Just out today: inflation the last 12 months has not gotten worse and at 3.5% is below the 4.0% average for the last 5 years. Inflation for the last 12 months stands unchanged from last month. That is the good news, but it doesn’t tell the entire story. This article drills down into the components of inflation and exposes how smoking products are driving the crazy train.

How Is Inflation Measured?

Inflation is called the Consumer Price Index (CPI) which is calculated by the Bureau of Labor who examines how consumers spend their money. There are two populations measured: the All Urban Consumer Group which represent 90% of the total population, and the Urban Wage Earners which includes clerical workers but only covers 30% of the population. Not included in the CPI are people in rural areas, farms, military, prisons and mental hospitals.

The major categories are Food and Energy but, like any government agency, there is a 3rd category called All Items Less Food & Energy. It includes apparel, vehicles, medical care, beverages and smoking products.

Smoking Is Driving The Inflation Crazy Train

While inflation averaged 3.5% over the last 12 months, both the Food and the Energy sectors only increased 2%, which means the real driver of inflation is everything else. The highest increase in prices were the Smoking Products category at 6.8%, Shelter at 5.8% and Transportation at 10.7%.

Inflation Components Can Be Finicky

Look for egg prices to skyrocket and Biden had nothing to do with it. Here are some finicky price changes:

Summary

Data used to calculate the CPI is collected monthly from 75 cities, including 6,000 homes and 22,000 retailers, for prices people pay for goods and services purchased for everyday living. The conclusion is that inflation is not just one number that applies to everything because goods and services have prices that increase but also decline, and each item has its own supply and demand curve.

For more insights into inflation and, most importantly, how inflation affects your lease, read our blogs:

cpi
Consumer Price Index Last 20 Years

The news just out on inflation is that the Consumer Price Index rose 3.2% for the last 12 months ending February, but what you hear in the news about inflation is that it is only one number which implies that it reflects everything we buy. Not true. This article examines how prices change in various industries and discloses what to look at in order to predict inflation.

Consumer Price Index

cpi sectors
Consumer Price Index Sectors

What you hear about most often is called the Consumer Price Index, which is collected from 75 urban areas throughout the country including 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants. Inflation is measured by the Bureau of Labor Statistics and includes over 8,000 items, but not all items change prices to the same degree. For example, food prices increased 2% but energy prices dropped 2% over the last 12 months.

Producer Price Index

However, if you really want to know where inflation is headed, look at the Producer Price Index, which measures the prices that domestic producers are charging and includes the very first transaction for many goods and services. As products flow through the supply chain, the Producer Price Index measures the first increase in prices from the producer’s perspective which eventually reach the consumer. This is different from the Consumer Price Index (CPI), that measures price change from the purchaser's perspective.

Producer Price Index Measures Goods & Services

The Producer Price Index covers goods and services. The Producer Price Index increased 1.6% from February 2023 to February 2024. Prices for goods rose 0.3% over the year, while prices for services rose 2.3%.

Goods

Producer Price Index-Goods Sector Measures 10,000 products

Services

PPI-Service Sector Includes Wholesale & Retail Trade

The PPI service sector includes 69% of service output including wholesale and retail trade, transportation and warehousing, information, finance and insurance, real estate brokering, rental, and leasing, professional, scientific, and technical services, administrative, support, and waste management services, health care and social assistance and accommodation.

Summary

The past 13 years the Consumer Price Index  has averaged 2.6%, with a low of -0.1% in 2015 and a high of 8% in 2022. During the same period, the Producer Price Index averaged 2.6% with a 2015 low of -0.9% and a 2022 high of 9.5%. The PPI peaked in July 2022 and appears to have established a bottom in December 2023, having a series of higher lows with an overall increase since then.

The big trend is still down and will not go back to the supply chain shortage days of 2002, but the short term trend is more of the same, having established a bottom and should trade within a range between 0% and 2%, below the long term average of 2.6%. Inflation should return to its long term average; however, interest rates will come down very slowly since demand is still strong.

The longer inflation maintains its historical average, the faster long term interest rates will fall, because of the reduced premium as a hedge against rising inflation. Long term rates will not reach the pandemic caused lows but should reach equilibrium around 5%. Keep an eye on the Producer Price Index to know for sure.


For more articles on inflation and the Consumer Price Index, check out our article: The Critical Item In Your Lease Is Not The Rate But The CPI

The days are long gone when you can just put up a sign and wait for phone calls to sell or find tenants for commercial property. This article dives into the top commercial databases in Louisiana and Mississippi to expose strengths and weaknesses in using technology to get commercial sold or leased. The top commercial databases are LACDB, MSCREX, Loopnet and CREXI which are utilized by commercial agents to find tenants, sellers and buyers, but we've discovered that the database with the most listings is not the one that works best. Let's get started.

pie channels success in commercial property

Finding Tenants For Your Commercial Property

The pie chart above shows the 6 common ways, called marketing channels, that agents can sell or lease commercial property, and the highest estimate is that 55% of prospects are found using commercial databases. In Louisiana there are 3 commercial databases, each having its own reach and costs ranging from $1,000 to $30,000 annually. Here is a deep dive into each database and its strengths.

LACDB

The Louisiana Commercial Database (LACDB.com) reaches 1,500 commercial agent members in Louisiana who post 8,539 listings, with 4,007 properties for sale and 4,532 for lease. The database also has 314 commercial listings in Mississippi, with 187 for sale and 127 for lease. There are free email blasts to promote properties to agents, limited to one daily but unlimited blasts to clients. LACDB uses Catylist as their software provider plus you have access to a national database called Commercial Exchange which gives you wider distribution. Costs for subscribing to the database are $720 annually and agents can add SiteLink to have their listings automatically populate their website for an additional $800 annually. Agents do not have to be a member of the National Association of Realtors before they can subscribe to the database which reaches mostly Louisiana and Mississippi agents and brokers because subscriptions are the least expensive. LACDB offers market statistics showing the average sale or lease price and days on the market in each of the major categories: office, industrial, retail, shopping centers, hospitality and multi-family.

