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 currently 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 office 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 occupancy 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 contradictions, with unique assets and distinctive 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 Mississippi River serving as natural barriers, new development in greater New Orleans is necessarily constrained. Consequently, availability in the central 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 downtown New Orleans or Metairie since 1984. What we have seen is historic buildings being converted from office to residential properties or hotels, another 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 essentially 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 downtown New Orleans is another issue that commercial tenants have to contend with. With space at a premium, businesses are looking at parking costs up around $5 to $7 per square foot annually. Parking rates downtown have soared as high as $250 to $325 per month.
Together, this constellation of rising 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 properties are in the hands of multi-generational 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 exerted some drag on the marketplace. Petroleum and engineering companies have downsized (in some cases significantly), 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 recognizing quality investment opportunities in a market that is not as competitive and overpriced as large coastal markets like New York and Los Angeles. New Orleans differs from those cities in another way, as well — while there is some hotel and office paired in certain buildings, development limitations have limited the volume of true mixed-use projects.
Despite a slight increase in subleasing, 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. Another fascinating and distinctive quirk in a city that truly occupies a place all its own in the broader commercial real estate marketplace.
By Kirsten Early, Partner, SRSA Commercial Real Estate (and Secretary, X Team International) and Sandra Corrigan, Director of Leasing, SRSA Commercial Real Estate. This article originally appeared in the October 2016 issue of Southeast Real Estate Business.