There was a time not so long ago when real estate investors considered “condominium” a dirty word. That’s because just about anyone old enough to have lived through an economic recession knows what can happen to condo values during a downturn. When real estate goes cold, condo values can plunge.
But at this moment in New Orleans, depressed condo values seem a distant concern, and new condos are proliferating. What is heating the market?
Factors that are driving demand include the changing tastes of homebuyers. Across the country, buyers are gravitating toward urban centers rather than suburbs. Modern residences in or near downtown areas are magnets for people who want to live within walking distance of their offices, restaurants and entertainment venues. While the idea is particularly popular with young professionals, older buyers also are embracing the trend.
It is this changing preference that over time led to New Orleans’ Warehouse District boasting nearly 100 percent occupancy in the residences created in former warehouses and factories. More recently, the continuing shift toward the urban core has sparked many new residential construction projects, aided by an expansion of Louisiana’s tax credit incentive for renovation of historic buildings.
“Folks are moving now to areas they would not have considered years ago,” said Kurt Weigle, president of the Downtown Development District. He said nearly 7,000 people today call downtown New Orleans home, about double the pre-Hurricane Katrina total.
The pull of downtown living and tax incentives has sparked apartment and condominium construction projects in areas from the Central Business District to the Tulane Avenue corridor and the Garden District. But a newer driver of residential development – short-term rentals – is changing the face of some other neighborhoods.
The short-term rental of residential properties has sparked heated debates in New Orleans. And while city leaders have stepped up enforcement of laws that limit French Quarter property owners’ ability to rent their homes to visitors, the city has made it easy for owners in other neighborhoods to advertise their homes for rent.
A justification for allowing such rentals is that it provides income to owners who otherwise have difficulty making ends meet. But a downside of the policy is becoming clear as new condo construction expands.
Nowhere is the impact more obvious than in the Bywater neighborhood, an area long filled with modest houses, many of whose inhabitants work in the city’s hospitality industry. The neighborhood during the past decade has been a magnet for young home buyers who might have chosen to live downtown but could not afford the prices, and that influx of young buyers has pushed Bywater home prices up. But an even stronger stimulus, in the form of Air B&B rentals, now threatens to make the neighborhood unaffordable for local working people.
Construction began recently on a new condo complex called The Saxony that will fill an entire block in Bywater with 72 luxury units.
Developers say that neighbors are welcoming the project as it replaces a long-vacant factory with a spiffy new building.
But underlying the enthusiasm for rejuvenation of the area is a concern that buyers of the condos will be absentee owners who rent their properties out to tourists for much of the year. This possibility gains credence from marketers of The Saxony, who emphasize that all of the new units “will be Air B&B compliant,” meaning that their use as short-term rentals is allowed under local law.
Why does that matter to developers? Local real estate market analyst Wade Ragas says it’s simple. “Air B&B owners will pay a lot more per unit than anybody else.”
Ragas says that with some 5,000 short-term rental units now in use, demand continues to push condo prices into new territory. The one- to three-bedroom Saxony condos are priced at about $450 a square foot – a surprisingly high price even amidst an unprecedented run-up that has pushed average home values in this working-class neighborhood near $300 a square foot.
And the growth continues. Construction will begin soon on at least two more luxury condo complexes in Bywater, and the units are expected to be priced at least as high as The Saxony.
If the Bywater condo prices seem eye-popping, consider the soaring values in the downtown area. New condominiums recently completed or underway in the Warehouse and Central Business districts have reached $750 a square foot.
How many of these residential units will end up in the hands of absentee owners who will offer their condos to Air B&B renters is impossible to predict. But as more and more prime local property becomes dedicated to transient use, and if tourists begin to outnumber permanent residents in some areas, New Orleans over time may see dramatic changes in some of its favorite neighborhoods.
Local home prices
Recent median home value in New Orleans. Values declined 0.1 percent in the past year.
The median list price per square foot in New Orleans.
The median rent price in New Orleans.
Source: Zillow Home Value Index, Oct. 31, 2017
NeighborhoodX researched listing and sales data for 17 New Orleans neighborhoods. Below are the average listing prices per square foot in selected areas as of August 2017.
French Quarter – $531
CBD – $456
Garden District – $421
Marigny/Bywater – $359
Uptown – $311
Source: Analysis by NeighborhoodX Corp.