MSCREX

Mississippi Commercial Real Estate Exchange has 106 members who are commercial real estate agents and brokers, with 1,284 listings divided into 680 for sale and 604 for lease. The cost is $720 annually, up from $600, to subscribe to the database which allows you to post listings but it is owned by the Mississippi Association of Realtors, so membership in the National Association of Realtors and Mississippi Association of Realtors is required, increasing the cost an additional $454 annually. MSCREX uses the Commercial Exchange platform which is owned by Moody's, so listings here get regional exposure for tenants and buyers seeking property, but listings only get in front of 106 members in Mississippi.

LOOPNET

loopnet

Loopnet.com has 1,100,000 properties listed by 300,000 commercial agents nationwide. The marketplace gets 11,000,000 unique visitors monthly. For its massive size, Loopnet.com only has 656 listings for sale and 368 for lease in Louisiana, and in Mississippi has 788 for lease and 726 for lease.

This database brings in tenants and investors both locally and nationwide because Loopnet was purchased by CoStar recently, giving it national exposure; however, not everyone can see a listing on Loopnet. Agents can post listings without paying to be a Loopnet subscriber, but those listings are marked as Basic which are not shown to anyone except paid CoStar subscribers and very few agents subscribe to CoStar because they require everyone licensed under a Broker name to pay. It gets very expensive and just not feasible for most listings.

Loopnet offers 4 platforms: Basic (free), Silver ($5,000 annually for 4 listings and 10 listings for $8,400 annually), Gold ($8,400 annually for 4 listings), Platinum ($14,000 annually for 4 listings) and Diamond ($30,000 annually for 7 listings). The Diamond level offers:

CREXI

crexi
CREXI Database Has Almost 10,000 Listings In Louisiana & Mississippi

CREXI.com has 1 million commercial real estate agent subscribers but an average 2 million buyers, brokers, and tenants each month exploring over $2 trillion of property value nationwide. Crexi has 2,367 properties in Mississippi for sale and 1,212 for lease, and 2,771 for sale in Louisiana and 3,587 for sale. Crexi Pro cost $4,800 annually for unlimited listings.

Summary

The Highest Number Of Listings Are Posted By The Database With The Fewest Agents

In utilizing a database to reach tenants and commercial agents directly, not all databases are the same. Most local agents who can bring tenants and buyers to a listing subscribe to LACDB.com since it is the most affordable. LACDB only reaches 1,500 agents so, in the chart above, their agent count column is barely visible when compared to the other databases; however, those are the local agents who often have qualified tenants and buyers as their clients and are seriously looking for property in Louisiana and Mississippi.

CREXI is a fairly new database but already has almost as many Louisiana and Mississippi listings as LACDB plus provides a national reach with 1,000,000 agents and investors as subscribers. Loopnet recently merged with CoStar and anything other than a Basic listing gets Louisiana and Mississippi property in front of prospective tenants and buyers nationally. If your property is above average in size, you may not find tenants or buyers easily because the Louisiana/Mississippi economy no longer drives large companies to the area. If you need to reach larger markets such as Houston, Dallas, Nashville or Miami, the Crexi database is for you.


For more information on managing commercial property, read our article 3 Common Mistakes In Every Lease

An estimated $532 billion in mortgages on commercial property comes due in 2024, and since most commercial property loans are made by local and regional banks, the potential damage for commercial property defaults could bring about the same problems we saw in the 2008 crisis which sent the economy off a cliff. Last year's bank victims were Signature Bank which held a 12% market share of New York City commercial property, and Silicon Valley Bank which was the 2nd largest bank failure in U.S. history. This article explores delinquency rates among the major sectors and examines which commercial property sectors are safer than others.

December 2023 Delinquency Rate Jumps

The overall delinquency rate for 2023 was 3.04% which does not seem high but amounts to $16 billion of the commercial mortgages due to mature in 2024. The risk to an average person is if a bank has a high percentage of commercial loans, any defaults could affect the banking industry but also the economy. New Orleans' FNBC bank failure was only $1 billion but was Louisiana's largest bank collapse.

Not All Sectors Have The Same Problems

Note in the chart above how little the industrial sector is affected by delinquent loans, compared to all the other sectors. The explanation is that an industrial plant is not feasible to relocate and is less susceptible to market changes like the lodging and office sectors are. The most vulnerable sector is still retail, which has double the overall delinquency rate, but was the only sector to get better in December compared to the last 12 months. It is no surprise that the office sector is worse, with December's delinquency almost three times its 2023 average.

The Banking Industry Solution Kicks The Can Down The Road

When a commercial loan gets into trouble, most banks will simply extend the loan and add on additional principal payments. The result is that the owner gets to fix things if the cycle reverses and keep the property but will give up equity. While non-performing loans are monitored by the Federal Reserve Bank, especially those over 90 days, the banks have an incentive to extend a loan rather than take over the property. This just throws good money after bad and we can only say a prayer when delinquent mortgage judgement day comes.


For more information on commercial property trends, read our article Commercial Property Prices By Sector in Louisiana Major Cities.

We examined 300,000,000 square feet of New Orleans office space for lease since 2010, comprised of 57,000 listings and 1,500 lease transactions, looking for trends and insight to why lease prices have increased the last 13 years despite the fact that supply has increased in the number of square feet for lease. Let's get started.

The Background

First let's look at the averages for the last 13 years. We start in 2010, at the tail end of the nasty 2008 recession where the economy stagnated for 2 years due to the mortgage crisis. Finally by 2011, GDP got back on track.

Gross Domestic Product (In Billions) Since 2008 Recession
Source: St. Louis Federal Reserve (Fred.stlouisfed.org)

From 2010 to 2022, 30 year mortgage rates declined, then skyrocketed from 3% to 7% in just 2 years.

30 Year Fixed Mortgage Rates Since 2008 Recession
Source: St. Louis Federal Reserve (Fred.stlouisfed.org)

Given declining rates and a slow growth economy in Orleans Parish, population increased 20% over 6 years then peaked in 2016. A declining population should mean less demand for offices in which to house them.

Population Growth In Orleans Parish Since 2010
Source: United States Census Bureau

The Averages

Since 2010, the average monthly supply of office space for lease has been 1,911,000 square feet, compared to 2024 of 2,243,000. There has been a monthly average of 364 listings for lease averaging 5,250 SF at $17.30/SF but only 10 actually leased averaging $16.09/SF.

Office properties for sale totaled 110,000,000 SF since 2010 and averaged 690,000 SF monthly comprised of 32 listings at 21,000 SF at a price of $81/SF.

Data benchmarks for office leasing in New Orleans since 2010

Defying Economic Law

Since 2010, supply for lease, measured by square footage, has decreased 5 times but always rallied back stronger. The anomaly is that those times where supply fell, prices fell twice but rose 3 times.

In 2011, supply fell 525,000 SF but prices increased from $16.80 to $17.35/SF. The number of listing for lease fell 24%. In 2015, supply fell 450,000 SF within 6 months, but lease prices increased from $15.58/SF to $16.64/SF.

The lowest lease price was May 2014 at $15.34/SF, followed by the lowest monthly SF for lease during December 2015, and prices have increased steadily since then to the 2024 all time highs of $19.14/SF and 2,250,000 SF listed for lease.

Summary

So how can prices increase even though supply has increased and population has declined? The answer is a shift in the demand curve. Despite more space for lease on the market, there has been enough demand to soak up the available space and pay the higher lease rates because there are few alternatives.

No new office buildings have been built in New Orleans since 2010 and several hundred thousand square feet has been taken off the market, including the 485,000 SF Plaza Tower and the 1250 Poydras conversion of office to hotel space.


For more information on office prices, see our blog: Prices For Office, Industrial, Retail & Shopping Centers In Major Cities In Louisiana

Two days ago, 30 year mortgage rates posted by Freddie Mac dropped to 6.67%, from a peak on October 26th at 7.79%. That is a big drop in a short time. The recent drop in rates was the result of lower inflation data in addition to a dramatic fall in the demand for new mortgages due to skyrocketing mortgage rates which bottomed January 7, 2021, at 2.65%. Rates increased since 2021 due to two main factors: OPEC reduced supply which caused oil prices to increase, and COVID caused supply chain disruptions which caused a shortage in goods which led to higher prices. This was a rapid mortgage rate increase which disrupted businesses who did not have enough time to adapt. Those businesses that were not flexible and loaded with debt were forced to close or merge. Such is the way of the normal business world-adapt or die.

Fastest Surge in Mortgage Rates In 40 Years

Mortgage rates have been in a downtrend the last 40 years, peaking at 18.44% on October 30, 1981, until the bottom in 2021. The chart above shows how rapid the 2021 increase in mortgage rates were, and it was the 2nd largest rate increase in 50 years. The cause for the largest mortgage rate increase in the 1970's was the same cause for the rise in mortgage rates in 2021: OPEC reduced supply which caused oil prices to increase. Inflation is a measurement of many factors, but oil prices have a large weighting in the calculation of inflation.

Summary

What we have experienced with mortgage rates the last two years is highly unusual and should not be taken lightly. Those businesses that lived through it should give themselves credit and build into their future business model the same strategy that pulled them through this crisis.


For more information on why businesses don't make it, read our article Goodbye Bed Bath & Beyond, But You Have To Go.

Today is National Pasta Day so remember the food service workers that bring you that delicious lasagna. We are curious as to why restaurants in Louisiana have such a difficult time getting workers, so we did some research and have the answer.

Average Wage For The Person That Brings You The Lasagna

There are about 1,100,000 food service workers in Louisiana, which include chefs, bartenders, waiters & waitresses, dishwashers and hostesses. Their average annual wage is $25,340, about 20% less than the national average of $32,130 and $2,540 less than what they could earn in Texas.

Bottom 10% Of Wage Earners

The range of wages is wide because food service has a wide skill set. The highest earners are the chefs which may have culinary school training and the bottom 10% of wage earners would be the dishwashers with an average annual wage of $17,390 in Louisiana, about 20% less than the national average.

Top 10% of Wage Earners

The top 10% of food service would be the skilled workers who earn an annual average of $45,150 nationally and $35,480 in Louisiana. The top 10% wage earner gets $13,020 annually more than the average, or 40%. In Louisiana, the top 10% earn $10,000 more than average, which is the same 40%. But if you are a top food wage earner in Louisiana, there is only a $2,000 annual gain in moving to Texas and only a $2,000 annual loss in moving to Mississippi.

Summary

So remember your food service workers in Louisiana and mention that culinary school could make them an extra $10,000 a year and thanks for not moving to Texas.

Valuing commercial property can be a real mystery sometimes because comparable sales are often scarce. This article discusses the 5 things you need to know when working in, buying, selling or leasing commercial property.

  1. Know what to look for in buying, selling or leasing, offices, shopping centers, apartments, hotels and warehouses.
  2. How to use technology, including demographics and zoning, to make better decisions.
  3. How to understand and command the nuances of contracts.
  4. How to utilize basic financial analysis tools for realistic valuations.
  5. How to negotiate with attorneys and agents.

Here Are The Major Sectors of Commercial Property

Understanding The Lease Contract

What is CAM? Stands for common area maintenance and is all the operating expenses of the property, including property taxes, insurance, landscaping, water and electricity costs. These costs can be passed along to the tenant or included in the rent price. If they are passed along, the landlord estimates the CAM expenses at the first of the year and charges 1/12 of the yearly cost monthly to the tenant. At the end of the year, if expenses are different from the estimate, the landlord bills the tenant a lump sum reconciliation.

What are rentable and usable square feet? Usable square footage is the actual size of the space a tenant would use, not lease; however, there are other spaces that the tenant uses, such as the hallways and lobby and restrooms. Adding up all the space in the building less the vertical penetrations such as elevators and stairs equals the rentable square footage. This is divided by the total usable square footage which is called the core factor. The usable square footage of an individual tenant space times the core factor is called the rentable square footage. The result is that the tenant pays the cleaning, air conditioning and heat for the hallways and lobby and other common area in the building.

What are gross and net leases? A gross lease is when all the operating expenses are included in the price of the lease. The tenant gets one price per square foot and never has to pay more, unless the lease spells it out. A net lease is a base rent per square foot plus the operating expenses, including everything else. Sometimes in a net lease, the property tax roll is in the tenant's name because the tenant is responsible for property taxes, even if they increase dramatically. Landlords love net leases.

