It’s too early to tell, but you can only imagine the need for housing that would be created with that.”

While there may be investor concerns in New Orleans, the market does have a number of bright spots, though, including the high barriers to entry. Plus, as Schedler notes, “people want to live here. … There’s a certain way of life,” which is also true of the rest of the region. In Mississippi, for example, while people may be moving away from the coast at this point in time, Schedler predicts that there will be new condo development, with the gaming industry and the military working to create jobs.

“New Orleans is an extremely resilient city,” says McNamara. “If you’re in a good location and provide a good apartment, you will be leased.”

To comment, e-mail Erika Schnitzer at eschnitzer@multi-housingnews.com