In a city facing one of the most profound real estate challenges in modern history, the opportunities and impasses seem to square off against one another in almost every neighborhood, and the New Orleans-area multifamily sector is no exception. On one hand, apartments are fully occupied with waiting lists longer than the St. Charles streetcar line. On the other, post-Katrina construction costs and flood-elevation concerns have made it nearly impossible to meet the overwhelming demand.
Out of more than 45,000 multifamily units in the metro area, 20,000 were rendered uninhabitable due to the effects of Katrina and 10,000 of those units are still not up and running, says Wade Ragas, a Metairie-based real estate consultant and apartment data tracker.
Meanwhile, apartments remain jam-packed, often sleeping six construction workers or two families per unit, with demand spilling over to outlying Houma, Hammond and even Baton Rouge, some 80 miles away. “Those markets are also completely full now,” says Ragas. “People are commuting an hour and a half each way to get to New Orleans.”
Though the New Orleans metro area's effective unemployment rate stands near zero and its unofficial minimum wage is about $11 per hour, “you still have to make $14 to $15 an hour now to qualify for an apartment,” says James Favrot, executive vice president of Favrot & Shane, a Metairie company that owns 8,000 units in Jefferson Parish, a suburban parish to the immediate west of New Orleans containing Metairie, Gretna and New Orleans International Airport.
The culprit: inflated post-Katrina construction costs. Premiums for wind and flood insurance, if available, have surged four-fold, good labor is tough to find, and future utility costs remain a mystery with local supplier Entergy New Orleans in bankruptcy.
The result is that developers are enduring construction costs, which are 30% higher than before Katrina. Rents, in turn, are also rising — up more than 30% from pre-Katrina rates, from $664 per unit to an estimated $863, according to Larry Schedler, president of local, Larry Schedler & Associates.
Rehab expenses are equally onerous. Favrot says that 3,500 of his firm's 8,000 units were damaged by the storm, and about 25% of those units required extensive rehabbing at $40 per sq. ft. or more, including amenity and code upgrades. Many apartment owners in New Orleans are paying twice that sum to rehab damaged historic properties, he says.
With the acute housing shortage, investors have been bullish on existing apartments, including New York investor Jeffrey Feil, who recently bought the 443-unit Esplanade at City Park for $46 million in a partnership with Ramius Capital Group. The partners, who will invest an additional $6.3 million, including installation of about 700 windows resistant to 130 mph winds, closed theon Aug. 29, the one-year anniversary of Katrina.
“We saw an opportunity to buy that made sense at a base level,” says Ralph Godwin, manager of the group's Louisiana entity, RCG LongView. “Every property in the market is full and there are waiting lists.” Most of those waiting lost their homes in the hurricane and are simply trying to return to the area.
Feil-Ramius has even grander plans. It's assembled a $125 million institutional investment fund to leverage $750 million in apartment acquisitions throughout the Gulf Coast region. “We'll be looking from Galveston to Pensacola, but our primary focus will be Louisiana and New Orleans,” Godwin says. The group plans to add 25 properties and 10,000 units by 2009.
Godwin notes that it took seven weeks to secure sufficient insurance for the Esplanade because of initial insurer concerns over potential risks. “Up until three days before closing, the lender wasn't willing to accept [the deal].”
While a handful of multifamily projects were on the drawing board before the storm, only one apartment development of note is going forward. The 1,100-unit, 60-acre residential complex known as River Garden is moving toward completion. Located in the mixed-income Lower Garden District, which only suffered moderate wind damage due to its higher elevation, River Garden includes both workforce and market-rate units and replaces the old St. Thomas housing project along the Mississippi River.
When completed in 2008, River Garden will include about 600 historically designed apartments, 300 continuing care and senior-living units, 100 condos, 35 apartments in restored historic buildings and 73 single-family residences, according to its New Orleans-based owner, Historic Restoration Inc. (HRI). The first phase of the $318 million project, including 300 fully occupied mixed-income apartments and a Wal-Mart, was completed before the storm.
To build the next 200 apartment units, Pres Kabacoff, chief executive of HRI, says he'll take advantage of low-income housing tax credits expanded to $18 per capita, or nearly 10 times the normal allocation of $1.90 (see sidebar, p. 42) “Unless you're incentivized, it's very difficult to make multifamily construction work.”