Types of Office Space

Four Seasons-Trade Mart

The bible of real estate is declared by the Building Owners and Managers Association, or BOMA, and here is how they classify the 3 types of office buildings:

Class A office buildings tend to have on site parking which is usually covered and have the highest rents. These buildings are the most luxurious and always well kept. Not a drop of trash anywhere. They usually have a cleaning crew operating continuously and a concierge or security guard at a desk in the lobby.

Class B space is nice but not the best. It is priced usually $2-$3/SF less than Class A and not as luxurious but just average in upkeep.

Class C is adequate and usually $5-$6/SF less in price. These are the older building without parking and not well maintained.

Industrial

industrial storage tanks

Industrial space can be anything from breweries to warehouses and 5,000 square feet to millions. Industrial property tenants and owners are interested mostly in:

Apartments/Multifamily

Low Income Tax Credits

Almost all multifamily/apartments are financed with help from the government. The most common assistance is Low Income Tax Credits from the Department of Housing & Urban Development, or Community Block Grants or New Market Tax Credits. Every year HUD issues $13 billion in tax credits to the states, which then takes applications from developers. Once the state awards the credits to developers, they can be sold to investors, usually at 90 cents on the dollar.

The investor then applies the full $1 worth against his state income tax obligation and the developer uses the cash payment from the developer as equity for a loan from a bank who acts as the middleman. The developer only has to agree that 40% of the apartment units are rented to tenants with incomes no more than 60% of the area's median income. Minimum wage income for 2 is $30,000 annually so the benchmark would be $24,000 income. All tenants would have jobs and be law abiding citizens, as dictated by the apartment's property manager.

Retailers

Retailers always want to be in an area where there are enough shoppers to make their store feasible. The standard in demographic research is the population count and household income, but the latest technology drills down into how that income is spent.

retail marketplace for consumer spending patterns

Data from ESRI shows that within a 10 minute drive time that 5,205 households own a pet which is 59.7% of households and 13% more than the average household in the United States. The retailer now knows that Petco would be a successful tenant.

Retailers-Consumer Spending Patterns

marketplace profile consumer spending

Drilling down further into consumer spending, the data show that $5,596,611 is spent on sporting goods within a 5 minute drive time, but no existing retailer sells sporting goods. This is vital information for the retailer tenant and also the landlord, because now both parties know that type of business will be successful and how much they can expect in sales.

Consumer Price Index Adjustments

The most important language in a lease contract is the clause on increasing the rent amount to keep pace with inflation. This language must be very specific but also clear. Most language states the rent is tied to the consumer price index, but there are actually 4 consumer price indices. Here is how your lease should state the inflation adjustment:

“The rental under this lease shall be four ($4.00) dollars per square foot for the first twelve (12) months, with annual adjustments tied to the Consumer Price Index (published by the Bureau of Labor Statistics, All Urban Consumers, Current Series, Index) for the previous calendar year period.”

Notice that language tells exactly what index is used, where to find it and how to apply it.

How To Value Commercial Property

The value of commercial property is based on the net operating income, which is the actual, not forecasted, rent income minus expenses (but not depreciation or interest). In the table above for a 10 unit apartment building, the rent income is $96,600 annually and the net operating income is $85,159.

The value is calculated by dividing the net operating income by the capitalization rate, which we assume is 7%. The seller would then value the property at $1,216,557. But wait, there's more. Notice that the seller left off management and advertising expenses. The buyer will add this expense back in because he will not manage the property himself like the seller did, who did not charge for his time. Assuming advertising of $500 monthly and management of $500 monthly, plus repairs/maintenance of $1,000 monthly, the buyer net operating income is $61,159 annually, making the value $873,700. The final sale price on this property was $810,000.

Negotiation

Most buyers and sellers can only negotiate on 3 variables, which usually are: price, deposit amount and length of inspection period. Often there might be 10-15 issues, but both parties need to let some issues go. You want to let go of the items that are not that important and negotiate on the items that are deal-breakers.

Be an active listener. Think about what the other party is saying, then repeat it back to them: "If I hear you correctly, what you are saying is ...". There is always the reason stated but then there is the reason behind the reason. Find that out.


For more information on commercial real estate, read our blog: Why Negotiation Is Like a Tennis Match.

This newsletter looks at price trends as of September 2023 for 9,018 listed properties for lease and for sale in the entire state of Louisiana, plus we drill down for major city trends as well as compare asking prices to actual transacted prices. We found some trends that help forecast future prices but also some trends that are harder to figure out than Taylor Swift and Travis Kelce. Let’s get started.

Louisiana Asking Lease and Sale Prices By Sector

First, let’s look at average sale and lease prices for the major sectors in the entire state of Louisiana. We examined 9,018 listings with 26 million square feet for sale and 30 million square feet for lease.  

Office Asking and Actual Lease Prices

We examined 6,967 office listings for lease over the past 3 months which had 194 actually leased. Of the 194 leases closed, Metairie had 21 leases and commanded the highest asking price of $21.27 per square foot and actual transacted lease prices were only discounted 3%, averaging $20.57 per square foot. Lake Charles, Slidell, Denham Springs and Bossier City only averaged 1 lease transacted per month each which explains the anomaly of actual lease prices higher than asking. Baton Rouge closed the highest number of leases at 66, averaging a 17% discount, but Lafayette is again the big winner closing 36 leases at a 3% premium.

Retail Asking and Actual Lease Prices

Of the 3,048 retail lease listings, only 3% or 95 were closed in the last 3 months. Metairie lists 232 spaces and only closed 6 but commands the highest asking lease price at $24.78 with actual price averaging $23.29. Baton Rouge has the most listings at 715 and closed 22 but New Orleans closed the most at 31 which is a large enough sample so is not an outlier but still unusual, averaging $25.83 per square foot which is a 7% premium to the asking price.

Industrial Asking and Actual Lease Prices

Lafayette commands the highest asking lease prices in the industrial sector at $10.03 per square foot but actual lease prices averaged a 20% discount at $8.10, on the 7 leases closed of the 101 listed. Among the major cities, there are 899 industrial lease listings and 42 spaces were leased, with Baton Rouge the most active with 18 leased followed by Shreveport with 13 leases closed. New Orleans and Lake Charles only closed 2 leases, so their actual lease prices at a large premium to asking prices were outliers, proving that in slow markets, only the prettiest warehouses get the attention.

