New Orleans Office Sector is in Rightsizing Mode as Tenants Downsize Footprints
With the recent influx of young talent, combined with the area’s thriving economy and renowned vibrant culture, the Greater New Orleans region is poised for growth.
Although the office market sector is slow to show any significant gains, this signifies a potential undervalued opportunity for users. The metro area has nearly 20 million square feet of office space, including over 11 million square feet of Class A space with a published occupancy rate exceeding 87 percent.
The predominant trend is a rightsizing of the market, resulting in more downsizing than growth. On a macro level, the oil and gas industry is phasing out, which has historically been a prominent space user. The conversion of office space into alternate uses also continues, as well as a reduction in company footprints.
The outlying suburban office market has seen the most growth, with East Metairie being one of the strongest submarkets in both occupancy and rental rates. With less product in the area, supply and demand are closer to equilibrium.
New Orleans’ central business district (CBD) and downtown office submarkets are coasting along. Class A occupancy rates are slightly down from last year, but rents have inched up to high-teens and low-20s. The recent development of the mixed-use South Market District and redevelopment of the Hyatt Regency hotel are huge asset gains for the downtown/CBD, offering many new amenities for future office users that may fuel growth and interest. This makes working downtown more attractive to young professionals who are now provided the opportunity to live and work in a walkable environment.
Availability of Class A office space at attractive rental rates has presented an opportunity for users to relocate “up” in the market from Class B to Class A or higher-level Class B locations. Today’s tenants want more flexibility with lease terms and are following the national trends of space utilization, desiring collaborative work environments and innovative trophy projects. It’s a tenant’s market, and tenants can afford to shop around and reposition their brands.
There have been few large businesses coming in leasing space and limited corporate expansions. Several existing companies are downsizing to improve operational efficiency. The benefit is quite a bit of a space — particularly Class B and C — is being taken off-market and converted to non-office uses, namely residential in the CBD and Warehouse District. This is keeping occupancy rates relatively stable as a result of shrinking inventory.
Hancock Whitney recently relocated to the 1.3 million-square-foot, Class A One Shell Square office building, backfilling space vacated by Shell Oil. Its former non-Class A, 300,000-square-foot Whitney Bank Building will be converted into other uses, including a hotel, apartments and retail.
The office market has celebrated some recent notable successes. DXC Technology selected New Orleans as the site for its 2,000-plus employee digital transformation center, resulting in the biggest economic development jobs win in Louisiana history. DXC will backfill multiple floors of the former Freeport McMoRan Building.
Accruent announced its 350-job technology center in the CBD, and EY is expanding, filling 23,000 square feet at One Shell Square. The Superior Energy building is slowly backfilling as well with various service providers like lawyers, insurance and engineering firms, and banking and financial managers. And the State of Louisiana is working to renew its long-term commitment with Benson Tower, a 540,000-square-foot office building shadowing the Superdome.
New Orleans’ office market is attractive for new companies and young talent looking to get started with an address and lease space, as well as for existing companies that are outgrowing their current space. It’s a relatively affordable area with cheaper occupancy costs than competing markets. Landlords are offering aggressive and attractive terms for sizable tenants if willing to commit to long-term deals.
Looking forward in the market, we don’t expect any new high-rises or office development in the foreseeable future, just continued reuse of existing properties. An example is the Pan American Life Center, where Stirling Properties is looking at major renovations and upgrades to make the building more attractive and functional for current tenants and new prospects.
Opportunity exists in the continuation of the live-work-play environments that are coming on line in various parts of the city, along with more coworking concepts developing in the market. The bid for the redevelopment of the 1 million-square-foot Charity Hospital has been awarded, which could also be a catalyst for future demand, as well as the sustained success of the retail sector.
The greater New Orleans region is open for business, and the commercial real estate community expects a robust future ahead.
— By Gaines Seaman, Senior Advisor at Stirling Properties. This article originally appeared in the October 2019 issue of Southeast Real Estate Business.