Whenever Beverly Hillbillies star Jethro Bodine needed to do math, he would commence to ciphering by the cement pond, proving that math can be simple if you have enough fingers and toes. Commercial real estate is sometimes that way but sometimes not. Fortunately, when we need to do some math to answer the simple question, "What is the average price of a full floor of Class A Office space in New Orleans?", the data is easily available and the work has already been done. There is just one catch: you can't get the answer the way you were taught.
There are 14 Class A office buildings in New Orleans CBD, with a total square footage of approximately 9 million square feet, with one million square feet of that currently for lease, and 428,464 square feet of that comprised of full floor space.
Prices range from $15 per square foot for sublease space to $19 per square foot, and each space varies in how it passes along the cost of taxes, insurance and common area maintenance.
What is the average price? The simple way to determine the average price is to add up all the prices in the table above and divide by 20 ( the number of spaces), but that would not be the most reliable method because it assigns an equal weighting to each of the 20 spaces, as if they all had the same influence on the total square footage of 428,464. The best method for getting the average price is to take into account how much square footage each space has relative to the total. This way the number 15 space at 601 Poydras, which is the largest at 38,160 square feet, has a bigger impact on the final number than does the smallest space, number 5 at 1515 Poydras with only 16,439 square feet.
Step 1 is to determine the percent each space is relative to the total. Take the square foot available and divide by the total (in space #1, 22,594 divided by 428,464). Space #1 amounts to about 5.27 percent of the total space. Fill down and you can see that space #15 amounts to 8.9 percent of the total space and, therefore, its price has more weight on the total market than does any other space. Note the total of the weighted square feet equals 1.
Step 2 multiplies the weighted square footage by the listed rate to determine the weighted price for that space. The value for each space is how much that space contributes to the average price, taking into account the amount of square feet contributed to the total square feet. The total of all 20 spaces is $17.264, which is the most reliable answer to "What Is The Average Price?".
The weighted average method utilized here can provide more reliable results for any sum of data. It works best when there is a large variation in the variables, such as square footage and price. The big surprise is that list prices of Class A office space in the New Orleans CBD are fairly close together, and further adjustments could be made for the variance in terms. While other amenities can affect price and are the judgment of the tenant or landlord, using the weighted average price in negotiations can be a good place to start.
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The Class A office market in New Orleans is 90% leased but the 10% that is vacant is almost half comprised of full floors, and full floors take an eternity to lease since they are configured for a single tenant. Full floors range from 18,000 square feet to 24,000 square feet which can accommodate 50 to 75 employees depending on the configuration.
Gone are the days of 10' x 10' private offices, which accommodate the fewest employees per full floor. The modern office configuration has plenty of open desk areas that facilitate collaboration and teamwork, and can accommodate the highest number of employees. Full floor space can be difficult to lease to multiple tenants due to the layout of restrooms, hallways, and conference rooms; therefore, the most likely tenant is a large company with at least 50 employees moving into the downtown area. Even with the 35% payroll rebate as an incentive to media and software companies moving into the city, no full floor space has been leased in the past 6 months and the amount of full floor space has increased 19,000 square feet.
The result is that vacancy rates will stay higher for those buildings with empty full floors compared to other Class A office buildings, and lease rates will include a larger amount of free rent and buildout allowance. Once the market reaches equilibrium; however, the buildings that can offer the last Class A full floor space will have the highest pricing power and can command a higher than market rent. The tradeoff is that the present value of the higher rent several years down the road may be less than a lower rent price today.
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Sources: LoopNet, LACDB
The biggest surprise to most sellers of commercial property is that the average time to find a buyer is well over one year. For example, in New Orleans, the average industrial property for sale or lease in the last 24 months has been on the market 510 days. And still counting.
The industrial sector has the longest waiting period. There are 81 industrial properties for sale or lease totaling 1.4 million square feet, with 632,000 square feet for lease and 770,000 square feet for sale. Of the properties on the market today, the average lease rate is $5 PSF and the average sale price is $40 PSF.
Contrast this with the residential market where in uptown New Orleans the average time it took to find a buyer was 46 days. But that doesn't tell the whole story. Of the 503 residential properties so far in 2014 that sold, 27% sold within 5 days and 5% sold within one day. So the benchmarks we might have for residential property do not apply to commercial property.
Each type of commercial property has its own supply and demand curve, with the economics of retail and office property making those sectors in higher demand than industrial property; therefore, the days on the market are less but still average almost one year.
There are 381 office properties for sale and for lease totaling 2.7 million square feet with 2 million square feet for lease and 700,000 square feet for sale. Lease prices average $15.60 PSF and sale prices average $64 PSF. The average office property has been on the market for 332 days.
There are 179 retail properties for sale and for lease totaling 915,000 square feet with 600,000 square feet for lease and 300,000 square feet for sale. Retail prices average $14 PSF and sale prices average $118 PSF. The average retail property has been on the market for 336 days.
There are 102 land sites for sale and for lease totaling 119 million square feet with 1 million square feet for lease and 118 million square feet for sale. Lease prices average $1.40 PSF and sale prices average $2 PSF. The average land site has been on the market for 345 days.
Commercial real estate can provide excellent returns to investors, especially since 30 year US Treasuries only return 4% today. But there is a trade-off, which is liquidity. Given that it takes a long time to sell or lease commercial property, have a plan and a marketing strategy to shorten the time period. Ideas that work include: