Robert Greer has been through more than a year of frustration, and it’s not over yet. The president of Michaels Development Co. has spent months negotiating with his insurance company, wrangling with state agencies to try and secure new tax credits, and wrestling to keep construction costs in line as he gets ready to rebuild a portion of his company’s 500 apartments that were inundated by Hurricane Katrina floodwaters.
“We have to demolish everything and start over,” he said, referring to the first two phases of Desire Village, a housing development in eastern New Orleans that was built under the Department of Housing and Urban Development’s HOPE VI program. Those buildings, consisting of 107 apartments, had been completed and fully occupied before the storm hit last year. The third phase, which was halfway built when Katrina struck, would have added another 318 apartments and 150 single-family homes.
Greer said he has kept track of all the former residents and that 90 percent of them want to return to Desire, but he couldn’t start rebuilding until his insurance claims were paid. “It’s taken a year of constant negotiation, justification, furnishing answers to requests over and over and over,” he said. The insurer finally settled the claims after Michaels Development filed a lawsuit, he said.
Good deal at double the price
Still, because Michaels has an umbrella insurance policy on its 35,000 apartment units, it only faced a 90 percent increase in its New Orleans insurance premiums, according to Greer.
That’s a much better deal than Stuart Jaffe, president of the Champion Group, Inc., got from his insurer, who hiked premiums on a 584-unit property the company owns in eastern New Orleans by 500 percent. And that’s not all. “We’re covered, but there’s no agreed-upon amount,” he said. “The dollar value of the insurance is still under discussion.”
Such increases are not that unusual, said Larry Schedler, founder of Larry G. Schedler & Associates, a New Orleans-based regional apartment broker which has handled sales of more than 22,000 multifamily units.
“Insurance is a nightmare right now,” he said. “When insurance costs go up 400 and 500 percent in some cases and deductibles are going up as well, it is the biggest impediment to redeveloping the market right now.”
On top of that, construction costs have risen at least 40 percent, wages have jumped, and workers are still hard to find. “Unless you’re building something with tax credits, you really can’t justify the cost of new construction right now,” said Schedler.
That’s one reason the competition for low-income housing tax credits in Louisiana has been fierce this year, even after the federal government increased the amount of tax credits available to the hurricane-affected Gulf Coast states to $18 per capita for the population located in what was dubbed the Gulf Opportunity (GO) Zone.
After facing criticism for allocating its first round of $24 million in GO Zone housing tax credits to projects spread across the 31 eligible parishes, the Louisiana Housing Finance Agency (LHFA) targeted $27 million of the $34 million available in its second round specifically to New Orleans.
“We need the housing,” LHFA board member Danette O’Neal told developers at a board meeting in August, according to a report in the Times-Picayune. The state will have another $56.8 million in GO Zone credits to dole out for each of the next two years as well.
About 188,000 people are estimated to have returned to Orleans Parish, which contains the city of New Orleans, out of the 437,000 pre-Katrina residents, according to a report from the Brookings Institution. The metro area population is estimated at 993,000 compared to 1.27 million before the storm.
Envisioning a new city
“Although apartment properties currently report almost 100 percent occupancy, only about half this figure can be attributed to returning tenants,” said a report this year from real estate research firm Reis, Inc. The rest are people involved in rebuilding efforts, said the report.
That’s got some lenders concerned about the sustainability of rent increases that have averaged between 20 percent and 40 percent, according to Schedler’s calculations. But Schedler expects that as many as 20 percent of the 48,000 units in larger apartment complexes (those with 100 units or more) will be demolished, further constraining a housing supply that wasn’t sufficient to meet demand even pre-Katrina. Those demolitions could account for as much as half the inventory damaged by the hurricane, he said.
“This is just a mammoth task,” said Greer of Michaels Development. “Our country has never seen such devastation.”
In eastern New Orleans, where lower-income housing units were concentrated, about half the 7,000 apartments that once housed maids, fast-food employees, and other service workers simply won’t come back online, Schedler predicted.
In addition to rising rebuilding costs, the lack of land for apartment construction is also keeping housing supply and demand far out of balance. That may be one reason Schedler, who’s been in the business for a quarter-century, says he’s sold more properties than ever in the wake of Katrina. “Owning an apartment community in New Orleans is ostensibly a franchise of sorts,” he said.
Schedler envisions the future New Orleans as a city with more high-rise developments due to the land constraints and a changing demographic makeup. “It’s a smaller city, a gentrified city, incomes are higher,” he said. “People make $10 to $12 an hour to work at Burger King; that was unheard of before.”