Shell’s Move Exemplifies Flight to Quality Trend for Office Users in New Orleans

by John Nelson

Shell’s announcement in mid-September to relocate its home from the Central Business District (CBD) of New Orleans to the planned 50-plus acre River District rocked the office market. The oil and gas giant has been in the Hancock Whitney Center (formerly One Shell Square) since 1972, and will be rightsizing in a Class A mid-rise office building that will anchor the River District. The planned building will be approximately 142,000 square feet and home to 850 to 1,000 employees. 

What a huge win for the planned River District and city of New Orleans. However, the void left in Hancock Whitney Center raises the question, what will building ownership group do with all of the space that Shell vacates? If the current occupancy rate stands, Hancock Whitney Center will have over 500,000 square feet of vacant space. 

Gaines Seaman, Stirling

Elsewhere, Entergy is in the process of a major contraction in its building located at 639 Loyola Ave., and earlier this year, Freeport McMoRan vacated over 100,000 square feet of space at 1615 Poydras. Both buildings are also located in the CBD. A number of office towers have loans maturing within the next 24 months, and the logical assumption is that securing financing will be a great challenge in this current economic environment. 

Office building conversions and partial conversions have been achieved in this market and 1515 Poydras St., located across the street from the Superdome, is in the process of converting multiple floors of office space to apartments. More partial conversions seem to be the most likely consideration due to the current office tenant base and lack of demand for new office space in the CBD of New Orleans. 

All of that said, the news in the CBD is not grim across the board. Jones Walker, the largest law firm in New Orleans, doubled down on its commitment to the area last year with a lease renewal of over 150,000 square feet, extending into the next decade. LCMC recently expanded in the Energy Centre at 1100 Poydras St., becoming the largest tenant in the building with a footprint of approximately 50,000 square feet. Frilot law firm also extended its lease in the Energy Center for two full floors. Other notable, recent commitments in the CBD include Merrill Lynch and First Horizon Bank in the Pan American Life Center located at 601 Poydras St. 

With the uptick in crime throughout New Orleans, there has been a migration of office tenants from the CBD to the largest suburb of New Orleans, Metairie. Cox Oil vacated a full floor at 1615 Poydras St. and relocated to a full floor in the Lakeway towers in April. 

Harvey Gulf International Marine, also a full-floor CBD office tenant, announced in mid-September that it would be moving to the Galleria building in Metairie. The interest level in the suburb is as high as it’s been in many years, and the Metairie landlords are well-capitalized and eager to attract new tenants. 

In both the CBD and Metairie office markets, rental rates are rising due to the soaring cost of operating expenses and construction. Insurance rates have gone up significantly throughout the market. 

For example, one of the Class A office towers in Metairie has seen an increase in its insurance rate of over 400 percent since 2019. 

A major trend also contributing to the rising costs has been the “flight to quality” movement. As tenants are right-sizing and considering new locations, they are looking for fresh space with a more current, upgraded feel rather than traditional second- or third-generation space. Therefore, landlords are requiring longer lengths of lease terms to amortize the improvement costs.

And the flight to quality trend leads back to the biggest headline in the office market in years, Shell relocating to the River District. By no means is this insinuating that the Hancock Whitney building is not a high-quality building as it’s considered one of the best in the market. As we are seeing on a national level, the demand for office space outside of major downtown areas and into brand new developments and suburban areas continues.

— By Gaines Seaman, Senior Advisor, Stirling. This article was originally published in the October 2023 issue of Southeast Real Estate Business.

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