2012 Real Estate Report

Looking up

Although financing remains tight, Capital Region real estate experts say we're on the road to recovery.

PARTICIPANTS

Brian Andrews
Andrews Commercial Real Estate

Tom Cook
Cook Moore and Associates

Darryl Gissel
Oak Real Estate

Mark Hebert
Kurz and Hebert Commercial Real Estate

To get a sense of what's going on in the local real estate market and where it's headed, the Baton Rouge Business Report convened a roundtable of experts to discuss what they're seeing in their respective segments of the industry.

Q: What is the mood among commercial lenders?

Brian Andrews: The general sense that I'm getting is that we're more optimistic. We're in our racecars but no one's pulled out yet.

Mark Hebert: Well the big guys are. Chic-fil-A is looking for a new location after College Drive. They want to do something around Woman's Hospital. Whole Foods is also looking for a second store.

Q: Where do you think the strongest area is in this market, geographically and commercially? Where are the best opportunities?

Tom Cook: I think Zachary is underserved. They don't have enough population yet, but I think you're going to see development up there just because of what's going on with their school system and their residential development.

Andrews: I've long thought that the school system is not just an education issue; it's a real estate issue. Because, why is Zachary an up-and-coming area? Schools. Why are people moving to other areas? Schools.

Cook: Same thing in Livingston, Central.

Andrews: It's all about perception of schools.

Hebert: They're voting with their feet. They're going to pick up and move somewhere with better schools.

Andrews: That's my point. So should the landowners in these areas be investing in schools?

Darryl Gissel: Or should they be really politically active? And the answer is yes.

Q: So are people in real estate asking these questions?

Andrews: They are, but they're going about it in the wrong way. They're thinking about schools as …

Hebert: Bricks and mortar.

Andrews: Bricks and mortar, exactly. And I'm talking about it as a demand generator for building homes with retail and office around it, and making all of it not happen. I see the education system as a real estate issue, not as bricks and mortar but more in terms of keeping our citizens in the parish instead of letting them go out where the perception of schools is better, and I stress the word “perception.”

Gissel: And I think with the price of fuel, you now have a third component, too. Crime, education and transportation. We get tons of people downtown now who call up to rent things saying, “We can't afford to pay for the fuel anymore.”

Q: Do you really hear that a lot?

Gissel: Yes, and then we have a lot of people who come into Baton Rouge— who commute every day from Houma, New Orleans or whatever—to work for the state because people can't afford it either, so they're forced to have a second location in Baton Rouge.

Q: Is that affecting the multifamily market as well?

Gissel: I think so. And price points are going up.

Cook: There are no economical apartments in Baton Rouge.

Hebert: The same thing happened in Austin Texas, and everybody had to move out.

Gissel: And same for the residential real estate, too. I mean that helps whole parts climb higher.

Q: What about downtown residential? Do we see any large projects coming together?

Gissel: You've got the Tessier Building. … They want to build 16 new ones behind it, and everything they've done so far is leased. I think they have two office spaces left.

Hebert: Here's what's going to happen. You're going to see the corridor between downtown and LSU improve along Nicholson Drive for residential. Several projects are slated for that area. Which people will be relieved: You can live and work downtown, or live and work at LSU, and kill that commute.

Q: Speaking of residential, what is the mood right now?

Cook: The low-low–priced homes are moving fast. The first-time homebuyer stuff and everything, those are going fast. Because rates are low and you've got credit and some down payment. That's what DSLD, Sullivan, Horton, all those guys, are buying lots as fast as they can, and they're selling those 1,500-square-foot houses for $175,000 to $225,000. The next market up is doing better. The $225,000 to $300,000 is better now than it was. But $400,000 and up is still dead. And if you get to $600,000 and up for a house …

Hebert: It better be fully remodeled, fully up-to-date, and have no issues.

Cook: I've got a friend who's got one over at University Club. He's got a house on the market there. It sold originally for $725,000, then sold for $665,000. He bought it for $625,000; he can't sell it for $625,000. It's dry.

Gissel: I've pulled up some numbers about days on market. Those houses at $225,000 to $300,000 have the shortest days on market.

Cook: I look at total inventory—total inventory, or current inventory, versus what it was last year. From 2009 to 2010, total inventory went down by 13%. From 2010 to 2011 it went up 11%. And it's pretty stable now, so inventory's flat. What was interesting to me … is sales volume went up, total number of sales went up and total dollars went up. So that was a good sign last year.

Gissel: I think the thing now is, we're starting to see more foreclosures. We're starting to see a lot of relocation sales.

Cook: Something like 20% of houses sold last year were bank-owned.

Gissel: It's all over the place. Not just the low-income areas; high-income areas, too. And the problem is, people can't deal with home lenders. The lenders aren't willing to work on anything.

Andrews: There are two things we've got going right now. First, the special servicers who were servicing these bad loans are getting caught with all these lawsuits and things like that. So there are lots of things on a national basis that slow things down. And then, when you clear that hurdle, you still have Louisiana, which isn't a judicial foreclosure state. You can't just go through a simple procedure. In Texas there is a fast lane. You can foreclose in 30 days and be gone. Here in Louisiana it can take years to foreclose on a residential property. That's why things are going to be slower to happen here.

Hebert: I think it's changed. Look at the Bank of America program in Florida that they just rolled out in Louisiana last week. If you have been foreclosed on, they are offering you money to get out. $20,000 to $30,000. They're rolling it out in all 50 states.

Cook: They're giving you money to go away?

Hebert: What they realized is, they're telling you you can't stay. What they're doing with this program is hoping, by offering you $20,000 to $30,000 if you'll voluntarily go and leave the house intact, they'll get the house back sooner and put it on the market sooner.

