The jazz funeral that many thought was imminent for the metro New Orleans apartment market is officially cancelled. In the immediate aftermath of Hurricane Katrina, apartment execs may have been prudent to have their black suit dry-cleaned, but once the water subsided and the clouds and water left, rebuilding got down to business.
The devastation that Hurricane Katrina brought to this historic city's apartment market in 2005 was unlike anything any other market in the country has seen, or hopefully ever will. Almost two years later, the New Orleans market has emerged smaller, yet very viable. Still, it is a market whose fundamentals and dynamics have drastically changed.
The apartment market that existed here 23 months ago is as relevant as the market that existed here 23 years ago. In the metamorphosis that a market goes through after such a catastrophe, questions of what and where to rebuild, multifamily vs. single-family, multifamily moratoriums, insurance, and affordability all determine the market's future.
New Orleans is a city with a soul and a rhythm as distinct as its music. What has been seen thus far is a market well on its way to recovery, both in the rehabilitation of existing inventory and in plans to replace the inventory that was rendered unsalvageable.
Pre-Katrina, metro New Orleans had an inventory of 48,000 units. The majority of these units were 25 to 30 years old, mostly comprising frame construction with T1-11, vinyl, or cedar shake siding exteriors. Furthermore, the lack of developable land in metro New Orleans serves as a barrier to entry atypical of most markets. As a result, the city has enjoyed a fairly stable market, one in which the demand is in sync with the supply. Occupancy levels in the city in August 2005 were in the mid- to upper 90 percent range; average suburban rents fell in the mid- to upper $.70 per square foot range while Central Business District/Historic Center/Mid City (see reference on page 22) rents ran $1.20-plus per square foot.
After the winds of Hurricanes Katrina and Rita subsided, owners found inventories reduced by 24 percent, from 48,000 units to 36,000 units. Roughly 2,100 units have been demolished, and more demolitions are anticipated. It is anticipated that of the 12,000 units New Orleans lost, approximately 1,500 to 1,800 units will be renovated, and the remaining units will inevitably meet their fate with a wrecking ball.
Among the new realities: It now costs more to live in metro New Orleans. Rental increases have averaged 30 percent to 50 percent, and what were once considered “top of the market” rents are now considered affordable. Unfortunately, construction and management expenses have increased as well, contributing to the overall rent hikes. The current costs of insuring a multifamily asset are astronomical. In addition to increased insurance costs, owners have also seen increases in salaries and utilities as well.
REBUILDING A CITY The majority of rehab activity thus far has been in eastern New Orleans, where approximately 7,000 affordable units were immediately taken out of commerce due to flooding and wind damage. Currently, there are 2,700 units undergoing rehabilitations in eastern New Orleans alone, with an additional 1,000 units scheduled to begin rehab by the end of the year. These assets are being acquired for $5,000 to $15,000 per unit; the most active buyers have been the Mitchell Co. of Mobile, Ala. and Southwood Realty Corp. of Gastonia, N.C. What is remarkable about this renaissance is that it is being driven solely by entrepreneurial, hands-on, construction-oriented buyers who, in many cases, are self-financing their acquisitions.
Rents in eastern New Orleans are in the $.90 per square foot range, and owners are reporting occupancy levels of 95 percent or higher on available units. Recent sales in eastern New Orleans include Hidden Lake Apartments (461 units); Carriage House Apartments (216 units); Lakewind East Apartments (371 units); Wind Run Apartments (400 units); and Huntington Park (160 units). All of these assets required major renovations.
In other areas of metro New Orleans, the majority of affected units are back in service. The East Jefferson market, which has 50 percent of the overall market (18,000 units), has rents averaging $1.00 to $1.15 per square foot and occupancy levels in the upper 90 percent range. A hub of the retail market, as well as a flourishing suburban office market, East Jefferson is an attractive area for residents.
The majority of units in East Jefferson are owned and operated by First Lake Properties, Tonti Properties, and Tonti Realty—all based in Metairie, La.—who began developing their assets in the 1970s. There is virtually no land available for new multifamily development in the East Jefferson submarket.