Shopping Center Asking Lease Prices

The shopping center market is slow. The chart shows only the asking lease prices of 1,364 lease listings. Since only 19 leases were transacted, comparing reported prices is as crazy as a Sam Bankman-Fried interview. Baton Rouge had the highest number of transactions at 7, averaging $15.56 per square foot on actual lease transactions or a 5% discount to the $16.34 asking price.

Summary

Three revelations arise when you look at all the data.

  1. Days on the market averages 300 days for all sectors and ranges from 188 for shopping centers to 705 for vacant land. Even excluding the land category, the time it takes to lease or sell commercial property averages 212 days.
  2. Not many commercial properties are leased or sold each month. Of the 6,839 properties for lease or sale in just the major cities, only 219, or 3%, were closed last month. This includes all sectors too.
  3. The good news is that, on average, the range is narrow between actual and asking prices for all sectors. For the entire state of Louisiana, average transacted prices range within a 12.70% and 15.70% discount, averaging only 13%. This means that transacted prices are pretty close to the asking price, no matter what sector or what town, which is a tribute to the agents who are doing the research to place a realistic value on both lease and sale listings.

For more information on prices, catch our blog Which Commercial Property Databases Are Best In 2023?

Footnotes: The Hospitality and Multifamily sectors did not have enough sales in this time period for the data to be reliable, but we will cover those sectors later.

Sources: Crexi, LoopNet, LACDB, MSCREX.

The industrial property market, for lease and for sale in Louisiana, is only 10% of the entire commercial market, but bringing a new industry to your city can have an impact much greater than all other commercial sectors combined. But you don’t just put a sign up and wait for an industry to come to your city. They have to be wooed. This article explores the behind the scenes work to get an automaker to invest $5 billion in a small town and employ 8,000 workers at $58,000 salary. Plus benefits.

electric vehicle manufacturing plant

How It Starts

The work started 20 years ago when the Port Authority purchased 1,500 acres for $22 million to give to an automaker who would come to the area. The work continued when, in 2018, Georgia Governor Brian Kemp wanted to get an automaker to bring an electric vehicle manufacturer to town. So how did he do it? He went to Seoul, South Korea to meet the CEO of Hyundai.

Georgia gave the automaker this $85 million site

Over the next 5 years, the terms of a deal were hammered out which involved senators for the state, economic development teams, city officials and the white house. The facility will be located near 150,000 population Savannah, Georgia, a touristy town and home of “The Big Chill”, but will be 16 million square feet under one roof with a 300,000-vehicle output per year plus a battery plant. Here were the freebies given to Hyundai as an incentive to come:

EV Vehicle needs a battery

Not The 1st Rodeo

This isn’t the state’s first rodeo. They gave $450 million in incentives for a Kia plant in 2009, and $300 million in incentives for an electric vehicle battery plant that created 2,600 jobs. Why is this worth it? New industry creates jobs, which lowers the crime rate and funds the resources to hire more police and increase teacher pay.

Kia plant in Georgia
May 11, 2022, West Point - Aerial photo shows Kia Motors' US Assembly Plant in West Point on Wednesday, May 11, 2022. Georgia is poised to announce its second electric vehicle plant, a massive assembly complex by Hyundai Motor Group, that could bring with it 8,500 jobs to a site near Savannah, people familiar with the matter have told The Atlanta Journal-Constitution. (Hyosub Shin / Hyosub.Shin@ajc.com)

Summary

Louisiana could be the kid to learn a lesson from Aaron Rogers. Rather than nickel and dime a developer for control over who a tenant would be, we need to realize we are competing against states that will give $86 million to purchase land and a building. Mississippi has a leg up with the Canton Nissan plant which brought a 95% increase in employment to Madison County. So how can real estate agents bring big industry to your city?


Since the major cities in Louisiana have such different economic drivers, lease prices for the same commercial property type can be as far apart as Scooter Braun and Taylor Swift. This article looks at price trends over the 3 months from May to July 2023 for 11,700 listed lease spaces in each major city for the major property sectors: retail, office, industrial and shopping center. We found some trends that help forecast future prices but also some trends that defied proven economic theory. Let’s get started.

Retail Prices-July 2023

First, let’s look at the retail sector. We examined the asking lease price for 2,800 listings where the average lease price was $17.60 per square foot; however, the actual price leased was $16.40. Asking lease prices ranged from $12.58 to $24.45, with Metairie and New Orleans commanding the highest lease prices and Lake Charles and Shreveport suffering with prices half of those. New Orleans accounted for 30% of all spaces leased and Baton Rouge with 20%, with Metairie, Denham Springs, Covington and Lake Charles only leasing 12 spaces. Total. Over 3 months.

Retail Prices Since 2010

From 2010 until 2017, the supply of space for lease declined from 6,000,000 square feet to 3,000,0000, but the asking prices for retail space also declined, hitting a low of $11.87 per square foot in December 2014. Supply then increased until peaking in 2020 at 6,000,000 square feet, then declined again to the current level of 4,600,000 square feet for lease. This defies economic theory that states increased supply must lead to reduced prices. But that theory has an assumption that demand remains steady. So, the explanation that defies Alfred Marshall’s 1890 law of supply is that demand simply changed. From 2014 to 2020, supply increased 100% but prices increased 24%, so demand for retail space increased dramatically. Then came Covid. Retail space for lease plummeted 36% but prices kept rising from $14 to $15.50 per square foot. The conclusion is that since 2015, the Louisiana retail sector has been very healthy, despite online shopping and Covid, with demand for retail space fueled by a fervent shopping consumer.

Office Prices-July 2023

We examined 6,700 office spaces for lease, which comprised 57% of all the sectors. Metairie and Lake Charles commanded the highest office prices and Slidell, Denham Springs and Shreveport were all near the bottom. New Orleans and Baton Rouge have 50% of the market, but the real winner is Lafayette that closed 22% of the office listings in the last 3 months but only has 13% of the listings. Something is going on in Lafayette.