Q: What about industrial? Anything interesting happening in that sector?

Cook: That is a bright spot in Ascension because of the expansion and the cheap natural gas.

Andrews: I think if you ask that question next year, there will be an answer; whereas now we're saying, the market is ripe for it, there's reasons for it and there's even been announcements for it, but it hasn't happened yet.

Cook: We are seeing some of those service buildings, big companies moving in and buying buildings or leasing buildings, and it's starting to gain momentum. Now in terms of new buildings, it hasn't happened yet, like you say, but it's been announced. And I think it's because of the cheap natural gas. If the price of natural gas stays where it is, I think people will move in.

Q: What's the story in the office market?

Andrews: Rates are down, occupancies are up, and the interpretation of that is landlords are kind of getting reeled with what they're asking for. The so-called market price is $15-a-foot, but they want to get somebody in the space, so people are getting it for $13. That's why occupancy is going up while average rates are going down.

Q: But I hear the same thing in retail.

Hebert: It depends on where you are. There are some areas of town, when you're in the pack of main traffic patterns. … Let's face it: The Mall of Louisiana is doing fabulous. I mean, they don't have to give away their wares. Town Centre is doing fabulous. Perkins Rowe, I think, has got a lot of key new tenants. They got Applebee's, who paid $25-a-foot.

Andrews: Well, in terms of office, I did meet with a banker this morning who said they're looking at office, they kind of like office—existing office, not new construction necessarily. There may be some financing available for it, for repositioning, the acquisition of office properties. What I hear is that the banks are willing to do it for some of the better properties.

Q: So the banks, are they willing to take even a little bit more of a risk than they were a couple of years ago?

Andrews: No, no, no. I think they're looking at less risk.

Cook: More risk relative to 2008, because in 2008 there was nothing.

Andrews: Are they willing to take more risk now? No. But in 2003 they took this much risk [holds hand up medium height], in 2007 this much risk [holding hand up very high], and now they're coming back down. That's one thing young people in my field are asking me: When are we going to get back to the good old days? This is it, we're there. These are the good old days. This is how you bought: You put down cash equity, you fully disclosed income and everything. So we are back there.

Hebert: It's not just equity; it's liquidity also.

Andrews: It's both.

Q: How different is it here than in other markets? Are we still behind the curve, or were we never as bad off as they were?

Andrews: The example I give is that it's the world's most boring roller coaster ride. Because we never overbuilt. We never had what other markets had, a great buildup.

Hebert: Atlanta had a 20-25 year ramp-up. I have properties in Atlanta that we're trying to move on what's owed to the bank, and we can't move them. I don't want to say “can't.” We could; it just depends on whether the seller wants to take a bite out of his hip pocket.

Andrews: It'll be interesting, because as the general national economy real estate market starts to improve, other markets are going to see 10% to 15% growth rates; we're going to see 1%, 2% or 3% growth rates. And we're all going to say, “Why aren't we as good as everyone else?” The thing is, we had such a gap. We didn't go down as bad. So we just need to keep that in mind as our local economy continues to rebound. It's all relative.

Gissel: I have people who come in who don't understand the market. They're coming from markets that are really depressed, and they think the same thing's here, and you have to explain to them over and over that's not the case. They want to make ridiculous offers on stuff, and then they suddenly realize you're right.

Q: What are the brightest spots in Baton Rouge real estate, and what are the darkest clouds?

Hebert: The bad news is that we need better road conditions. The traffic. Now I realize there's the construction on I-10, and that might be part of the problem. And I hope that once that's done, things will get better. I'm cautiously optimistic. Is it truly going to solve our problems? Or are we just going to put more cars on the road? It's hard to say.

Q: But in terms of development, you see a direct correlation?

Hebert: Exactly. We're running out of places to develop. Granted, it's healthy to come back and do some in-fill, but that's very expensive. To tear down and start over can be very, very costly. So that's probably my bad news. If I had to pick a good thing, I'm seeing a lot of interest from national companies in this market. They love this market. … And then I'm seeing the banks are a little more user-friendly, from the retail-leasing standpoint of small businesses.

Q: Brian, what do you see as the biggest problem areas in the market right now?

Andrews: Financing and financing. Seriously, though, uncertainty is the big thing right now. The banks want to lend, but they're uncertain about the impact of regulatory pressures.

Cook: I think the bright spot is that we've bottomed out and the attitude of the real estate community is more positive. Lending, although it's been nonexistent and they're cautious, at least they're looking at deals. The local community banks are covered up with loan applications for new deals. … That's exciting; new projects are coming out of the ground again.

Q: What about dark spots, problem areas? What worries you?

Cook: I hate to agree with Brian twice, but it would be uncertainty. I still think people are worried about what's going to happen in November and how that's going to impact—how our new administration will view business and how that will impact the stock market. If the liquidity dries up for the lenders, that's the uncertainty.

Gissel: Well, I think the bright spot for residential is just interest rates are so low. I mean, banks are fairly willing to lend if somebody's got decent credit.

Q: And it's better than it was a couple years ago?

Gissel: Yeah. I mean, the problem is, you'd rather have a buyer than a seller; it's certainly a buyer's market. I think sellers are still struggling with price drops. The dark spot is people who bought at the wrong time trying to get their money out right now. The city and the infrastructure is a big issue, too. I think in the city—if we don't get a handle on some of those social issues within the city—then we've got a big problem.

Andrews: I would hope that public education would be a huge issue for the real estate community. It adds or detracts value from commercial real estate investment, so it's something that commercial real estate people should be more active in.

Gissel: And the charter school thing is going to be an interesting case study, too. If that grows, the question is, how does that affect property values?

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