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THE WALL STREET JOURNAL: Office Space in the Big Easy Gets Harder to Find

 

New Orleans's Comeback
Is Swift, but Officials Say
Huge Problems Lie Ahead
By JENNIFER S. FORSYTH
May 10, 2006; Page B6

Eight months after Hurricane Katrina, the lights are back on in many downtown New Orleans buildings, creating a nighttime skyline that doesn't look that different than before the storm.

Despite Katrina — and, in some ways, because of it — the occupancy rate for top-quality office space is better than it was at the beginning of 2005. Many larger companies — especially those in the crucial energy sector — that temporarily evacuated have returned. Government relief agencies, contractors doing cleanup work and various advocacy groups have set up shop. And the market has tightened because some damaged offices haven't reopened, while others were converted to condos and hotel rooms before the storm.

Therein lies a public-relations dilemma for the city: The office market has recovered so much faster than predicted that it risks masking the mammoth difficulties that remain.

“On the one hand, we want the world to know that New Orleans is recovering from a business and tourist standpoint,” says Richard Juge, president of RE/MAX Commercial Brokers Inc. in the New Orleans suburb of Metairie, La. “On the other hand, with the Katrina fatigue factor, we don't want people to overlook the need that we have here for people on a personal level.”

Because the metropolitan area lost an estimated 118,000 jobs in the second half of 2005, market experts are careful not to ballyhoo the resurgence of the office sector.

Case in point: In the past three weeks, the city lost one big company and gained another. April 20, Entergy Corp., the only Fortune 500 company with headquarters in the city, said it would return to its downtown tower, allaying fears that the power company would remain in its temporary headquarters in Clinton, Miss. However, last week, Chevron Corp. announced its 500 workers would leave the company's downtown office building and move to a new corporate campus to be built in a suburb.

Yet, real-estate experts believe that about 85% of the largest companies have returned with much or all of their prestorm work force. Moody's Economy.com, a consulting firm in West Chester, Pa., found that the New Orleans area gained almost 8,000 jobs in the first three months of this year, including 2,000 in the business and professional sectors. In the city's biggest coup, Shell Exploration & Production Co., a unit of Royal Dutch Shell PLC, returned with 1,000 jobs, showing that the energy sector, which has moved many jobs to the Houston area over the years, still values southeast Louisiana as a hub of operations.

Firm numbers are still hard to come by, but several real-estate experts put the vacancy rate for New Orleans “Class A” space downtown between 8% and 12% — significantly better than in most southern cities. That, along with the reopening of several high-rise hotels, has contributed to a livelier downtown even though a few buildings remain boarded up. “The skyline, compared to October or November, is now very much intact,” says Mr. Juge, who wondered after the storm whether he would ever have a job again in commercial real estate in New Orleans.

The suburban market of Kenner, Metairie and east Jefferson Parish, which saw flooding but not as much severe damage from the hurricane, is even stronger, adds Brian Rourke, an office specialist with Latter & Blum Inc., a New Orleans real-estate brokerage firm.

Demand for office space has been steady, though some landlords are worried that tenants may later scale back if insurance rates continue to rise for coverage of possible future storm damage. Mr. Juge says insurance rates on buildings his company oversees have increased between 25% and 40% since Katrina. Still, landlords are encouraged that companies are returning even though they aren't receiving special incentives like the tax breaks given to New York businesses that returned workers to lower Manhattan after the World Trade Center terrorist attacks. “These companies want or need to be here,” says Henry Charlot Jr., director of economic development for New Orleans's Downtown Development District.

Dominion Exploration & Production Inc., a subsidiary of Dominion Resources in Richmond, Va., evacuated more than 350 employees to Houston, but wanted to return to New Orleans. Yet as the months passed there were signs that its namesake downtown building, Dominion Tower, might not reopen. So the company moved about 210 employees this spring into the nearby former Mobil Building after it was repaired and retrofitted. About 140 positions will stay in Houston.

The Dominion sign still sits atop the empty 26-story tower, damaged when part of the Louisiana Superdome roof blew into it. Judah Hertz, chief executive of Hertz Investment Group Inc., which owns Dominion Tower, declines to say what will happen to the landmark.

“I think there was a perception that there was somewhat of an exodus of companies leaving the New Orleans market,” says Bryan Burns III, senior vice president of real-estate services firm Transwestern Commercial Services, who is based in New Orleans. “In fact, that turned out not to be the case.”

Of Entergy's 1,400 employees, about 1,000 had homes that were rendered uninhabitable after Katrina slammed into the Gulf Coast on Aug. 29, 2005, says company spokesman Morgan Stewart. Nonetheless, within days after the flooding, Entergy executives made clear that when the city was viable — with operating schools, hospitals and businesses — the company would come back. Last month, J. Wayne Leonard, Entergy's chief executive officer, said the company would return. “We…hope our decision — as disciplined as any we have ever made — will send a strong message the city is returning to its previous greatness,” Mr. Leonard said in a written statement.

The Federal Emergency Management Agency alone has leased nearly 2.8 million square feet, pumping about $30 million into the office market annually. While those leases tend to be short-term, government contractors, many of which expect their housing or levee-rebuilding work to last up to five years, have been signing on for longer. Outside advocacy groups, such as the Rainbow PUSH Coalition and the NAACP, also took space.

[Coming Back, But Smaller]

The market also tightened due to reduced supply. Even before the storm, the New Orleans office market had lost about two million square feet of space to condo and hotel conversions over the past decade. Now, five office buildings aren't expected to reopen, sending their tenants scampering for new digs. Real-estate experts in New Orleans predict that at least some of those buildings will be converted to apartments because the city's housing needs are so dire.

Businesses remain cautious. Like many companies that returned, Entergy downsized its space. It kept its 20 floors in Entergy Tower but didn't renew the lease for an additional eight floors in the Mobil Building. Many real-estate experts predict that companies that were held to their prestorm leases will take less space when the leases come up for renewal — a reminder of how precarious the office recovery is. Mark Drennen, chief executive of Greater New Orleans Inc., a regional economic-development group, says many small companies could still go under because of the lack of tourists and conventioneers.

Meanwhile, landlords must battle increased utility costs as well as insurance costs that have gone up about 40% since Katrina.

Equity Office Properties Trust, a publicly traded real-estate investment trust with a complex of three Class A buildings in Metairie, says some local companies are seeking one-year leases. “They want to see what will happen and they don't want to make any long-term commitments,” says Peyton Owen Jr., the company's chief operating officer.

Chevron acknowledges that one reason it decided to build a new campus in nearby St. Tammany Parish is that it won't be affected if the New Orleans levee system fails again. “Business continuity certainly played a role,” says Chevron spokesman Matt Carmichael.

In the next few years, many short-term leases taken by the federal government and its contractors will expire. Whether that means the end of a healthy office market depends on what New Orleans does with the goodwill and government money coming its way, says Michael Siegel, executive vice president of New Corporate Realty Inc., based in New Orleans. “If we take the money and we do not use it wisely and do not fix some of the problems that existed,” he says, “then there may be an exodus in the next three to five years.”

Write to Jennifer S. Forsyth at [email protected]

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