The population in New Orleans and Metairie is declining. Residents are moving out of both cities in droves. Data show that in the last 3 years, New Orleans and Metairie both have the 2nd largest percent decline in population among all the U.S. cities. Tracked by the Census Bureau, the population declined 17,024 last year alone and 45,121 for the last 3 years, which amounts to 4.69% of the total New Orleans/Metairie population. That percent decline is higher than San Francisco, Los Angeles, Pittsburg and Detroit. Only Honolulu has a higher percent decline in population.
The commercial real estate market only grows in areas where population is growing, and the more growth in population, the higher the growth in businesses and commercial real estate. Of the 5 main sectors of commercial real estate: office, retail, multi-family, industrial and hospitality, 3 are dependent on a growing population. Let's look at how each sector is affected by a declining population.
Offices are dependent on new businesses coming into the area or current businesses expanding their employee count. Even with the increase in employees working remotely, the amount of office space leased is usually negotiated for 5 to 10 year periods so companies are committed to office space regardless of whether the employees show up there or not. In order for the office market to grow, landlords need more businesses moving into the area who provide services for a growing population. For example, if the population is growing, residents would buy a home in the area which would cause an increase in other businesses such as real estate agents, landscapers, contractors, appliance and furniture retailers who depend on new home owners. Each new business would have a need for administration which would lease new office space.
The decline in New Orleans population has decimated the office market, causing two of the largest office tower owners to be able to collect enough rent to make the loan payments.
1100 Poydras is the 4th largest office building in New Orleans and the owner defaulted on a $56,000,000 loan causing the bank to foreclose on the property.
1615 Poydras is a 475,000 square foot office tower default due to declining rent income and named in the top 5 loan losses in the U.S. office sector with debt of $30,000,000 and liquidated recently for $18,000,000.
The Retail sector depends on consumer spending patterns, which are heavily tracked by data analysis companies. For a retailer to come into a market, they first research how much money is spent by residents within a 5, 10 & 15 minute drive time specifically on goods a business sells, and then the retailer compares that spending to how much is sold by existing retailers. The difference is called a Spending Gap, and the higher the population, the greater the consumer spending and the more likely a business would be successful in that area. Since starting a business is an expensive endeavor, retailers want to make sure the area they target will make the business feasible, otherwise they will just go somewhere else.
Apartment demand depends on new people moving into a city when they get new jobs or are transferred. All but one of the new apartment developments in New Orleans occurred during periods of growing population after Hurricane Katrina. We brokered 90% of the land acquisitions to make building the apartments feasible, so we should know.
Developers were very specific about the areas they wanted to build apartments in, and target areas where people were moving to. Apartment developments like this usually cost $10,000,000 to $30,000,000 to build, not to mention the time it takes to get them leased up, so the investments requires a high degree of confidence that the population will support he investment.
It is just common sense that commercial real estate depends on a growing population, but what will surprise you is the correlation and multiplier effect that declining population has on 3 of the 5 sectors of commercial property. New Orleans' trophy for the 2nd highest rate of declining population in the United States is the reality and businesses have to be hopeful but play the cards they are dealt.
The optimistic part of this declining population reality is that we can fix it, but it will take city, state and federal government to change their thinking. Currently New Orleans has a 4.45% tax plus a state tax of 5% on purchases. There is a 20% tax on hotels that tourists stay in. There is a 25% increase in property taxes by the city on commercial property. If government can reduce taxes a little we can gain several times more than that from the increase in business in the office, retail and multi-family commercial sectors.
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