Retail Traffic

An Ill Wind

New Orleans-retailer Amanda Sierra didn't celebrate the New Year, not when she's been struggling to deal with the damage wrought by Hurricane Katrina. Sierra and her husband, Majin, were forced to permanently close their Riverwalk Marketplace store, Clay Originals, after looters broke in and destroyed the 300-square-foot boutique.

“I am feeling very depressed,” Sierra says. “It's too expensive to keep the store open when there's no business.” Clay Originals, a Riverwalk tenant since the mid-1980s, garnered the bulk of its business from tourists and conventioneers. Tourism hasn't returned to the Big Easy, impacting hundreds of small — and big — retailers.

At Riverwalk, which sits on the Mississippi at the foot of Poydras, Canal and Julia Streets near historic St. Charles Avenue, fewer than 30 percent of retailers have reopened, according to Brian Lade, senior shopping center manager for owner General Growth Properties Inc. Chicago-based General Growth officially reopened the property on Nov. 21 — about three months after Katrina hit. “By and large, traffic is exceeding our expectations,” Lade say. But he couldn't say what percentage of retailers plan to return.

General Growth, which owns several Louisiana malls, offered rent incentives such as straight percentage-of-sales rent to its retailers in an effort to persuade them to resurrect their businesses, Lade says. Those incentives weren't appealing enough for Sierra, who says that just a few days before the storm hit, the rent on her Riverwalk Marketplace store increased 40 percent to more than $3,000 per month. That rate hike, combined with the cost of looting damage and the lack of tourist traffic, made it unprofitable to revive the space, Sierra says. She and her husband are focusing on their second store in the French Quarter. “This is our home,” she says of New Orleans. “We've lived here for 38 years, and we're trying to stay here, but there's not much business at our other store either.”

Repopulation woes

Tourism will likely return to New Orleans over time, but just how long it will take is unclear. Some predict that next month's controversial and watered-down Mardi Gras will re-ignite interest in the city's charms. Retailers that depend on full-time residents, however, face a different situation.

“What lies ahead appears to be a difficult road because the federal response has been extremely slow and it's causing a great deal of stress on retailers that have already had significant cash flow disruption,” says Don Pierson, assistant secretary of the Louisiana Economic Development Department.

The Gulf Coast has always been ripe for hurricanes. The city suffered wind damage and minor flooding from rain when Hurricane Camille hit the coast in 1969, but emerged relatively unscathed. Katrina would have been as harmless, if the levees had not burst, says James Maurin, chairman of Covington, La.-based Stirling Properties, one of the largest commercial real estate owners in the state.

“If it hadn't flooded, Katrina would have been just another hurricane,” Maurin says. Flooding from breaches at both 17th Street and London Avenue wiped out entire neighborhoods on the east side of New Orleans, with most of the damage concentrated in Orleans and St. Bernard parishes. Residents of Lakeview and the Lower Ninth Ward have not been allowed to return to their homes.

Historic areas such as the French Quarter and the Garden District largely escaped the damaging floods that covered 80 percent of the city because they sit on high ground and are part of the “Crescent” that was originally settled in safe areas.

The National Association of Realtors estimates the floodwaters destroyed about $100 billion of residential, commercial and public property. Housing was hardest hit. Economist Loren Scott of Louisiana State University projects that 357,000 single-family homes are uninhabitable. Because of housing shortages and concerns about the future safety of the city, Scott further estimates that the population of Orleans Parish will plunge to only 250,000 residents from 460,000 people pre-Hurricane Katrina.

By contrast, Jefferson Parish, which is the second-largest parish in the New Orleans metro area, and St. Tammany Parish received minimal damage. Suburbs such as Covington and Metairie along the north shore of Lake Pontchartrain have already been repopulated, according to published reports.

Roughly 30 percent of the 11 million-square-feet of community and neighborhood center retail space in the New Orleans area was flooded, according to REIS. But, the amount of retail is not the problem. “The dilemma is not that we don't have retail; it is that we don't have any people,” Maurin says. “The biggest issue is repopulating New Orleans, both with tourists and residents.”

Now city planners are wondering what comes first — population or the retail services necessary to encourage the return of residents. “No one wants to move back if there are no services, and the retailers don't want to reopen if they have no customers,” says Randy Crochet, a New Orleans native and head of GMAC Commercial Mortgage Corp.'s local office.

Robert Israel, a Smoothie King franchisee and director of leasing for Lauricella & Associates Inc., a New Orleans-based commercial real estate owner, agrees.

“Would you want to be the first retailer to re-open if there's no one else around you?” asks Israel.

As of mid-December, Israel had reopened only three of his six Smoothie Kings in the city. “I've lost my customer base, and I don't know if it will ever come back in certain areas,” he says, adding that two stores still have no electricity or water. “I don't think the stores will be open in the next five years because the population won't be there.”