Office Prices Since 2010

The office market since 2010 tells a different story than the retail market does; instead of a decline, then an increase, then another decline and another increase, the office market increased in supply from 2010 to the peak in 2018 but has declined ever since. That leads to the explanation of why prices have increased from $16 per square foot to $18: because there has been little new construction of office buildings. Why no new construction? There is little demand in office space due to a population decline. Office building demand is based on the number of workers, which is based on the number of people at working age. Louisiana’s population has declined, with the 2021 year witnessing the largest one year population decline since Katrina. The decline in office square feet for lease has resulted in an increase in price from $16 to $18 per square feet, but this trend cannot continue if the population continues to decline causing the need for office space to house a declining work force to decline with it.

Industrial Prices-July 2023

The industrial lease market in Louisiana is small with 875 listings accounting for 7% of the total. The big dogs are Baton Rouge and Shreveport with 82% of the leases closed in the last 3 months and 70% of the listings, but New Orleans was sucking hind teat* and only closed 4 leases of their 135 on the market.

Industrial Prices Since 2010

The Louisiana industrial market has the most consistent price, compared to all the other sectors. Over the last 13 years, asking lease prices have been in a narrow range of $3.55 to $5.00 per square foot. Supply has increased from a low of 8,000,000 square feet to 19,000,000 in 2023, with most of the supply coming in 2019 when supply increased from 12 to 19 million square feet.

Shopping Center Prices-July 2023

Baton Rouge and Lafayette closed 60% of the shopping center space for lease in the last 3 months, with the other cities only closing 2 leases each. Baton Rouge alone has 30% of the listings. Metairie only has 57 spaces for lease which is 4% of the market, and their average asking price is the 2nd highest. Lake Charles proves to be the strongest market with 138 listings averaging $21.62 per square foot.

Shopping Center Prices Since 2010

Louisiana shopping center supply bottomed in June 2013 at 2.2 million square feet for lease and peaked September 2019 with 4.5 million square feet. While supply has declined 1.7 million square feet over the last 4 years, lease prices are about the same. In fact, prices are only 5% more now than they were in 2010, over 13 years ago. Owning a shopping center in Louisiana is a tough way to make a living.

Summary

Retail: Metairie and New Orleans command the highest lease prices, but Baton Rouge closed 20% of the deals these last 3 months with prices 10% below average.

Office: Lafayette closed 22% of all deals with only 13% of the number of listings. New Orleans and Baton Rouge have 50% of the market, but Baton Rouge closed 58 deals or 30% of the listings in the last 3 months. Metairie has the highest prices but only closed 9% of the listings.

Industrial: Lake Charles and Lafayette have the highest prices, almost double the other major cities but Baton Rouge and Shreveport closed 82% of the leases. New Orleans closed 4. Total.

Shopping Center: Prices are highest in Lake Charles and Metairie, but they only closed 3 leases in the last 3 months. Asking lease prices overall are only 5% higher than in 2010.


For more information on prices, catch our blog New Orleans Office Tenants Leave CBD in Doves.

Copyright 2023. Reprinted with permission.

*This is a farming phrase and nothing derogatory.

Hard data from LACDB, CREXI & Loopnet/CoStar.

This is the kitchen sink article: we look at all the commercial sectors across the state of Louisiana to examine current asking and actual prices and size of the market, then we drill down into the office sector in the major cities to determine trends in prices and supply since 2011. Let’s get started.

Louisiana Market Share By Sector

First, let’s look at Louisiana. The total market value for all commercial property sectors, for sale and for lease, is $5.1 billion, with only $367 million for lease and $4.78 billion for sale, but the data uncovers two surprises: one, that 60% of the dollar value is in the vacant land sector and, on top of that, the driving force of the New Orleans economy-the hospitality sector-has the smallest market share of 1.67%.

Louisiana Prices By Sector

Even though we are examining last month’s activity for the entire state, each sector is driven by its own supply and demand. For example, the industrial sector lease prices are the most stable, with the average asking price for lease across the state at $4.90 per square foot and the actual price leased at $4.89 per square foot for the 10 spaces leased last month of the 287 properties on the market.

The office sector failed to get its Covid shots and is still sick, with average asking prices of $18 per square foot but landlords, so anxious to find any tenant, were willing to settle for $16.10 per square foot for the 60 spaces leased of the 2,406 on the market.

The retail sector averaged lease rates of $18.23 per square foot, 18% higher than the average asking price of $15.50, for the 34 spaces leased of the 1,079 on the market. The explanation is that the higher priced retail stores are in better locations and the only ones in demand.

The shopping center sector averaged actual lease rates of $21.98 per square foot, an increase of 53% over the average asking lease rate. There were only 15 lease transactions of the 655 listed, so the large variance in actual prices means that the well-maintained, best location, shopping centers were the ones attracting tenants.

Office Price Trends & Supply-2011 to 2023

This week we drill down into the office market in Louisiana where there are 2,406 lease listings, approximately 20% more than the 2,162 average since 2011. The average lease listing since 2011 is 3,900 square feet with an asking lease rate of $16.35 but actually leased at $14.35 per square foot. Asking lease rates are at their highest levels with the July 2023 average asking lease price at $18 per square foot, up 9% from $16.50 per square foot in January 2021. The increase in rates was produced by a supply of office space that peaked at 11,500,000 square feet in December 2017 and declined 26% to 8,500,000 square feet as of July 2023. These numbers are for the state as a whole, but each city has a different dynamic.

Office Sector Moves To Quality Over The Last 3 Months

Drilling down into the office sector for the last 3 months, Baton Rouge and Lafayette accounted for 52% of all office lease transactions. Baton Rouge averaged only 2nd to last in prices however, with an average lease rate of $14.99 which was a 20% discount to asking lease rates. There were 58 office spaces leased the last 3 months in Baton Rouge, of the 1,872 on the market.

The Slidell office market has proven to be the strongest, with the highest lease rates averaging $25.15 per square foot for the 6 spaces leased of the 152 listed. Asking prices average $15.75, so the highest quality office spaces at the top of the price range were the spaces tenants wanted.

