New Orleans keeps this sector alive as brokers piece together the city.
While some commercial real estate professionals have no problem finding properties to market, in New Orleans, many are trying to rebuild what they used to have. As the city continues to work through the devastating effects of Hurricane Katrina, the multifamily sector is proving to be a value-add opportunity for investors.
Commercial Investment Real Estate spoke with Larry G. Schedler, CCIM, president of Larry G. Schedler & Associates in Metairie, La., about the New Orleans post-Katrina multifamily market.
What type of multifamily properties do you work with?
Schedler: I mainly work with garden apartment communities, which generally are two- to three-story buildings situated around a series of courtyard/garden areas. These assets are usually frame construction with an exterior of brick veneer, hardi-plank, vinyl, or stucco.
Traditionally, garden apartment communities are located in suburban locations and offer residents a maintenance-free living environment with various amenity packages such as swimming pools, fitness centers, and concierge services. The communities serve all segments of the market, from government-subsidized developments to developments with monthly rents exceeding upscale single-family mortgage payments.
CIRE: What types of buyers were/are buying the severely damaged properties? Did you do any outside marketing for the communities or did buyers seek you out?
Schedler: The predominant buyers for the heavily damaged properties are construction-oriented buyers who have the ability to rehab the properties in-house. This type of buyer was active in the metropolitan New Orleans market in the late 1980s and early 1990s when the market had a large number of assets in need of rehabilitation. My company markets these assets through an extensive database of local, regional and national buyers that we have maintained for the past 25 years.
Additionally, with the national press focused on the metropolitan New Orleans area in the wake of Hurricane Katrina, value-add buyers continue to contact my company in their quest to locate assets that are compatible with their acquisition criteria.
CIRE: Why are these properties considered “ultimate turn-arounds?” Are the properties remaining apartment communities or being redeveloped? What is your role in this process?
Schedler: The devastation that the metro New Orleans apartment market sustained is unprecedented and represents a tragedy that other markets have never been through. Many of the properties my company sold in the aftermath of Katrina were uninhabitable, with the interiors down to the studs. These assets required a complete reconstruction of the interiors and, in some cases, all new electrical systems as well.
As the brokers in these transactions, my colleagues and I are primarily retained by sellers. We market the properties to and also tour prospective purchasers through not only the specific asset but the overall submarket. Both buyers and sellers should realize that the submarkets were damaged as well, and therefore lack many basic services that most take for granted, such as grocery stores, gas stations, restaurants, and post offices.
In the weeks immediately following Katrina, my colleagues and I traded our suits and ties for rubber boots and surgical masks in order to tour assets in areas that suffered the greatest devastation. We then counseled buyers on the various rebuilding guidelines and GoZone initiatives for specific areas as well as interacted with buyers, investors, lenders, and appraisers.
CIRE: How many properties are you currently listing that are still damaged from Hurricane Katrina?
Schedler: The majority of heavily damaged assets have been either sold or demolished. Currently, my company has less than a half-dozen properties that are still in need of significant rehab. The longer properties are on the market without rehab, the more possibility they will ultimately be demolished, making way for newer inventory.
CIRE: Are you currently working on any big multifamily projects?
Schedler: We are working on an assortment of multifamily properties located not only in New Orleans but Baton Rouge, La., and the Mississippi Gulf Coast as well. Some of the properties are recently rehabbed while others are recently developed and being marketed to investors searching for bonus depreciation benefits offered on new developments in the GoZone.
CIRE: What is the current state of multifamily in New Orleans? What do you predict for the future?
Schedler: The multifamily market in metro New Orleans has stabilized along with rents and occupancy levels. Rents are 25 percent to 30 percent higher than pre-Katrina levels, which is the result of increased operating expenses due to increases in insurance, energy, and personnel expenditures.
Occupancy levels are in the 93 percent to 95 percent range with a rental rate range of $.75 -$1.97 per square foot per month. Sales activity has been very strong because of the amount of value-add opportunities and the overwhelming need for housing. Although New Orleans lost 150,000 to 175,000 of its pre-Katrina population, 55 percent of the households in metro New Orleans were renter-occupied single- family homes.
The future of the multifamily market is positive. New Orleans offers the most significant barriers of any other market in the country. Supply and demand always have remained in sync as the metro area has very limited land on which to develop additional product. However, areas that do have available land have enacted moratoriums to ward off any future multifamily development.
The properties being developed will be infill central city locations and are utilizing the Section 42, Low Income Housing Tax Credit Program, whose allocation from the federal government was substantially increased as a vehicle to create additional housing.
Sales activity will most likely slow as the assets that are being rehabbed will need to complete renovations, lease up, and stabilize before owners can realize their true value.