“Complex decisions” could disrupt the office market

Despite some ebbs and flows, the New Orleans office market has seen fairly consistent occupancy levels over the past decade, even during the last two years of the COVID-19 pandemic.

Analysts aren’t yet sure how this might change the market, though it has accelerated an existing trend that Class B buildings are outperforming Class A spaces. It’s also causing employers to figure out how much space they need. based on employee appetite for remote work.

A 10-year report from Corporate Realty released this month shows that since 2012, the amount of office space leased across the market has varied from a low of 83.19% in 2018 to a high of 88. .51% in 2014. New Orleans currently has an average building occupancy of 84.72%, according to the report, which looks at office buildings over 20,000 square feet. Prices range from over $19 in Orleans Parish per square foot to nearly $22 in Metairie, with lower rates in other areas.

The company’s 2021 report shows the pandemic has yet to materially affect occupancy levels or prices, despite the past two years of the workforce staying at home or working out. part-time in offices. However, the 2021 figures reflect current leases – not necessarily the number of people in their office.

Three of the eight markets (Orleans Parish non-CBD, Elmwood, St. Charles) featured in the report have seen their occupancy rates increase since the pandemic, while four have remained stable (Orleans Parish CBD, East Metairie, West Bank, North Shore). Kenner/West Metairie saw the only decline beyond five percentage points, primarily due to the double whammy of Hurricane Ida and COVID-19.

“What we’ve definitely seen is a shift in how business owners think about their office space needs based on employee demand for remote work,” said Mike Siegel, president and leasing manager for Corporate Realty. “Executives are making these complex decisions now, and only time will tell how this will affect market statistics.”

Any impact from the pandemic “may take three to five more years to really see it reflected in the numbers, because many office leases are long-term,” Siegel said.

By the numbers

The Central Business District recorded an office rental rate of 82.45% in 2021, a decline of 1.7% from 2020 and a decline of 3.1% from 2019, pre-COVID. Outside the CBD, Orleans Parish recorded an office space rental rate of 89.18% in 2021, a 4.1% increase from 2020 and a 5.2% increase from to 2019.

East Metairie reported an office rental rate of 86.50% in 2021, down from 86.48% in 2020, but down 3.2% from 2019. Elmwood had an office rental rate of 88, 80% in 2021, an increase of 6.1% compared to 2020 and an increase of 4.2% compared to 2019. West Metairie/Kenner recorded an office rental rate of 71.09% in 2021, a decrease of 14.3% compared to 2020 and a decrease of 14.8% compared to 2019.

In the West Bank, the office space rental rate was 83.40% in 2021, a decrease of 1.9% compared to 2020 and a decrease of 2% compared to 2019. The North Shore recorded a office space rental rate of 93.73% in 2021, an increase of 2.1% compared to 2019. 2020 and an increase of 0.9% compared to 2019. Saint-Charles Parish had a rate office rental of 83.86% in 2021, an increase of 4.2% compared to 2020 and an increase of 11.9% compared to 2019.

Stay or go?

There were significant lease renewals in 2021. In the CBD, Pan-American Life Insurance Group renewed 84,014 square feet in the Pan-American Life Center at 601 Poydras St. Fishman Haygood renewed 25,368 square feet and NFE Management renewed 24,633 square feet, both at Place Saint-Charles at 201 Saint-Charles Avenue.

Gieger Laborde & Laperouse LLC renewed 23,607 square feet at Hancock Whitney Center at 701 Poydras St., while Regions Bank renewed 18,441 square feet at 400 Poydras Tower. At One Canal Place, Livingston International renewed 15,768 square feet and SHMR, LLC purchased 12,749 square feet of new space.

LCMC Health has signed an agreement for 41,000 square feet in the Poydras Street Energy Center for its offices on the 24th and 25th floors as well as a clinic on the ground floor. Hertz Investment Group, which owns several Class A buildings downtown, said in November 2021 that it had leased 150,000 square feet of new space and renewed 300,000 square feet since last January. The new leases included the Louisiana Children’s Medical Center, UBS Financial Services and the Louisiana Public Health Institute.

Some companies have revamped and modernized their office spaces to be more efficient and attractive to returning employees. For example, 65% of new leased space at Metairie’s Lakeway Center in 2021 was due to corporate upgrades to their offices.

The biggest change in 2021 compared to the previous year has been the willingness of tenants to commit to longer-term leases. With rising construction costs, tenants are considering longer commitments to help meet higher construction costs. 2020 saw mostly three to five year lease terms, but in 2021 seven to 10 year lease terms were not uncommon for large tenants moving out.

There were a few notable releases. One of the biggest came in 2020, when General Electric closed its 60,000 square foot space at Place Saint-Charles as part of a $2 billion cost-cutting measure. Freeport McMoRan will leave New Orleans in 2022, where it has leased 130,000 square feet at 1615 Poydras.

But across the region, “there hasn’t been this massive loss of businesses giving up office space,” said Richard Juge, president and CEO of RE/MAX Commercial Brokers.

“Companies are mostly keeping these spaces available for employees when they need to get to work, allocating desks for employees who are there regularly and wish to socially distance, and in some cases only cutting about 10% of their office space if they want to reduce their physical operations,” he said.

Trends to Watch

Siegel said the pandemic has heightened tenants’ desire for flexible rental terms and ready-to-let spaces, and coworking spaces offer a solution to that. Some companies have taken a hybrid approach, where employees come into the office a certain number of days a week and work remotely the rest of the week; this can advance the desktop footprint. Others have opted for an entirely remote work schedule.

Another trend to watch is construction costs for tenants and their operating expenses in buildings, which could continue to rise much faster than rental rates for office buildings. Out of necessity, landlords could dramatically increase rental rates over the next three to five years, Siegel said.

Latter & Blum commercial sales and leasing agent Daniel Marse said Class B office space in the CBD has outperformed Class A buildings since the height of the virus outbreak. He also noted that many brokers and landlords have lowered rental rates to retain tenants over the past two years.

Marse said 27 transactions took place on 20,000 square feet in 2021 for a total of 457,318 square feet, with 74% of those transactions being renewals and 52% of those transactions involving law firms.

Siegel said that as the number of available buildings decreases, he expects more Class A office space to be redeveloped into other uses such as hotels and apartments.

At the same time, rented spaces that are not occupied will expire, leaving additional vacancies on the market. Office market demand, however, is expected to stabilize as tenants adopt post-COVID work strategies.

Some businesses may find areas outside of the CBD more attractive. Many of these smaller buildings offer conveniences such as off-street parking, low touch points, flexible hours, and pet-friendly offices. These amenities and locations have become more popular over the past 10 years. Meanwhile, the lack of available sites and high construction costs create significant barriers to entry for new developments.

“Rental rates are generally higher outside of the CBD because renters pay a premium for convenience and free parking,” said Corporate Realty leasing and brokerage specialist Andrea Huseman.

CityBusiness staff contributed to this report.

Jose C. Birney