New Orleans—How long does it take to recover from a hurricane? Natives here can't say for sure, but most can see that, while rebuilt homes, businesses, and apartment buildings may line many streets, getting back to full strength is likely to take much longer than three years.

Luckily, residents of the city that's become a symbol of government ineptitude and neglect were spared the worst of Hurricanes Ike and Gustav—scant comfort to their fellow Louisianians in Baton Rouge. But the breather they got didn't last for long. New Orleans was subsequently battered, as were cities across the nation, by the Wall Street financial storm that got upgraded to a Category 5 in September, with failures and sell-offs of the nation's largest and most prestigious investment banks.

Projects from a luxury condo development in the Bywater neighborhood to the planned Trump hotel and tower to the redevelopment of the New Orleans World Trade Center have been stalled, postponed, or completely scuttled, according to local news reports.

“Finding capital for these kind of [apartment building] conversions so that you can turn around and sell them as condos in this market is just a little bit of a hard sell,” says Victor Calanog, a senior economist and the director of empirical research at Reis, Inc., a New York Citybased market research firm. “People are holding off on a lot of stuff ; the recent confirmation of a huge credit crunch for business will only make that worse.”

With the supply of apartments already constrained, a further shrinkage of the pipeline may put upward pressure on prices, allowing landlords to raise rents, although it may be a couple of quarters before they can exercise that pricing power. “Rents are probably going to stay pretty static right now,” says Larry Schedler, a principal with apartment brokerage Larry G. Schedler & Associates, Inc.

No pain for already-fat wallets

For owners, hanging on for a few more months at current rent levels is unlikely to cause too much pain, given the massive increases they were able to push through the year after Katrina hit. In 2006, asking rents jumped 26.5 percent, to $826 a month from $653 a year earlier, data from Reis shows. Yet the vacancy rate fell by more than half, to 2.7 percent from 6.5 percent. That's largely because inventory shrank dramatically in the wake of Katrina, from about 48,000 apartments in the metro to about 40,000, according to Schedler.

The new rent regime “really just kind of reflects the new realities of operations, primarily property insurance,” says Schedler. “In the immediate aftermath of Katrina, property insurance went up 400, in some cases, 500 percent.” Insurance rates have since declined, he says, but remain 200 to 250 percent higher than their pre-Katrina levels.

Rent gains in 2007 were more modest, clocking in at 3.8 percent to bring rents to $857, and gains in the first half of this year were less than 1 percent. Vacancy rates climbed from 3.3 percent in the first quarter of 2007 to 4.2 percent in the second quarter of 2008.

Supply shortage

One factor keeping vacancy rates in check has been the lack of new supply. New Orleans saw just 172 apartments added to its inventory in 2006, followed by a paltry 33 last year, according to Calanog of Reis. “This is relatively constrained supply, which means vacancy or occupancy rates will be much more sensitive to any kind of uptick than if we had a larger number of fallow apartments out there,” he says.

Those numbers, of course, don't count renovations, and although many properties are still a far cry from being fully rehabbed, local and regional operators like New Orleans-based HRI Properties and Mobile, Ala.-based The Mitchell Co. have done substantial repairs on hurricane-affected properties.

The Mitchell Co. completed a full renovation of the 161-unit Huntington Park apartment complex in eastern New Orleans last year before selling the property to Strategic Realty Capital, a Santa Monica, Calif.-based investment firm. It's now working on a rehab of a 442-unit complex known as Hidden Lake. “We're about 90 percent done with repairs, and I think we have about 150 people living there,” said Vice President Chuck Stefan in August. “We leased 28 apartments at Hidden Lake last month,” he said in October. “My lifetime batting average is only 20 a month, so that's a good month.”

Rising vacancies ahead?

Vacancy rates may rise in the coming months as more new supply comes online. Eight new properties totaling 1,775 units are under construction in the New Orleans region, according to a report from J. Mark Madderra, a principal with local real estate investment banking firm Madderra & Cazalot.

One of those is Walnut Square, a mixed-income, mixed-use property in eastern New Orleans, which began a $37.2 million renovation in July 2007. The 12-acre community is being rebuilt on the site of an older complex that had to be demolished after sustaining severe damage from Hurricane Katrina, and it will feature 63 market-rate and 146 affordable housing units, as well as an acre devoted to commercial space.

The property will include a playground, a laundry facility, and a community center. Among the project's funders: the Department of Housing and Urban Development, the state of Louisiana, Capital One, Bank of America, the Ford Foundation, Freddie Mac, NeighborWorks America, and the Bush- Clinton Katrina Fund.

“Walnut Square marks a significant milestone in the rebuilding of New Orleans,” says R. Eugene Taylor, vice chairman at Bank of America and president of the firm's Global Commercial and Investment Banking division. The community “will not only help restore much-needed housing but also revitalize New Orleans East,” he adds.

As of May, developers in the eastern part of the city had renovated about 4,000 apartments, or about 57 percent of the pre-storm inventory, Schedler told the New Orleans Times-Picayune.

“If there's one silver lining for both owners and residents,” says Schedler, “it's that the average age of these properties has declined because they've been completely rehabbed.”