Hurricane Katrina left in its wake thousands of displaced residents and a staggering loss of life and property — the full extent of which is still not known. Like most industries affected by the powerful Category 4 storm, commercial real estate professionals along the Gulf Coast emerged from their shelters to face the daunting task of restoring order to a ravaged landscape. Within hours of the storm's passing,were already scrambling to provide replacement space for their client companies and housing for employees.
On Sunday, Aug. 28, almost everybody with a car in New Orleans — nearly a half-million people — left. Almost everybody without a car — maybe 50,000 people — waited for a ride out of town, some at the Superdome (24,000) or the convention center (15,000) and some in, on or near their sinking homes.
On Monday, the storm struck. Initial effects were deceptively typical of the storms that ravage the coast each year. Trees came down, roofs blew away, the lights went out. A few of the large hotels had generators, fresh water and ballrooms where emergency workers, tourists and hotel employees took refuge.
But on Tuesday, the flooding intensified. The bars, even on Bourbon Street, fell silent and dark. Floating trash and broken fragments of buildings swept the narrow streets. The greatest damage was only beginning as waters laden with fuel, debris and the dead inundated homes and commercial properties alike. Three weeks later, the Crescent City resembled a war zone.
Assessing the damage
Lewis Stirling, executive vice president and partner of Stirling Properties based in Covington, La., has been in and out of the city several times since the storm. He witnessed firsthand the looting, the institution of martial law and the spectacle of thousands of National Guardsmen entering the city. “The nights I've stayed there, it's strange,” explains Stirling. “It's pitch black, with no sounds other than crickets. It's real spooky and real scary. Everybody's got pistols on their hips and machine guns. When the sun comes up, the military is marching down the street.”
With 16 offices throughout Louisiana and Mississippi, Stirling Properties tasted a broad sampling of Katrina's wrath. The storm's tidal surge swept away Stirling's Gulf Port office completely. Surprisingly, the company's offices in downtown New Orleans and in nearby Metairie and Mandeville escaped with only minor wind damage.
Of its commercial properties in New Orleans, Stirling counts only one complete loss — a 50,000 sq. ft. retail service center that was destroyed by 6 feet of floodwater. And though the firm's three Metro New Orleans offices had lights and running water shortly after the storm, there was no housing for employees.
Initial damage estimates are staggering. New Orleans Mayor Ray Nagin said at least half the city's 160,000 homes will have to be torn down. In addition, about 70,000 primarily small businesses in southern Louisiana were destroyed or severely damaged, according to Michael Olivier, Louisiana's secretary for economic development.
The French Quarter, Garden District and Uptown mansions, known to draw tourists to the 300-year-old city appear to have suffered minimal damage. In spite of that small victory, the storm did take away a number of essentials: port docks, which form the largest port complex in the United States; the oil and gas industry around the Gulf of Mexico, which supplies more than one-third of U.S. domestic oil production; and the tourists, who support the French Quarter, the hotels, and an estimated 25,000 jobs in the arts, entertainment, recreation, hotel and food industries.
In a worst-case scenario, New Orleans' 38,000 hotel rooms and the Mississippi's 18,000 rooms would be taken offline in 2006, cutting projected growth in the U.S. hotel supply by 1.9% to increase the nation's total hotel units by only 0.6% for the year, according to projections by Lodging Econometrics. In mid-September, the group reported that 70% of the rooms in New Orleans and 65% of the rooms in Mississippi remained closed.
When Katrina struck, New Orleans had 15 hotel projects in the development pipeline. Those that had just begun or that were in the early planning stages at the end of August could be cancelled or indefinitely postponed, according to Lodging Econometrics. Despite this depressing, the overall U.S. lodging market is expected to benefit slightly over the next few months as a result of emergency-related travel. Accordingly, Hendersonville, Tenn.-based Smith Travel Research has revised its projections for the industry to an 8.2% increase in revenue per available room for 2005, up from a previously projected 7.6% increase for the year.
While it appears that the flood-prone, working-class sections of the city's eastern districts sustained the most storm-related damage, many of the hotels, office buildings and other commercial real estate outside of the flood zone suffered great losses from looting, Stirling says.
Of the more than 21 million sq. ft. of office space in the New Orleans metropolitan area, just 2% were inside the flood zone, according to Reis Inc., a New York-based research firm. In the retail sector, 20% of the total 22 million sq. ft. lay in the major flooding area. As of late September, the National Association of Office and Industrial Properties (NAIOP) was still gathering information on the extent of industrial property damage.
Refuge in neighboring markets
While cleanup and damage tallies continue, and all levels of government debate the future of New Orleans' levee system, cities within close proximity are soaking up displaced businesses and residents.
