The market for office space remains steady in New Orleans, with rents and occupancy rates rising modestly during 2014.
The occupancy rate for office space was 88.5 percent in the greater New Orleans market, up from the 85.5 percent occupancy rate in 2013, according to an annual report recently put out by Corporate Realty, a commercial real estate firm based in New Orleans. At the same time, the average rental rate was virtually unchanged, going from $18.73 per square foot in 2013 to $18.77 in 2014.
The improving occupancy rate and rents came even though the amount of office space in greater New Orleans increased from nearly 18.8 million square feet in 2013 to 19.1 million in 2014, a 1.7 percent gain.
“The supply and demand for office space is improving,” said Mike Siegel, Corporate Realty’s president and director of office leasing. “The market is better off than it has been for some time.”
At the same time, Siegel said the New Orleans office market is split. There’s a difference between the suburban market, which is largely a renters market, where the demand for space and rents increase every year, and the Central Business District, which is much more competitive. While occupancy rates in the CBD increased slightly during 2014 from 83.8 percent to 86.3 percent, rents actually dropped from $18.17 a square foot to $18.12. Even the rental rates for quality Class A space dropped from $18.86 to $18.69.
“Downtown is a great place to live, work and play, like what everybody wants, but there is still more supply than there is demand,” he said. “There’s not a lot of new demand downtown.”
New Orleans has a growing entrepreneurial and tech community, thanks to developments such as the Idea Village. But the fledgling startups aren’t yet businesses that need a lot of office space, Siegel said.
The CBD office market has been boosted over the past few years by developers finding alternative uses for some properties, such as turning them into hotels or apartments. For example, seven floors in the 1250 Poydras building are being converted into a Hyatt House Hotel, slated to open later this year. The old Texaco building on Canal Street near Iberville was recently turned into senior apartments. 225 Baronne, one of first high-rise buildings in the CBD, has been turned into apartments, an Aloft Hotel and a public garage. City officials are expected make a decision Tuesday on what to do with the World Trade Center building at the foot of Canal Street: Five local and national developers have proposed converting the building to hotels and apartments.
While the conversions have lessened the pool of office space, Brian Rourke, of NAI/Latter & Blum, said they are bringing more people and cars to downtown, causing parking rates to rise. That’s affecting the CBD office market.
“You may be paying an $18 rate for office space, but if you’re paying $200 a month for parking, that’s adding $6 or $7 a month per square foot to your occupancy costs,” Rourke said. That could lead some businesses to consider other markets besides the CBD.
East Metairie continued to be the strongest market in the New Orleans region, with average rents jumping up to $22.47 per square foot from $20.86 the year before. The occupancy rate was virtually unchanged, going from 93.7 percent in 2013 to 93.2 percent.
“There’s been a steady demand in Metairie for a number of years,” Siegel said. “It’s near residential areas and the schools in the suburban parishes. You’re close to the Causeway, so it’s central for residents.”
Another factor leading to the rising rents is the fact that while demand has remained steady, no new office buildings have been built in Metairie since 1987 when the Three Lakeway Center at 3838 N. Causeway Blvd. opened. The last new office building in the CBD was Benson Tower, which opened in 1989.
The nearly 30-year streak of no new office buildings going up in the suburbs isn’t expected to change in the near future, Siegel said.
“There’s no pressing demand and the economics of new construction suggest you would have to get rents north of $30 a square foot,” he said. “The top-end rates in Metairie are $25, and $20 to $22 a square foot downtown.”
The same steady performance that marked 2014 is expected to continue into 2015. Demand for space in suburban markets is expected to get tighter because no major tenants are forecast to move out.
“You get to the smaller submarkets, like the West Bank, Elmwood, there are no major blocks of space,” Siegel said.
One thing to keep an eye on is what happens to the Stewart Enterprises Service Center at 1333 S. Clearview Parkway in Jefferson. Stewart was acquired by Service Corporation International in 2013, a fellow funeral service company. It is not known yet how much of a presence Houston-based SCI will keep in the 90,000-square-foot building. One possibility could be SCI converting parts of the building for different uses and tenants leasing up space a little bit at a time, he said.
The activity going on in New Orleans provides a strong underpinning for the office market, which should lead to steady growth and companies trickling into the market, Siegel said. That’s a good path, even while it’s too much for New Orleans officials to pin their hopes on bringing in a Fortune 500 company that would require a significant amount of office space.
“We’re doing the right thing and that’s the good news,” he said. “If you do the right things, something good will happen.”
Follow Timothy Boone on Twitter, @TCB_TheAdvocate.