The story of the New Orleans apartment market is inextricably tied to Katrina — the hurricane that wiped out 20% of the city's rental housing stock and decimated the population by more than half. Ironically, the storm that did so much damage is also the economic engine that has provided the Crescent City a buffer against the deep recession that plagues most of the nation.
Over the past year, the Federal Emergency Management Agency (FEMA) has paid more than $800 million for infrastructure repairs in the five parishes that make up the New Orleans metropolitan area, according to the August 2009 New Orleans Index, developed by the Greater New Orleans Community Data Center. Another $2.8 billion in FEMA money is forthcoming this year as part of a $5.8 billion commitment to rebuild levees and infrastructure. That work won't be completed until 2012, according to Allison Plyer, deputy director of the non-profit.
The city of New Orleans is contained within the boundaries of Orleans Parish, but the metro area encompasses four other parishes that surround the central city, including St. Tammany across Lake Pontchartrain to the north, Plaquemines to the south and Jefferson to the south and west. St. Bernard Parish makes up the eastern boundary. The Mississippi River bisects the city through Jefferson Parish.
About 12,000 market-rate rental apartment units out of more than 62,500 units existing pre-Katrina were lost, reports New York-based research firm Reis. The majority of apartment units wiped out by the hurricane were located in east New Orleans. Of the 7,000 apartments lost in the eastern neighborhoods, 4,000 have been replaced, says Larry Schedler, principal of New Orleans multifamily brokerage Larry Schedler Associates.
In east New Orleans, most developers have gutted existing properties and rehabbed them, whereas in the central city, Schedler explains, there has been more new construction of multifamily projects in infill locations. All told, astute multifamily developers like the Domain Cos., HRI Properties and Provident Realty Advisors have been able to build or rehabilitate thousands of units over the past four years with the aid of state and federal tax credits and incentives.
Build and hold
New York-based Domain Cos., for example, has completed about 500 units in three New Orleans multifamily projects — the Crescent Club, the Preserve, and the Meridian. Both the Preserve and Meridian are fully leased, and the Crescent Club, which opened for leasing in March, is already roughly 65% leased.
The three projects are in a downtown New Orleans area known as the Tulane Avenue Corridor, and were financed via the federal Gulf Opportunity Zone (GO Zone) recovery program. “Without these types of programs,” says Michael Schwartz, co-founder of Domain Cos. and a graduate of Tulane University, “these developments wouldn't have worked.”
The 183-unit, $45 million Preserve, a mixed-income project, and the 72-unit, $20 million Meridian, an affordable-housing community, utilized $17.2 million in federal disaster recovery funds. Another $3 million in GO Zone housing tax credits were tapped, as well as Community Development Block Grants and conventional financing.
The tax credit program carries a minimum hold period of 15 years, says Schwartz. For that reason Domain, like many New Orleans multifamily developers and owners, did not approach their projects with the intention to snap up cheap land upon which to build and flip.
New Orleans multifamily developer Anthony “TJ” Iarocci concurs. “In New Orleans, historically, you tend to have a lot of ‘build and hold’ because you sort of have to,” he explains. “A lot of the buildings down here are historic buildings, which means the owners typically use federal and state historic tax credits.” In addition, explains Iarocci, most owners have put too much money into a rehab to make a flip financially feasible, even if it was allowed.
Building for affordability
The Domain Cos.' projects exemplify the changing face of the city. Where once the affordable housing in New Orleans stood out among the nation's worst, today the metro boasts some of the industry's most impressive creations. Its state-of-the-art complexes now feature courtyards, resort-style swimming pools, fitness and business centers.
Pre-Katrina, says Plyer, there was “naturally occurring affordable housing.” Landlords would rent out a whole shotgun house for $300. Shotgun houses were built from the end of the Civil War through the 1920s and are usually no wider than 12 feet with three to five rooms in a row and no hallway. The vast majority of this older, now historic housing stock was flooded during Katrina.
“For the landlords to rehab it and start renting again, they had to charge more money because they had to put a bunch of money into it,” says Plyer, who notes that monthly rents went from $500 on average to almost $800, an increase of roughly 40%, while wages only rose 26%.