In Baton Rouge, 80 miles northwest of New Orleans, the population doubled within a few days of Katrina's arrival in Louisiana. In one week alone, housing prices rose 20% to 30%, reports the Greater Baton Rouge Association of Realtors. “Commercial business has seen an unbelievable boom,” Stirling said of Baton Rouge and other surrounding markets that include Covington, Lafayette and Hammond, where he said the warehouse and office space has been completely absorbed. “People are moving in and occupying anything available.”
Some landlords saw their overall occupancy improve in Louisiana after Katrina.-based HSA Commercial Real Estate leased its only Baton Rouge property within days of the storm. The 253,000 sq. ft. industrial building had been unoccupied for the previous 18 months.
HSA leased another building to the U.S. Postal Service to process New Orleans mail. The company could have landed a more lucrative, but CEO Bob Smietana said going with the postal service was “the right thing to do.”
Energy companies had already beaten a well-worn path from New Orleans to Houston in the two years before Katrina. “Most of the major oil companies are de-emphasizing non-essential employment in favor of Houston anyway,” says Bruce Rutherford, director of real estate company Jones Lang LaSalle's emergency response team.
Hence, as evacuees poured into Houston's Astrodome, real estate property managers began working around the clock to secure temporary space for displaced New Orleans firms.
“The leases are anywhere from month-to-month or six months to a year,” says Jim Arket, senior vice president for Grubb & Ellis' Houston office. Many firms have been placed in shadow spaces of existing buildings and complexes where they already had offices, he says. While absorption increased in a relatively short time, no figures are yet available.
There has been a need not only for space, but for space that is immediately functional and wired for computers and phones. “We were doing documents late in the evening the night before and they were moving furniture and equipment in next day,” says Arket. “And in some cases, (moving in) while we negotiated.”
Lee Arnold, CEO of Colliers Arnold in Tampa, Fla., established a Web site — www.KatrinaSolutions.com — on Aug. 29 as a clearing house both for his company and for competitors to post notices of available space. Businesses can also use the site to post space requirements. With phone systems down, the Web site quickly took on a life of its own. “We encouraged everyone, including the competition, to post space,” Arnold says.
A rebuilt New Orleans will be a smaller city, many analysts agree, and what's left — or what is added — will cost more than it did before Katrina.
“If we lose a large minority community in New Orleans, if it becomes more upscale, more gentrified, then there's a real danger that it will not be the New Orleans it was,” says Walter Peacock, director of the Hazard Reduction & Recovery Center at Texas A&M University. “There could be that attempt to make it almost like a Disney World place, where its [character] is recaptured artificially.”
Not everyone has such a bleak outlook, however. The people who will not have to sell cheap, Rutherford believes, are the owners of Class-A buildings who were relatively unscathed by the storm. “It will be a flight to quality,” he says.
Stirling agrees. “We think New Orleans will be a smaller, better place when it's done,” he says. “The metro area is 1.5 million — maybe it'll be 1.1 million.”
And while the short term may reveal a weak employment forecast, aid dollars are flooding in to assist with community and economic recovery. Less than two weeks after the storm, Congress appropriated $60 billion for recovery and the final total of federal, Katrina-related spending is expected to go as high as $200 billion.
Investors and operators of more than 10,000 businesses in New Orleans have lost uncounted millions, however, insured losses, experts said in mid-September, would be about $25 billion with uninsured losses several times that number. The same storm also brought opportunities worth billions in redevelopment and restoration of a city. FEMA and other U.S. agencies have already signed temporary and short-term housing contracts that include separate $100 million deals with Bechtel National Inc. and Fluor Corp. to supply temporary housing for displaced residents. Kellogg Brown and Root secured a $29.8 billion contract to rebuild Navy bases in Louisiana and Mississippi.
Katrina also presented an opportunity for those in the real estate community to help their fellow man. In fact, not all commercial space has been taken up by businesses. An old Kmart in Baton Rouge, for example, located on Airline Highway blocks away from the Earl K. Long Medical Center, was turned into a triage center. Colliers Arnold of Clearwater, Fla., and Louisiana developer Herbert Brown donated the 77,000 sq. ft. store to the Louisiana State University Medical School to conduct triage for New Orleans evacuees a week after the storm.
LSU officials had approached Brown with $675,000 to spend on the approximately $3 million property, and Brown had agreed to the sale. Circumstances pushed the deal forward. “I am from Louisiana,” Brown says. “I love Louisiana and I love LSU and I was interested in trying to help.”
For the first few weeks following Katrina, rooms in the former retail space were petitioned off and babies were delivered, hot food was served and cots were set up for the weary. Now the building is being used as storage for clothing, medical supplies and food.
Margaret Leonard is a Tallassee, Fla.-based writer.