New Orleans Awaits More Demand as Office Market Continues to Strengthen

Michael Siegel

Michael Siegel, Corporate Realty

The office market of the Greater New Orleans area is gaining strength alongside the economy of the region. Continued infrastructure investment in and around New Orleans and a surging entrepreneurial spirit throughout the city have contributed to several significant economic development successes, which have resulted in consistent and positive national press about the region and sense of optimism in the general market. The impact of this optimism on the office market differs by submarket but has had the most measurable positive impact in the New Orleans central business district (CBD) and Metairie submarkets, which have the highest concentration of Class A office space.

The office market in the New Orleans CBD is stable. This market has not yet experienced the consistent new tenant demand or existing tenant growth that would result in significantly higher rates, so the overall CBD market remains largely tenant-oriented with aggressive lease deals for credit tenants. However, there have been several regional economic successes like the attraction of GE Capital and Gameloft to the New Orleans CBD, as well as the renewal of major office leases such as Shell Oil (approximately 650,000 square feet), Capital One (approximately 150,000 square feet), and Freeport McMoRan (approximately 210,000 square feet). The leases collectively represent more than 10 percent of the entire Class A office building inventory, which have served to stabilize the market.

At the same time, the supply of office space in the CBD continues to be reduced due to the conversion of older, obsolete office buildings to alternative uses. The inventory of CBD office space is unlikely to grow as barriers to entry such as land costs, lack of availability, construction costs, lending criteria and lack of new tenant demand, will restrict any new development. While the picture is relatively positive for Class A properties, the demand for non-Class A properties has been lethargic. What will bolster the non-A market will be the continuing decline of inventory, not an increase in demand. The non-Class A market is not sustainable at under 70 percent leased and some of the properties will find their highest and best use as apartments, condos or hotels rather than continuing to operate as office buildings. Displaced tenants will likely relocate within the CBD into Class A or other buildings, further strengthening the Class A market and rightsizing the non-Class A market. The key to the CBD turning the existing optimism into higher rates and stronger occupancy is for the city, and the city’s economic development partners, to continue to attract new talent and new companies to New Orleans.

The overall Metairie submarket is at historic highs in terms of both occupancy and real rental rates. The entire Metairie/Jefferson Parish office market is more than 91 percent leased with no new inventory and strong demand. Additionally, it is diversified relative to tenant mix, and there are very few tenants occupying 50,000 square feet or more, which has created stability and a very strong office market. Both rental rates and occupancy will continue to increase as growth in the market is coming from a variety of industries, especially engineering, healthcare, insurance, legal, and energy that show no signs of abating. The Feil Organization, which was already a large owner of office space in this submarket, purchased the 1.2 million-square-foot Lakeway Complex in 2013, strengthening its control of the market. Most landlords are already asking for, and receiving, annual rent step-ups, and as demand remains robust, and occupancy rates stay high, prices are expected to continue to rise.

While the suburban St. Tammany Parish real estate market is more widely recognized for the plethora of successful retail developments, the North Shore also has a healthy and growing office market. Even prior to the development of the 300,000-square-foot Chevron Building in Northpark in 2008, and certainly since, the availability of newly constructed office buildings has been steady. However, while the North Shore continues to become less of a bedroom community and more of a place where people live and work, the prototypical office development is smaller than its counterparts south of Lake Pontchartrain. Instead of large high-rise office buildings, this submarket mostly consists of small suburban office complexes or standalone buildings. There are quite a few 4,000 to 10,000-square-foot structures dotting the landscape between Covington and Mandeville that are used by single or small tenants, and we expect to see more small office buildings continue to be developed on the Northshore.

— Michael Siegel, President and Director of Office Leasing, Corporate Realty. This article originally appeared in the October 2014 issue of Southeast Real Estate Business.

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