Cajun Country Puts Spice in Markets
Down south in Louisiana, "Our economy is basically tied to the oil industry," explains Gary P. Tilley, CCIM, of Stirling Properties, Inc., in Covington, Louisiana. While others contend that the economy has become more diversified and note the impact of tourism and recently approved casino gambling, oil still is king in many residents’ minds. "The oil and gas industry will be paramount in the future of this office market," says Gerard J. Delahoussaye, CCIM, SIOR, of Stirling Properties, Inc., in New Orleans. "Should crude oil prices fall further or remain sub-$16 per barrel for any significant length of time, then the office market will be negatively impacted."
This update on commercial real estate in the Pelican State’s largest city of New Orleans and its capital, Baton Rouge, shows that both cities’ economies are doing well, local brokers report.
"The single most important factor affecting our market is the lack of available land," Tilley says. "Our market is surrounded by water—the Mississippi River to the west and south and Lake Pontchartrain and swamp areas to the north and east. Good retail locations are few in number and we must create sites by land assembly and demolition. This, of course, can be very expensive, which in turn makes the economics of the deal very tough."
Retail occupancies overall run about 92 percent, Tilley says. The market has gained several new big-box retailers in recent years, including Barnes & Noble, Office Max, and PetsMart. Class A storefronts downtown lease for an average of $19 psf annually and suburban rents run $8 psf to $15 psf, he says.
In Baton Rouge, the retail market is "excellent, with strong activity in every category," says Dottie Tarleton, CCIM, of Stirling Properties in Baton Rouge. For instance, a new 1.2 million-sf mall opened in the past year, bringing some higher-end retailers to the area, including AnnTaylor and Laura Ashley. In addition, several category killers have entered the market, several theme restaurants have opened, and 25 movie screens have been added in the past couple of years, she says.
"The economy is excellent, with the Baton Rouge MSA [metropolitan statistical area] enjoying one of the longest and most sustained periods of economic growth among the state’s eight MSAs," Tarleton says.
The New Orleans CBD office market has seen rental and occupancy rates increase by about 20 percent to 25 percent over the past two to three years to 83 percent to 85 percent, Delahoussaye says. Real estate investment trusts (REITs) have acquired most of the class A and several class B properties for prices ranging from $68 psf to $110 psf for class A and $20 psf to $40 psf for class B.
"The strength of the market, however, in my opinion, is very fragile," Delahoussaye says. "The office market is still very much influenced by the oil and gas industry, and void of this industry there is very little evidence of real growth and absorption in the marketplace. If the current woes in the oil and gas industry continue for any length of time, then real cutbacks in occupancies and rates may be a direct result."
The office market in suburban New Orleans is "hot," says Richard E. Juge, CCIM, CIPS, of Re/Max Commercial Brokers, Inc., in suburban New Orleans. "The suburban markets have followed the national trend of being the most vibrant, with rates between $16 and $20 psf." Suburban occupancies are about 95 percent, Juge says, with "our premier suburban market—Metairie—being ‘effectively’ 100 percent."
Baton Rouge’s office market also is doing well, reports Richard B. Hymel, CCIM, CPM, of Select Properties, Ltd., in Baton Rouge. "Over the past year...class A office space occupancy has been over 95 percent, with rental rates pushing $18 psf annually in some select office buildings." Though not many sales have occurred, prices over the past three years have increased from the high $40 range psf to more than $85 psf, he says.
Baton Rouge’s class A office market will continue to see its rental rates and occupancies grow, Hymel predicts, but "possibly going down as new product becomes available to the market. Class B will see higher occupancy with a possible small decline in rental rates. The ‘hot’ areas still will be high-quality build-to-suit in good areas."
"Industrial real estate in the metro New Orleans market continues at a slow but steady pace in all sectors," says Max J. Derbes, III, CCIM, SIOR, CRE, of Max J. Derbes, Inc., in New Orleans. "The only ‘fragile’ segment of the industrial market would be the area based primarily on the ‘oil patch,’ i.e., drilling, processing, etc. As the price of oil goes, so goes the oil patch market. Currently, all indicators point to a stable market. Due to high taxes, crime, and poor schools, the industrial market in general will continue to relocate into the suburban market out of New Orleans."
Industrial lease rates appear to be keeping up with inflation, Derbes says. In sales, REITs and institutional investors are the main players for large, multiple-building industrial properties. "Sales of smaller, owner-occupied properties are slow, more due to a lack of available inventory and the availability of sites for expansion or relocation."
In Baton Rouge, the industrial market has experienced "lots of activity," reports Clay M. Johnston, CCIM, of Latter & Blum, Inc./Realtors in Baton Rouge. "We need more industrial subdivisions." Occupancy rates are "way up" at 95 percent, he says, adding, "Remember, this is the oil patch. We were the first to hit bottom in the late ‘80s."
Lease rates run about $4 psf to $4.50 psf annually for warehouse space, he says. Sales run approximately $25 psf to $35 psf, but vary widely, Johnston says.
New Orleans’ multifamily market is doing well, according to Larry Schedler, CCIM, of Property One, Inc., in New Orleans. "We have achieved an equilibrium whereby the demand has finally caught up with the supply," he says. "Limited amounts of developable land will limit the new construction to high-end niche product in selected areas. The need for affordable housing will be met by the continued rehabilitation of our existing inventory. Most owners are upgrading their properties with the focus being on refinancing rather than selling."
Multifamily occupancies generally range from 95 percent to 97 percent, Schedler says, with lease rates steadily increasing to about $0.55 psf to $0.59 psf per month.
Looking forward, "Niche developments will emerge in select areas, and I would anticipate the conversion of older C and D office buildings in the CBD to multifamily," Schedler says. "Some moderate-income development will occur, utilizing the Section 42 low-income tax credit program."
Serving Up Deals in Birmingham, Alabama
Commercial real estate is showing some southern hospitality in another of the South’s markets, Birmingham, Alabama. "Birmingham is enjoying one of the strongest real estate markets in years," says Van Corr, CCIM, of Commercial Realty Co., Inc., in Birmingham.
"The retail market in Birmingham is very brisk," Corr says, and "1998 has seen a continuation of the growth experienced in 1997." Several factors contribute to the market’s boom, he says, including high personal income levels that have created new subdivisions, and consequently, the need for new retail. Low interest rates and plentiful financing also have helped.
Most new retail construction is build-to-suit for drug store and fast-food retailers, he says. Several 15,000-sf to 25,000-sf shopping centers also have been built. New construction typically leases for $13 psf to $15 psf per year for neighborhood strip centers, Corr says.
In Birmingham’s multifamily market, occupancy rates are 90 percent to 92 percent, down from 98 percent to 100 percent in the last couple of years, because the market has delivered more than 3,000 new units, says Philip P. Mulkey, CCIM, of Brigham-Williams, Inc., in Birmingham. Moreover, 240 more class A units recently were in lease-up and 534 units were under construction, he says.
Apartment lease rates are up, running $0.60 psf to $0.80 psf per month, he says, and sales prices also have risen, with top deals reaching $60 psf.
The area’s industrial market has 90 percent to 95 percent occupancy in all categories, says J. Howard King, CCIM, of Watts Realty Co., Inc., in Birmingham. "Demand outpaces supply and activity is slowed only by the shortage of suitable inventory."
New industrial parks are being developed, he says, but construction is limited to small build-to-suits "and even less in true speculative construction."
Rising rental rates "at a future point will either ignite new developments or drive companies in need of large blocks of space to competing cities," King says.
Office occupancies in the city were about 95 percent at year-end 1997, according to Colonial Properties Trust, a Birmingham-based REIT.