All of HRI's local units suffered hurricane damage to some degree, explains Kabacoff. Flint Goodridge Apartments, located in a building that once housed the city's first private African-American hospital, and the 126-unit Redemptorist senior apartments set in a pre-Civil War building, were vandalized and looted to the extent that they can't be rehabbed until all insurance claims are received.
Even before all its claims were settled, however, HRI found its insurance premiums had spiked from $500,000 to $2.5 million annually, with windstorm deductibles rising from 1% to 5% when the policy renewed this spring.
The multifamily market should remain healthy for years to come in New Orleans based on high demand, Kabacoff predicts. “But we need to find ways to deliver more product.”
Schedler, who handled the Esplanade sale, concurs. The biggest impediment to construction starts on workforce apartments in New Orleans has been the lack of a cohesive redevelopment plan and the fact that developers are still waiting for federal subsidies, he says.
Before Katrina, 55% of New Orleans' population rented, “and those [rental] homes will not be rebuilt,” Schedler says. About 48,000 total rental units, including apartment complexes and rental houses, were destroyed or damaged in the flood, reports the Brookings Institution. Adding to the woes, about 5,000 hurricane-damaged public-housing units in New Orleans have been slated for demolition with no immediate plans to replace them.
But, adds Schedler, “there is a lot more buyer interest [in existing apartments] than product right now. I've been doing this for 25 years, and I'm busier now than ever. Sometimes you shake your head and wonder, ‘How can this be?’”
Getting it right
Several companies are waiting in the wings to address the need for multifamily housing. Atlanta-based Lane Co., one of the nation's largest apartment and condo developers, recently established a division covering Louisiana, Alabama and Mississippi.
Several Biloxi projects are under contract, but the company is just now testing the New Orleans waters and gauging project economics, according to Ted Doody, who heads Lane Southeast. It's too early to estimate the number of units planned there, but New Orleans-area projects will be mostly workforce apartments, he says.
Favrot says his firm will start development of a 500-unit apartment complex next year in Elmwood, a town of about 4,000 in Jefferson Parish.
Many developers in New Orleans are awaiting the issuance of flood-insurance rate maps by the Federal Emergency Management Agency (FEMA) in 2007 that will officially tell commercial and residential owners how high above ground they must build.
A FEMA-issued advisory recommending that all new buildings in the flood-prone region be constructed to “base flood elevation,” or 3 feet above grade level — whichever is higher — was adopted by New Orleans Aug. 25, opening the door for about 53,000 homeowners to start receiving federal rebuilding aid.
However, uncertainties surrounding the same FEMA regulations have hamstrung apartment developers. If the levees are reinforced to a higher level than they are currently, FEMA has indicated it may eventually relax the 3-foot restriction, says Ragas, the apartment consultant. “So if you plan a $20 million complex, you ask yourself, ‘If I built up in the air, but the market suddenly changes, where does that leave me?”
Lenders have similar concerns. “We have several substantial [multifamily] deals waiting for this issue to be resolved,” says Chip Moore, senior vice president of Capmark Financial Group in Birmingham, Ala. “FHA, Fannie Mae and the CMBS markets — those are the players who will help turn things around, but they won't step in until these issues are [fully] addressed.”
In addition to the pending regulations, there is also a long-held perception that the New Orleans political landscape is rife with corruption, power struggles, indecision and racial politics that may compound matters.
“New Orleans never attracted much institutional investment because of difficulties in doing business there,” says Kim Duty, spokesperson for the Washington D.C.-based National Multi Housing Council. “We hope that is changing.”
Other factors are contributing to the apartment shortage. Lack of available land in New Orleans drove most of the area's recent multifamily growth to Slidell and other suburbs at about the same time that several New Orleans apartment communities were being converted to condos from 2001 to 2005, notes Godwin.
Many of the approximately 3,000 condo units currently proposed for the New Orleans area, including projects announced pre-Katrina, aren't getting adequate pre-sales to justify construction, particularly high-rise projects slated for downtown New Orleans, says Ragas.
For example, Trey Cefalu, developer of Vantage Tower, a 220-unit downtown condo project planned for a defunct office tower on Girod Street, says he had to raise prices from about $315,000 per unit to $430,000 per unit to make his numbers work — and that's dampened buyer enthusiasm. Only about 45 units have been sold and construction is not slated to start until at least December. “Part of it, I think, was that we needed to get past the first anniversary of Katrina before people could start making buying decisions.”