Summary

The commercial market in Louisiana is not homogeneous by sector nor by city. Prices as of July 2023 show that the industrial market is stable, the office market has the highest lease prices of all time but deals are done at a 20% discount, the retail sector is strong with actual lease rates higher that the overall asking rates, and the shopping center sector last month had 15 transactions at a 53% premium to the average lease price. Slidell reported the highest office lease prices but Baton Rouge scored the most spaces leased because prices were discounted 20%.


For more information on prices, catch our blog on New Orleans prices by sector-May 2023.

Hard data from LACDB, Loopnet/CoStar & Crexi.

The most important unknown in valuing commercial real estate is the Cap Rate, which is the multiple applied to income from property to determine market price. Cap Rates vary by city, state and sector but are also influenced by rates of returns in other investments such as US Treasury Bonds. This article drills down into Cap Rates for the US, and highlights Louisiana and Mississippi Cap Rates for all the major sectors: Office, Industrial, Hospitality, Retail and Multifamily.

National Average Cap Rates

First, let’s summarize the national markets and then drill down into each sector in Louisiana and Mississippi. Nationwide, we examined 176,120 properties totaling $959 billion, which provides a large enough population of data so the results can be statistically significant. The data show that the average property is priced at $175 per square foot and was on the market 158 days with an average asking Cap Rate of 6.1% but the actual sale Cap Rate was 6.3%, which means that the property sold at a slight discount to asking price. The asking Cap Rate ranged between 6% and 6.5% except for an outlier in the Hospitality sector where the nationwide asking Cap Rate was 8.8%. The explanation is that in the Hospitality sector, 40% of the properties are smaller properties valued under $1,000,000 and listed at higher Cap Rates.

Louisiana Cap Rates

Louisiana asking Cap Rates average 7%, with 4.2 billion in property averaging $113 per square foot for 8,000 SF. The Hospitality sector has an asking 12.6% Cap Rate because over 50% of the properties are priced under $1,000,000.

These lower priced properties tend to be in less demand but the averages are offset by the 10% of Hospitality properties priced over $6,000,000 which are more in demand. Asking Cap Rates on Industrial are 7.7% and Retail is back in strong demand at a 6.5% asking Cap Rate.

Mississippi Cap Rates

Mississippi asking Cap Rates average 6.8% with 2 billion in 3,072 properties averaging 7,790 square feet for $105 per square foot. The Multifamily sector averages a 9.5% asking Cap Rate with over 75% priced under $1,500,000 which can carry a higher Cap Rate that raises the average.

The Hospitality sector also stands out with an average asking Cap Rate of 9.20% because over 80% of the properties are priced under $1,200,000. Industrial asking Cap Rates are 7.4% but Retail is back in strong demand at a 6.7% Cap Rate.

Summary

Nationwide, actual sold Cap Rates over the last 12 months increased from 5.7% to an ending June 2023 of 6.3%. While this increase in Cap Rates seems small, the effect on the market price of the asset can be dramatic because any change in asset value can trigger loan parameters that a bank may have on a property. In a worse case future scenario, a bank may require the owner to come up with additional money on a loan, so that the loan to value ratio is unchanged. For example, the Cap Rate change just these past 12 months from 5.7% to 6.3% means that for every $10,000 in net operating income, the value of the asset would have fallen $16,700.

The Louisiana market followed the national average these last 12 months, with the Hospitality sector having a much higher asking Cap Rate of 12.6% due to a large number of lower priced properties. Overall, the Louisiana asking Cap Rate increased from 6.5% to 7%.

The Mississippi Cap Rates were unusual in that both the Hospitality and Multifamily sectors had asking Cap Rates over 9%. While overall asking Cap Rates over the last 12 months ranged from 6.9% to 7.4%, now the average is 6.8%.


Want more information on using Cap Rates to value commercial property, rather than articles on recipes? Check out our blog: How To Value Real Estate Using Cap Rate.

Hard data is from Crexi, LACDB and LoopNet/CoStar.

Today marks 20 years licensed in the real estate industry. The relationships formed along the way in doing the deals are the most meaningful but my body of work is how I keep score:

BenchmarkCount
# transactions125
# properties targeted/pitched527
# brokers worked for3
# real estate brokers rejecting my job application5
# brokers who fired me for not responding to an email1
# times sued broker1
# times sued by client0
# times sued client1
# website redesigns23
# times website hacked by Russians1
# times published in national magazine6

Businesses looking to expand and open a new location always research demographic criteria such as population count, income, age and how nearby residents spend their money; however, one of the most reliable indicators of future success of a business is nearby employment that affects the ability of customers to purchase goods and services. This article explores the major cities in Louisiana and Mississippi to see who ranks #1 in putting people to work.

Louisiana

First, let’s examine how Louisiana and Mississippi as a whole are doing and then we will drill down into the top cities in each. For Louisiana, employment increased steadily from 1.4 million in 1976 when data was first collected until 2014 when the number of people with jobs peaked at 2 million and has been stuck there the last 9 years with only a gain of 11,123 workers since. The average gain in employment has been .92% per year since 1976.

Mississippi

Mississippi paints a grim scenario with increased employment from 900,000 in 1976 until peaking at 1.24 million in 2000 and never recovering. That is a total loss of 35,000 workers the last 23 years.

Next let’s drill down into the top 4 cities in Louisiana and then get into Mississippi cities. What we uncover is a wide variety of employment growth, with ups and downs characterized by each city’s competitive advantage such as natural resources or being closely tied to the oil industry or to government.

Louisiana Top Cities

Baton Rouge

Baton Rouge tells a Cinderella story with employment in 1990 of 280,000 growing steady to 440,000 in 2023. In the 32 years of data, Baton Rouge employment rose each year 80% of the time and the worst decline was only 5% due to Covid in 2020.

New Orleans

New Orleans since 1990 has been in cardiac arrest. Starting in 1990 with employment of 552,000 and ending in 2023 with 565,000, New Orleans has only gained 13,000 workers, or 2.5% over the 33-year time frame. Even before Katrina in 2005, New Orleans had been stagnant, with only a 6% total gain of 13,000 workers for the 14-year period from 1990 to 2004.

