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Space Race

Office rents could put businesses in a moving mood

JOSEPH DANIEL FIEDLER ILLUSTRATION

For owners of companies doing business in the local area, deciding where to locate their offices is relatively simple. The first big choice for those looking for top-quality space usually is whether to locate downtown or in Metairie.

The factors that tend to influence that choice also are pretty basic. Many companies want to operate in the heart of the city, where they feel more a part of the general business activity that drives the local economy. Others believe their business will be better served by being in Metairie, where parking is less of an issue and employees who live in outlying areas may find it easier to get to and from work via Interstate 10 or the Lake Pontchartrain Causeway.

What can complicate these choices is the disparity in rental rates between the two markets.

Through much of the history of the area’s newest office buildings, most of which were built during the 1980s, the Metairie properties have commanded higher rates than downtown offices. A big reason is the ease of access and availability of free parking in the suburban market. Monthly per-square-foot leasing rates in Metairie have always run at least a few dollars higher than their counterparts downtown, where workers must foot hefty parking tabs.

Another factor is the limited inventory of space in Metairie. Class A offices, as the most modern spaces are termed, are found in just three Jefferson Parish properties: Heritage Plaza, an 18-story building at 111 Veterans Memorial Blvd.; the Galleria, a 21-story tower off Interstate 10 at Causeway Boulevard; and Lakeway Center, a three-tower complex containing more than 1 million square feet at Lake Pontchartrain and Causeway Boulevard.

Still another driver behind the price disparity is vacancy rates. Commercial real estate broker Robert Hand says the Metairie Class A office market was about 94 percent leased in July, when he did his latest analysis. Meanwhile, the downtown inventory – which is about five times larger than the suburban market – was only 88 percent full.

Hand, who owns Louisiana Commercial Realty, says these factors have helped create one of the biggest price spreads between downtown and Metairie that the area has seen. Class A space in Metairie now averages $24 per square foot, more than 30 percent higher than the average downtown rate, he says.

“This price difference is the biggest trend in the office market, and we’re starting to see some businesses move from Metairie to New Orleans,” he says.

Hand says businesses that are nearing the end of their current leasing contracts likely will be looking closely at the price differences as they decide whether to stay or go. A part of the Metairie market that may be particularly vulnerable is older office properties, termed Class B space, he says.

Rental rates for some such space in Metairie is nearing the average $18 per-square-foot price of Class A space in New Orleans, and Hand says that could give some office tenants reason to move. “Why would you lease older space when you get newer space for cheap?” he asks.

The situation is unlikely to spark a stampede of office tenants toward downtown, but over time the dynamics could begin to narrow the price gap between the two markets.

With plenty of space available in New Orleans, however, the trend could take a while to play out.

Hand says about 1 million square feet of Class A office space lies vacant in the city, and while “demand is out there,” it isn’t coming from people seeking big chunks of space. About half of the available space consists of full floors, he says.

Hand recently brokered a deal for 56,000 square feet of space in the 1250 Poydras St. building, and he says it was the largest single chunk of Class A space available in the city.

Before that, one of the last large deals done was GE Capital’s lease of space in the 201 St. Charles Ave. building, where it opened the GE Capital Technology Center.

But most of the office demand these days is coming from businesses such as law firms and engineering companies that are relocating or expanding and need just 3,000 to 5,000 square feet.

“It’s almost impossible to (broker) a full floor of class A office space right now” because the demand doesn’t exist, Hand says.

The situation has produced something of a checkerboard effect in downtown buildings, in terms of occupancies.

At the moment, Benson Tower – the building next to the Superdome that belongs to New Orleans Saints owner Tom Benson – is 97 percent occupied, Hand says. That tower got a big boost from a contract Benson signed with Louisiana to house a large number of the state’s local workers in the building.

Meanwhile, other downtown Class A office buildings are running occupancies in the low 90s, 80s and even as low as 70 percent, he says.

“The dilemma for people who own office buildings is to bring in a big company that has 200 employees that would take two to three floors,” Hand says. “Right now we’re not seeing that.”

 

Surplus space
Research by commercial real estate broker Robert Hand shows that New Orleans has an inventory of 8.8 million square feet of Class A office space, and is about 88 percent occupied.

The Metairie market has about 2 million square feet of Class A space and is about 94 percent occupied.

With a lot of modern space available, tenants are moving out of older space, causing market rates to drop.

Eventually, Hand says, more older office buildings may be converted to apartments or condominiums.

 

 

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