In contrast, the lower-density condos of the New Orleans Warehouse District, many of which have 12-foot-high ceilings, garden patios and historic appeal, are moving at a brisk rate of roughly 250 units per year, according to Ragas.
About a half-dozen condo complexes are slated for a higher-elevated area along the Mississippi known locally as “the sliver by the river.” The buildable area is the result of the Port of New Orleans opening up development along four miles of maritime riverfront in February.
Plans for the Trump International Hotel & Tower in downtown New Orleans, trumpeted in August 2005 a few weeks before Katrina, are still on. The Trump Organization said it now plans to break ground in the first quarter of 2007 on the 67-story, $400 million project, which will feature 400 condos, making it the tallest building in Louisiana. Typically, Trump condos have an international appeal that supersedes local market conditions, Ragas notes.
Even with higher construction costs, Favrot believes that many of the planned downtown units will be built. “New Orleans is still a great place to visit and have a condo for vacations,” he says. Developer Kabacoff also believes demand will remain intact, in part because people are seeking homes above street level.
But Kabacoff also acknowledged that post-Katrina construction prices are starting to turn away buyers who can still pick up a restored historic New Orleans home for the same money.
Many other questions remain about the New Orleans housing market, land use and the next rebuilding plan, which is expected to be announced before year's end. While the city has a footprint to house more than a half-million residents, “you just can't bring back the whole city,” Favrot says. “It would be impossible to service it with utility, fire and police. And politically, it will be almost impossible for elected officials to make the kinds of tough — and very unusual — decisions about whose neighborhood is going to stay and whose isn't.”
Meanwhile, more than 13 months after Katrina, less than half of New Orleans' population of 462,000 has returned, including workers new to the market and occupants of the region's estimated 80,000 FEMA trailers. A Rand Corp. study estimates the city's population will reach 272,000 by September 2008. “The biggest need now is for low-to-moderate income units,” says Favrot, “but no one is building them.”
Steve McLinden is a Dallas-based writer.
IMPACT OF KATRINA ON NEW ORLEANS' MULTIFAMILY MARKET
20,000 apartment units rendered uninhabitable due to wind and water damage
10,000 apartment units still not up and running more than a year later
400% average increase in post-Katrina insurance costs for multifamily owners
30% estimated increase in rents, construction and rehab costs
3,000 new condo units proposed for area, including pre-Katrina announcements
Sources: Real Property Associates, Apartment Association of New Orleans, Larry G. Schedler & Associates
‘GO Zone’ helps jump-start development
As multifamily builders and developers pore over the latest FEMA advisories and regulations and debate how high off the ground they should build in New Orleans and along the hurricane-battered Gulf Coast, they need to keep their eyes on the end prize, according to experts.
That, says apartment broker and market analyst Larry Schedler, is the litany of generous Gulf Opportunity Zone — or “GO Zone” — tax breaks. The use or disuse of the GO Zone's one-time incentives could make or break a potential deal in New Orleans and neighboring regions of the country devastated by Hurricane Katrina in 2005.
From expanded tax credits to accelerated depreciation to big breaks on historic restoration and environmental clean-up costs, “these will allow developers to build those properties and have as little as 20% to 30% on the debt side when it's over,” says Schedler, president of Metairie-based Larry Schedler & Associates.
The hourglass is running out. While the incentives are generous, the window of opportunity is not. A qualifying GO Zone commercial property must be placed into service by Dec. 31, 2008, according to the Department of Housing and Urban Development.
Modeled after the New York Liberty Zone created following the 9-11 attacks, GO Zone incentives allow:
low-income housing tax credits that have been expanded to $18 per capita, or nearly 10 times the current allocation of $1.90 under current tax law.
accelerated 50% depreciation that allows a bonus deduction for depreciation in the first year that a qualified property is placed into service. This can be employed for up to 50% of the costs of either a new or rehabbed project and can be used in addition to the normal depreciation deduction for the balance of a project's costs. There is no dollar cap.
three additional years for carryback of net operating losses, or a total of five years. This law enables real estate businesses to convert operating losses from prior-year operations into refunds, even if the operations were not in the GO Zone.
expanded historical rehabilitation credits and tax breaks on environmental clean-up costs.
(See www.gozoneguide.com, the Louisiana Gulf Opportunity Zone Business Guide for more detail and additional incentives.)
— Steve McLinden