The majority of new multifamily projects have been mixed-income or affordable to meet existing needs, yet some neighborhoods have stoutly resisted apartment developments. “St. Bernard Parish has really dug in,” says David Abbenante, president of property management for New Orleans-based HRI Properties.
In mid-August, in fact, suburban St. Bernard Parish was held in contempt for defying a court order to lift a moratorium on the construction of new multifamily units. “I think you've got a combination of misinformation, fear, racism and fear of economic impacts,” says Abbenante.
Next Page: HUD's deep pockets
Despite opposition, the courts are on the side of the developers. In her August ruling, U.S. District Judge Helen Berrigan said that the parish had used “stall and delay tactics” to prevent Dallas-based Provident Realty Advisors from building 288 mixed-income units in the parish.
HUD's deep pockets
While lower price points are prevalent, not all multifamily developers are building mixed-income and affordable housing. Iarocci, for instance, is taking on one of the few market-rate projects in the city — the National Rice Mill Lofts, a 69-unit rehab slated to open in December 2010. Rents for the project will be $1.35 per sq. ft. compared with $1 per sq. ft. for tax-credit funded housing.
The Rice Mill Lofts are being funded with one of the U.S. Department of Housing and Urban Development's (HUD) 221(d)(4) loans, a funding source that is drying up due in large part to waning demand for apartments. There are currently about 42,000 apartment units in New Orleans, according to Schedler.
“Right now we have roughly 2,556 units coming on line, and that doesn't count the product that was under way,” he says. “Each year since Katrina we probably added to our inventory almost 20%.”
The HUD loans have been appealing to market-rate multifamily developers because they offer a 40-year term and amortization, a locked-in interest rate, and up to 90% of the loan is non-recourse, meaning there is no personal liability on the part of the borrower.
To qualify, developers must show economic feasibility — largely ascertained through a market study and a limited appraisal by a licensed appraiser — and secure site approval from the city. The developer must also present a layout of unit mix, rents and expenses, and architectural plans to receive an application invitation from HUD. The process takes about six months, according to Iarocci.
“Once you get the invitation, you can proceed to your loan closing, which is another six months because you've got to pull all of our documents, partnership agreements, construction documents and be fully inspected by HUD and its third-party appraisers,” he says.
Another rare market-rate project that has utilized HUD funding is the 21-story high-rise 930 Poydras, located in the city's central business district. The $65 million project, currently under development by Brian Gibbs Development, is slated for completion at the end of this year and will feature 250 market-rate apartment units, 8,700 sq. ft. of retail space and a 500-space parking garage.
Like the Rice Mill Lofts, the apartment portion of 930 Poydras is being funded with a HUD 221(d)(4) loan. Federal and state new-market tax credits have been tapped to finance the garage.
In this past year, population growth in New Orleans has gathered steam, with 76.4% of the pre-Katrina residences actively receiving mail, a 4.3% increase from August 2008. In addition to locals, still returning four years after the storm, there has been an influx of newcomers, including Latinos, young professionals and entrepreneurs.
“Folks are coming here because it's so much worse everywhere else,” says Plyer. Anecdotally, she says, 25% of the people at the community meetings that she attends are from other areas of the country. “They have a relative in New Orleans, some friends and they're looking for work because they know they're not going to find it in Cleveland.”
Companies like HRI Properties have been focused on housing the growing population. Josh Collens, vice president of development for HRI Properties, describes his company as a “for-profit developer with a non-profit mission.”
One exception to HRI's mission was the redevelopment of the Rex Garment Factory, which opened in the 1930s and sat vacant for decades after the factory closed.
The building is located two neighborhoods downstream from the French Quarter in a community called Bywater. “It's an area where a lot of artists live but rental housing is not affordable,” Collens explains. “Market-rate rents went up quite a bit after the storm.”
The renovation of the old garment factory began in December 2007 and the project opened as Bywater Art Lofts a year later. By March 2009, all 37 apartments were occupied and the once-derelict building is now a thriving artist community. HRI Properties funded the $10 million Bywater Art Lofts using a $2.4 million historic tax credit and an $8 million low-income tax credit.
