If you mention "Panic in the Streets" in New Orleans, it calls to mind two things for most locals: a 1950s film of that name shot in the city, and the response around town following the oil and gas crash of the 1980s. So when oil prices began falling again last year, New Orleanians were better prepared for the effects than they were nearly 20 years ago. With a more diversified, less oil-dependent economy, the Big Easy is not about to make the same mistake twice.
Mergers, consolidations, and downsizing among oil and gas companies have begun to take a toll on the downtown New Orleans office market this year. But unlike the bust of the 1980s, the metro area is countering the effects with thriving office, industrial and retail markets in the suburbs. Additionally, a massive expansion of the Ernest M. Morial Convention Center downtown has catalyzed strong hotel development in the city's CBD, while the French Quarter hotel and retail markets continue to enjoy a strong tourist trade.
A shortage of land due to the metro area's unique, winding geography has produced a marked absence of new construction on the South Shore, or the New Orleans side, of the lake. The North Shore market of St. Tammany Parish (Louisiana is divided into parishes rather than counties) is currently seeing the strongest residential growth in the New Orleans metro area. Retail growth in the St. Tammany communities of Covington and Mandeville is burgeoning, as demand for convenience increases in this predominately commuter parish. Office and industrial development on the North Shore, however, has been minor to date.
Multifamily markets currently enjoy an average occupancy of 95% in the suburbs, and new construction is occurring both in the suburbs and center city at a rate of about 700 units annually. Rents are rising at about 5% per year. More new multifamily construction has been announced than at any time in the past 15 years.
Office market surviving oil exodus For decades, The Crescent City has lived and died by the oil barrel. Even today, with a slowly diversifying economy, the oil- and gas-industry has had the strongest impact on the CBD office market this year. With the merger of British Petroleum and Amoco, the latter company has shut down its New Orleans operations. Additionally, Shell Offshore, Texaco and Chevron all downsized in response to falling oil prices. And Hayden Wren, director of commercial and investmentat New Orleans-based Corporate Realty Inc. says he would not be surprised if Mobil and Exxon eliminate more jobs and add sub-lease space to the market in the third or fourth quarter.
Bruce Sossaman, marketing director in the New Orleans office of Dallas-based Transwestern, feels that it is still a bit early to quantify the effects of these moves, but he says, "Probably most of them will materialize towards the end of this year or early next year in the sub-lease market or through cancellation options."
As yet, he adds, no one is certain how much sub-lease space may come onto the market as a result of the cuts. Still, most realtors are optimistic about the ramifications. "As of now, the price of oil has come back up again, so you could actually see some of those oil companies coming back, taking some of that space back and rehiring people," says Sossaman.
Andy Smith, local leasing director for Equity Office Properties Trust, a-based REIT which owns the LL&E and Texaco buildings in the CBD, is also relatively calm about the potential effects. "My opinion is that it's not going to be as severe as everybody thinks," he says of the possible oil crisis. "It won't have a crippling effect on the market. The recovery won't necessarily be in 1999, but I don't see it taking five years either."
Barry Spizer, partner with Metairie, La.-based SRSA Commercial Real Estate Inc., feels the market is sufficiently poised to handle oil- and gas-cutbacks. "We're not attracting a lot of big, out-of-town companies for headquarter-type situations, but New Orleans is not that kind of market," he says. "But we are seeing some pretty good local growth, and we've got a vibrant hospitality industry, so with a combination of things going on here, the oil and gas space will get absorbed."
Potential oil and gas sub-lease vacancies notwithstanding, occupancies in the CBD still are fairly strong. "In the CBD, the Class-A market i about 9.2 million sq. ft.," says Sossaman. "Its occupancy at the end of the first quarter was about 87%, and that's a high point going back before 1994."
New Orleans' suburban market is faring much better these days. The suburban market of Metairie in Jefferson Parish paints a far more vibrant and bustling picture than the CBD. Office space in Metairie has become so desirable that all five of the market's major Class-A properties now charge their tenants for parking. Occupancy is between 90% to 95%.
Although the suburban market is healthy, realtors say it is not quite strong enough to support any substantial new construction. Given the limited availability of land, and subsequent high prices, Spizer says that he does not envision any new construction in Metairie for the next several years, especially when there is an abundance of downtown space as an alternative.Considering the amount of sub-lease space that may soon be entering the CBD market, Spizer and Equity's Smith both see a certain degree of migration back to the CBD in the next year.
