The Baton Rouge real estate market is shaking off the effects of the August 2016 flood, which boosted demand for apartments and led to a surge in homebuying, and feeling the lull in petrochemical construction that had increased demand for industrial and office space.
Speakers at the annual Trends in Real Estate seminar said Wednesday that various sectors of the market remain largely healthy and stable, although there are concerns about the recent surge in apartment construction across the metro area could lead to lower rents, higher vacancies and more features being offered in order to attract tenants.
“Concessions are going to continue, if not increase,” said Craig Davenport, of Cook, Moore, Davenport and Associates, who tracks the local apartment market. “We had people offering one month of free rent or a free iPad. Now, I’ve seen places offering two months of free rent.”
In the years after Hurricane Katrina, 3,983 apartment units were built in Baton Rouge to deal with the increased population flowing in fro New Orleans. But from 2015 to 2017, a time when there wasn’t any major event leading to population surges in the area, Davenport said 3,963 more apartment units were built.
While the apartment market got a boost in 2016 and early 2017 by people displaced by the flood and an influx of workers rebuilding after the storm, that has largely dissipated. A survey of rental rates taken earlier this year found they had dropped by 3.85 percent from 2017 and properties now rent for an average of $1 per square foot. Vacancy rates have gone up from 2 percent in early 2017 to 6.5 percent.
Vacancies are expected to continue rising in 2018. Right now, 3,811 apartment units are under construction and set to open later this year or in 2019. Another 2,290 units have been announced and are set for completion in 2019 or 2020. But Davenport noted it may be tougher for those properties to actually get out of the ground.
Here's what speakers said about other sectors:
RETAIL: The retail market is being changed locally and nationally because young people want to be entertained and e-commerce is wiping out “mediocre” stores.
Jonathan Walker, of Maestri-Murrell Inc., noted locally that entertainment concepts such as Topgolf and Main Event are replacing defunct businesses like hhgregg at the Mall of Louisiana and Tinsel Town movie theater at Siegen Marketplace.
“People want to get rid of boring retailers and get something that drives traffic,” he said.
While there’s been talk about the competition between brick-and-mortar stores and e-commerce companies, Walker said the two work together. He noted a national survey that found in markets where a retailer shut down its physical operations, its online sales dropped by 38 percent.
“Brand awareness is the key,” he said.
Even though retail vacancies have gone up in Baton Rouge, because Cortana Mall has faded as a shopping center and national chains such as Toys R Us have shut down, Walker noted the vacancy rate locally is still better than the national average. Baton Rouge’s rate is at 8.8 percent, while nationally the rate is 10 percent.
The Sam’s Club at Cortana, which closed earlier this year, is expected to reopen as a Sam’s Plus fulfillment center, serving as a hub for items ordered locally online, Walker said.
OFFICE: The outlook for the Baton Rouge office market is “fairly bullish” as the market continues to absorb new developments.
During the past year, 90,000 square feet of new space was added to the market in the @Highland building at the corner of Highland Road and Bluebonnet Boulevard and in the River House development on Nicholson Drive between LSU and downtown, said Ty Gose, of NAI/Latter & Blum. Even with the new space, occupancy rates in the office market were relatively flat for 2018, dropping two-tenths of a point to come in at 82.2 percent.
Gose noted that taking out the additional space that came online, the office market actually would have seen its occupancy rate increase 1.9 percentage points over the year.
So far, the office market is off to a healthy start in 2018. Gose said the volume of inquiries has doubled over past years and there are rumblings of petrochemical companies needing more office space. There also has been more interest from companies wanting to set up call centers.
“There are a lot of people looking at 5,000 to 10,000 square feet of space,” he said.
RESIDENTIAL: The Baton Rouge housing market had a strong 2017, with sales increasing by 4.4 percent, said Kyle Petersen, of Re/Max Professional. There were 11,786 homes sold in East Baton Rouge, Ascension and Livingston parishes over a 12-month period that ended Feb. 28.
Petersen said the hottest Zip codes in the region were 70809, 70819 and 70734. In some neighborhoods in the 70809 Zip code, such as Jefferson Place, there were homes that were selling less than a day on the market.
Other neighborhoods in the Zip code, such as Pine Park and Jefferson Terrace, saw home values rise by more than 20 percent after the August 2016 flood.
INDUSTRIAL: Vacancy rates for industrial real estate in the Baton Rouge market hit a 10-year low in 2017, thanks to the demand from the petrochemical industry.
But that trend is expected to change because construction of major petrochemical projects has wound down, said Ryan Greene, of NAI/Latter & Blum.
Greene said three factors will drive local industrial activity in the future: the continuing growth of Amazon, the widespread legalization of marijuana for medical and recreational use and bigger ships passing through the Panama Canal. Baton Rouge may not be big enough to serve as an Amazon distribution hub, but Greene said an operation could be set up here to ship goods to customers locally and in New Orleans.
FINANCING: The market is in a “rinse and repeat” period, repeating predictable patterns, said Brian Andrews of the Real Estate Research Institute at LSU’s E.J. Ourso College of Business.
Andrews noted the stock market is at its highest point since 1995, while home prices have nearly recovered to what they were before the Great Recession and auto loans and credit card/revolving debt are also at what they were before the recession.
“Are things gonna crash? Not necessarily,” he said, “but we’re in the risk business and where have we seen this before?"
Commercial and multifamily mortgage debt continues to rise, going up $200 billion over 2016 for a 6.7 percent increase. Andrews notes that most of that debt is held by banks. “There’s a lot of money going out,” he said.