New Orleans Mayor Ray Nagin has tapped the Urban Land Institute and the American Institute of Architects to help create rebuilding plans for New Orleans and the surrounding region. Overall, most of the plans focus on building new housing, although the type and location varies. Some plans offer a Disneyesque version of New Orleans — to be built in the areas that were damaged. Other plans suggest reclamation of low-lying areas such as the Lower Ninth Ward for marshes and wetlands.

New Orleanians worry about the shape the reconstruction will take. “I don't think that anyone here wants to see the city lose its charm and culture,” says General Growth's Lade. “There's little support for any rebuilding that would take away the city's history.”

Of particular concern is the fact that developers, not just planners and government officials, will largely decide what is and is not worth rebuilding, leaving retailers at their mercy. Even if retailers want to reopen a store in a devastated neighborhood, they may not have the option unless they construct the space themselves.

All decision-making related to rebuilding is on hold because the amount of money and resources the federal government will allocate to the city and surrounding regions is unknown. “The local government is saying its wants to rebuild, but it all comes down to funding and money,” says Dawn Johnson, executive director of the Louisiana Retail Association, an organization that represents more than 2,000 storefronts in the state. “We need to get money flowing through the city rather than water.”

In particular, the lack of certainty surrounding the levees is preventing progress, both from a housing and retail standpoint. “There's far too much focus on who did what wrong and on making an autopsy of the situation rather than fixing the real problem, which is the levees,” says Dashka Roth, owner of Dashka Roth Contemporary Jewelry & Judaica on Chartres Street in the French Quarter.

The store, which caters to tourists, is doing about 5 percent the business it brought in pre-Katrina, Roth says. Still, she remains confident. She's less sure, however, that she and her husband will return to their home, which flooded when the 17th Street levee broke. “We could fix our house, but we don't want to put money into something that could be destroyed again next hurricane season,” she says. “The biggest impediment to getting this city back on its feet is the uncertainty with the levees.”

Dealing with Uncertainty

In mid-December, President Bush said he would seek billions of dollars to reinforce the levees against a Category 5 hurricane. The long-awaited decision won't be enough to convince retailers and retail developers to make any hard and fast plans. “Until there is certainty regarding the levees being fixed and the (incentives that might be) available, I don't think much is going to happen,” says Michael Beyard, senior resident fellow for retail development for ULI. “Most people are not going to move back into an area that is unsafe; most lenders are not going to loan money in an area that isn't protected; and most developers are not going to come in unless there's some concrete plans.” He contends that until the “difficult decisions” are made, people will simply wait because it's the “logical thing to do.”

Nonetheless, stories of developers buying up land on speculation abound. Some consider the stories wishful thinking. For one thing, buying land is a difficult transaction, since many of the land records in Orleans parish were damaged by flood waters.

Moreover, Crochet says there aren't many lenders eager to dump money into the area. “They think that we have to get the people back,” he says. “That's the quandary we're dealing with.”

But at least one developer, North Miami Beach-based Equity One Inc., is scouting for sites in the area. In fact, Katrina reversed the company's decision to sell its Louisiana portfolio, says Doron Valero, COO. “The money that is pouring into to rebuild will trickle into the economy, and if you have patience it pays off,” he says. Valero says Equity One saw the economy build over time after Hurricane Andrew hit Florida where his firm has many properties.

Most commercial real estate players are keeping their ears to the ground, waiting for local and state governments to offer tax incentives. “They are wondering whether or not it pays to wait and see,” says Steve Lovell, head of Houston-based U.S. Builders Inc., which opened an office in Baton Rouge, La. to take on rebuilding following Katrina.

After enjoying dinner recently with 20 developers (from New Orleans and beyond), Lovell observed that most believe there is considerable long-term opportunity in the region, but feel that doing anything right now is risky. “A boom will come,” he says. “It's just a question of when and how.” None of the developers he spoke with planned to close any land deals before April or May.

That's not keeping some companies from sniffing around for good deals, hoping to get a head start on the competition. Stirling Properties, for example, is looking to acquire property in Orleans Parish, Maurin says. “There are some strategic properties that were untouchable before this storm and are now available,” he explains, adding that the storm offers companies such as Stirling an opportunity to redevelop properties into their highest and best uses.

But even optimistic Maurin concedes that property speculation in New Orleans right now is somewhat of a guessing game. “We've gone in with our research folks and come to a decision in our minds about which neighborhoods will be rebuilt and those that won't be rebuilt,” he says. “It's a question of looking at a soil and topography map and projecting which neighborhoods will come back first as the most desirable places to live.”

Today, pinpointing future population trends and retail demand in New Orleans is next to impossible, according to industry experts. “We knew where all the pockets of demand were before Katrina, but now the whole landscape will be different with different centers of employment, housing and retail,” says Mark Winter, CEO of Prediction Analytics, a Dallas-based retail research firm. “New Orleans is really a clean slate,” he says. “You can't think about what it looked like before, but what it will look like when people have come back again.”

TAGS: Development
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