Southeast Real Estate Business

OCT 2016

Southeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Southeast United States.

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34 • October 2016 • Southeast Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: N E W O R L E A N S DESPITE CHALLENGES IN MARKETPLACE, NEW ORLEANS OFFICE ACTIVITY HAS PICKED UP New Orleans may be The Big Easy, but when it comes to understanding this unique Southern city's commercial real estate marketplace, very little is easy or simple. The numbers, at least, are fairly straightforward. New Orleans current- ly has around 8.8 million square feet of Class A office space and 1.6 million square feet of Class B. Average rental rates are approximately $19.00 per square foot and $15.50 per square foot for Class A and Class B, respectively, with current occupancy rates at 89.5 percent for Class A and 71 percent for Class B. By way of comparison, the popular suburban Metairie market has around 2 million square feet of Class A and 1.5 million square feet of Class B of- fice space, with occupancy rates at 93 percent and 88.2 percent, respectively (both down slightly from 2014 highs of 95 percent and 92 percent). Average rental rates are approximately $24.00 per square foot in Class A properties and $19.50 for Class B. The numbers in the suburban North Shore market are similarly healthy, with rates and oc- cupancy numbers in the same general range as Metairie. Look beyond the surface numbers, however, and things get interesting, and a little more complicated. In some ways, New Orleans is a city of contra- dictions, with unique assets and dis- tinctive challenges. Space is the single biggest issue — specifically a lack of space, as the city is limited by some unique geographical circumstances. With Lake Pontchartrain and the Mis- sissippi River serving as natural barri- ers, new development in greater New Orleans is necessarily constrained. Consequently, availability in the cen- tral business district tends to be scarce, and the total supply of office space downtown has shrunk by about a third in the last two decades. Remarkably, we have not seen a new major office building built in down- town New Orleans or Metairie since 1984. What we have seen is historic buildings being converted from office to residential properties or hotels, an- other factor contributing to the overall reduction in supply. Partly as a result of this trend, which accelerated in the wake of Hurricane Katrina, there is es- sentially no Class C office remaining in New Orleans. Demand, however, has remained fairly steady. In that context, it is not particularly surprising that land prices have risen significantly. And, while rental rates overall have crept up over the last several years, rates in prime locations are spiking as high as the $25.00 per square foot range. While it might sound prosaic, the scarcity of available parking in down- town New Orleans is another issue that commercial tenants have to contend with. With space at a premium, busi- nesses are looking at parking costs up around $5 to $7 per square foot an- nually. Parking rates downtown have soared as high as $250 to $325 per month. Together, this constellation of ris- ing costs and limited space makes for a commercial environment where smaller retailers and office tenants are simply unable to make the numbers work. More than a few are electing (or being forced) to move when their leases expire. While larger national brands, businesses and institutions may be able to handle the price tag, larger high- quality places are vanishing, making entry into the New Orleans market a barrier to entry for some. Ground leases are another issue that need to be navigated when purchasing property, as some commercial proper- ties are in the hands of multi-genera- tional owners. While the overall economic climate in and around New Orleans has remained steady-to-strong in recent years, the slack in the oil and gas sector has ex- erted some drag on the marketplace. Petroleum and engineering companies have downsized (in some cases signifi- cantly), and, while the impact has not been nearly as significant as it has been in Houston, for example, New Orleans has definitely felt it. Purchasing and investment activity has picked up in New Orleans, with national developers and investors rec- ognizing quality investment opportu- nities in a market that is not as com- petitive and overpriced as large coastal markets like New York and Los An- geles. New Orleans differs from those cities in another way, as well — while there is some hotel and office paired in certain buildings, development limita- tions have limited the volume of true mixed-use projects. Despite a slight increase in subleas- ing, rates are continuing to trend up. And, with a finite amount of square footage, owners/landlords are being increasingly creative, turning to full- scale conversions instead of simply shuffling tenants around. Some have successfully taken advantage of New Orleans generous historic tax credits to make those conversions work. An- other fascinating and distinctive quirk in a city that truly occupies a place all its own in the broader commercial real estate marketplace. Kirsten Early Partner, SRSA Commercial Real Estate Secretary, X Team International Sandra Corrigan Director of Leasing, SRSA Commercial Real Estate Armada Hoffler Properties' acquisition program includes a particular focus on retail assets including grocery-anchored, lifestyle and mixed- use centers. In addition to a streamlined diligence and closing process and all-cash purchases, the Company has tax-advantaged strategies that may be beneficial to many sellers. Meet our executives at ICSC in Atlanta to discuss acquisition opportunities. I C S C S O U T H E A S T • A T L A N T A • N O V 2 0 1 6 • EXHIBIT SPACE 841 ArmadaHoffler.com NYSE : AHH Activity for office product in New Orleans has increased now that developers and investors are finding quality opportunities in an affordable market. Remarkably, we have not seen a new major office building built in downtown New Orleans or Metairie since 1984.

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