Plus there is still the steady, if slow, development in the North Shore and the West Bank - an expanse of land divided between Orleans Parish and Jefferson Parish that faces New Orleans from across the Mississippi River. West Bank Class-A office properties presently comprise about 372,000 sq. ft., according to Sossaman, with combined occupancy between Jefferson and Orleans inventories at about 92%.
Industrial market faring well As the office market rides out oil-business woes, the industrial market in metro New Orleans is riding high. Industrial space, particularly in the concentrated sub-market of Elmwood (Jefferson Parish's industrial hub), is seeing its lowest vacancy rates in more than 15 years. In fact, realtors report that nearly all desirable warehouse and distribution facilities in the area are currently leased with little new construction in the works.
Metro New Orleans is enjoying a particularly strong industrial market with a paucity of quality space.
"The actual available inventory at the end of first quarter 1999 has been the lowest, square-footage-wise, in 16 years [a rate of approximately 8%]," says Rich Stone, director of commercial sales for Latter & Blum in New Orleans.
Randall Walker, an industrial broker with Property One Industrial Group in Jefferson Parish, says the pace of new construction and absorption is slow, but points to a significant construction start - Service Center 24 by First Industrial in St. Charles Parish - just west of the Jefferson Parish line.
Elsewhere, however, industrial/warehouse real estate suffers from the same set-back as the office market.
"The warehouse market is growing slowly at probably only 100,000 sq. ft./year," says Wade Ragas, professor of finance at the University of New Orleans (UNO) and director of its real estate market data research center,. "There's just very little land left available for warehouse and industrial development in Jefferson Parish." But Ragas also points out that Louisiana is presently studying a relocation or construction of a new major port facility either below New Orleans on the Mississippi River or on the Gulf of Mexico at the edge of Jefferson Parish. Such a project could refocus additional industrial attention on riverfront warehousing as a result. The project is only in the exploratory stages at present.
New faces in the retail market Many national retail chains have begun exploring the New Orleans market. Retail space on Metairie's main thoroughfare, Veterans Memorial Boulevard, is now at an all-time premium. Many national retailers such as Barnes & Noble, Borders Books & Music, and Just For Feet now operate metro area anchor stores. Additionally, a $35 million redevelopment is scheduled this fall for Clearview Mall, a long-time underachieving shopping center compared to the popular Lakeside Mall several miles down the boulevard.
Significant big-box construction, which has dominated retail construction for the past several years here, is slated for both sides of the lake in the coming year, as Wal-Mart and Home Depot continue to expand their presence in the area, all of which will add more than 700,000 sq. ft. of retail space.
In the CBD and the French Quarter, Spizer sees a "tremendous resurgence" among riverfront retailers. "The Canal Place mall has been very successful, and the Virgin Megastore has really helped Jax Brewery," he reports. "Redeveloping Canal Street, which is the old retail major thoroughfare, however, is a little more challenging."
The North Shore continues to expand its retail horizons. Martin Mayer, executive vice president with Covington, La.-based Stirling Properties reports that his company is presently developing the 270,000 sq. ft. Premier Center in Mandeville, which will include a Barnes & Noble, Bed Bath & Beyond, T.J. Maxx, SteinMart, and The Gap, among others. "It's about a $20 million project," he says, noting that numerous other developers are building nearby free-standing stores, including Just For Feet .
Hotels to meet demand Like the retail market, New Orleans' hotel sector has been active for the past few years. J. Jon Fels, president and CEO of the Baton Rouge, La.-based Fels Hotel Group, predicts a New Orleans metro area hotel inventory exceeding 30,000 rooms by the end of 1999. Approximately 4,800 hotel rooms are in the planning stages, he says, with expansion of existing hotels adding another 1,500 rooms.
A flurry of recent hotel developments is accompanied by both the opening of the Morial Convention Center's third phase and the projected November opening of a Harrah's Casino on Canal Street by the French Quarter and Mississippi River. At least six hotels totaling 1,384 new rooms are presently under construction in the CBD and on Canal Street alone, with 13 more (and potentially 3,706 more rooms) in the planning stages, according to Fels. Tourism is up about 5% in 1999.
While oil and gas consolidations may cast a measure of uncertainty over the downtown office market, New Orleans commercial realtors are fairly upbeat. The retail sector is growing, the industrial sector is steady, and hotels are proliferating under an ever-growing tourist and convention industry. So as sub-lease downtown office vacancies inevitably grow to an undetermined extent in the coming year, New Orleans enters the millennium confident in its ability to weather new economic changes that may come its way.