Because the project focused on affordable housing for artists only, it is being used as a neighborhood revitalization tool. Residents display their art in a public exhibition space in the building.
Shifting the economy
The New Orleans unemployment rate of 7.4% in July was dwarfed by the national average of 9.4% for the same month, according to the U.S. Bureau of Labor Statistics. New Orleans ranked as the 15th strongest of the 100 largest metros because of its low unemployment rate.
The million-dollar question remains: Will the city be able to use its respite from recession to diversify its economy? There are opportunities to move away from low-wage tourism jobs and take advantage of New Orleans' status as a port city, perhaps with a medical corridor that could create as many as 20,000 high-paying jobs.
Next Page: Major Projects
The latter prospect is a strong possibility given that $2 billion is being pumped into the development of a 70-acre medical campus to replace two hospitals damaged during Hurricane Katrina in the heart of New Orleans. A joint venture between Louisiana State University and the Veterans Administration, the project is slated for completion in 2013.
“Our economy is largely driven by low-wage tourism jobs as it was before the storm, so as soon as these recovery dollars are spent in three to five years, we will return to a low-wage tourism economy,” says Plyer. “We have the opportunity in the next five years to change that.”
While the New Orleans multifamily market absorbs its new housing stock, developers like the Domain Cos. are turning their attention to another commercial sector — retail. The 228-unit, mixed-income Crescent Club, for example, includes 3,000 sq. ft. of street-front shopping. Across the street, the Shops at Crescent with an additional 15,000 sq. ft. of retail space is slated for completion in May 2010, according to Schwartz.
Most of the city's retail is now located 20 to 30 minutes away from downtown. Because the multifamily and mixed-use projects in the shadow of downtown have proven successful, Schwartz believes retail will present the next big opportunity for commercial real estate.
“Since the initial recovery dollars were focused around housing, developers really had the opportunity first to relocate housing within close proximity to the downtown corridor,” he says. Now retail investors are “starting to look for sites to locate in close proximity and convenience to all of this new housing.”
Sibley Fleming is managing editor.
NEW ORLEANS - BY THE NUMBERS
Ochsner Health System
St. Tammany Parish Public School Board
Jefferson Parish School Board
Source: Greater New Orleans Inc.
Source: Greater New Orleans Inc.
Source: U.S. Bureau of Labor Statistics
METRO AREA VITAL SIGNS
11.6% vacancy, 2Q 2009
10.5% vacancy, 2Q 2008
$17.97 rent per sq. ft., 2Q 2009
$17.97 rent per sq. ft., 2Q 2008
11% vacancy, 2Q 2009
6% vacancy, 2Q 2008
$842 effective rent 2Q 2009
$855 effective rent 2Q 2008
Source: Larry Schedler Associates
11% vacancy, 1Q 2009
10.3% vacancy, 1Q 2008
$14.42 rent per sq. ft., 1Q 2009
$14.39 rent per sq. ft., 1Q 2008
5% vacancy, 2008
10% vacancy, 2007
$4.00 rent per sq. ft., 2008
$3.50 rent per sq. ft., 2007
Source: University of New Orleans, most current data
59.8% occupancy, 2Q 2009
68.1% occupancy, 2Q 2008
$69.85 average daily rate, 2Q 2009
$83.03 average daily rate, 2Q 2008
Source: Smith Travel Research
930 Poydras: A 21-story high-rise apartment building that will feature 250 apartments, including 146 one-bedroom units, 99 two-bedroom units and five townhouses that will be built beside a pool and outdoor terrace. All of the units will rent at market rates, starting at $1,175 per month for the smallest apartments and up to $1,900 per month for the townhouses. A parking garage will be located on the first eight floors.
Developer: Brian Gibbs Development
Completion: End of 2009
Cost: $65 million
Crescent Club: This project includes 228 mixed-income rental housing units and 3,000 sq. ft. of street-front retail ($55 million), which are complete. Across the street, another 15,000 sq. ft. of retail, the Shops at Crescent ($5 million), is under construction. It is part of the developer's multi-phase initiative to transform the downtown area into a live/work/play destination.
Developer: Domain Cos.
Completion: May 2010
Cost: $60 million