Shreveport

Shreveport grew steadily with 169,000 employment in 1990 until 1999, then declined for 3 years, then exploded 30,000 jobs or 17% for 7 years until 2006 due to oil prices climbing from $26 per barrel to $61 during the same 3-year period.

Employment then declined steadily for the next 17 years to 179,000. The result is a total employment growth of 10,000 jobs, or 6% during the 33-year time frame.

Lafayette

Lafayette is the 4th largest municipality in Louisiana with a population of 240,000, and solid growth in employment of 156,000 in 1990 growing 33% to 207,000 in 2023. Lafayette also benefitted from the 2002-2006 oil price increase, but peaked in 2014 with employment at 220,000, followed by a 6% decline over the next 9 years.

Mississippi Top Cities

Mississippi ranks at the bottom in household income, 3rd to the bottom in percent graduating high school, and bottom in health care among all 50 states. Let’s examine how Mississippi’s major cities are growing.

Hattiesburg

The Hattiesburg MSA which includes Laurel has a population around 170,000 and enjoyed a steady 40% employment growth from 47,000 workers in 1990 to 67,000 on 2023. In the 33-year period of recordkeeping, employment increased 65% of the time and never declined more than 4% from one calendar year to the next.

Jackson

Jackson enjoyed solid growth from 1990 with 216,000 people employed until peaking in 2004 at 264,000 workers and for the last 19 years has lost 9,000 workers total. There were 3 severe drops in employment: losing 24,000 people from 2004 to 2010, building it back up but then losing 16,000 from 2012 to 2014, then building employment back up, only to lose 42,000 workers in 5 months but then building it back up to almost the 2004 level.

Gulfport/Biloxi MSA

Gulfport has a population of 72,000 and Biloxi has 50,000 and the Gulfport/Biloxi MSA includes the surrounding 4 counties with a population of 246,000 people. Employment since 1990 grew from 126,000 to 1999, peaking at 171,000 for the next 24 years. The most severe loss was 31,000 workers within 6 months due to Hurricane Katrina in August of 2005. The area never recovered. Total growth since 1990 has been 32,000 people working, averaging only .8% growth per year.

Rockstar Cities

Baton Rouge and Hattiesburg stand out as having the best employment growth, but they are dwarfed by other cities with spectacular growth rates from 70% to over 200%. Unfortunately, those cities are located in other states. Let’s look at a few cities with exceptional employment growth, making them a no-brainer as the perfect new location for a business.

Austin, Texas MSA

Austin grew employment consistently from 445,000 in 1990 to 1,380,000 in 2023, with total employment growth of 935,000 or 210% which averages 6% growth per year. The only decline was due to Covid, causing employment to decline 15% but within 12 months employment had recovered to the 1,240,000 number and is now 138,000 workers above the Covid peak and at an all-time high.

Dallas, Texas

Dallas grew from 1990 employment of 2.1 million to 4.2 million in 2023 with only one 4-month Covid decline of 10% then a recovery.

Huntsville, Alabama

Huntsville grew employment consistently from 145,000 in 1990 to 250,000 in 2023, with total employment growth of 105,000 or 72% which averages 2% growth per year. The only stagnant period was from 2008 to 2015 was due the mortgage meltdown, but in the past 8 years employment has increased 20% by 50,000 jobs.


Summary

The cities that have a definite trend in creating jobs are Baton Rouge, Louisiana and Hattiesburg, Mississippi, so locating a new business in these thriving economic areas would increase the chance of being successful. There are many reasons certain cities grow their economy and create jobs, such as a business-friendly environment with low government restrictions or a high number of corporate headquarters. Our next article drills down into what the top cities are doing to increase employment that the laggard cities are not.


For more information on how to select the best location for a business, check out our article, Which City Ranks Tops In Growth In The U.S.?

SF Leased In New Orleans Office Sectors
Kenner & Metairie Class A Capture Office Tenants While CBD and Class A Lose

The first 3 months of 2023 confirmed that downtown high rise office buildings are suffering a loss of tenants to Metairie and Kenner. During Covid, from 2020 to 2022, the common hypothesis was that employees would learn to work from home and employers would adapt their processes and controls to accommodate the change. In 2023, we are seeing confirmation that the expectation is proving to be fact. The result is a collapse in rented office space downtown because employers are renting office space in Metairie and Kenner rather than downtown New Orleans, resulting in a $30,000,000 loss due to vacant office space for downtown high rise office landlords. Every year.

Kenner Office Buildings Captured The Most Market Share of New Tenants

The first 3 months of 2023 saw the total New Orleans downtown Class A office market only lease 1,720 net square feet, while in Kenner 27,838 square feet was leased and in Metairie 19,575 Class B square feet was leased. While the quoted rates for downtown Class A space average $20 per square foot, Metairie Class A averages $24 and Kenner averages $19, often much lower rates plus a tenant improvement allowance can be negotiated when new tenants lease in buildings that have a high vacancy.

Where Is The Highest Vacant Office Space?

Kenner Has The Lowest Occupancy At Only 70%

Kenner has the lowest occupancy rate at 70%, compared to 89% for the highest occupancy rate, not in the Class A CBD office buildings but in the Class B Metairie office buildings. The Class A office rate averages $20/SF compared to the Class B rate averaging $16/SF.

Market Share

Pie Chart Showing Office Market Share
Downtown Class A Office Buildings Are Two-Thirds Of The Market

The office market in the New Orleans/Metairie/Kenner area totals 14,000,000 square feet, dominated in size by the downtown Class A office space which is two-thirds of the market. Metairie only has 14% of the market and Kenner only 1%, so their impact of taking space away from downtown may not initially be felt; however, the vacant space outside the downtown market totals over 4,000,000 square feet which could lead to heavy price competition. Normally, in a competitive market, a shift in demand causes a fall in prices until they reach equilibrium. In the office market, that seems to be between $16 and $20 until the vacant space is no longer available.

Summary

In summary, if you lease office space, now is the time to check out alternative spaces and negotiate a rate that can lower your rent expense which can make your business instantly more profitable. You can find commercial real estate agents to represent you who are trained in negotiating and have years of experience. Just look for the CCIM or SIOR designation, which means they are the most qualified in the industry and may specialize in the office leasing market.


CCIM Designation:  CCIM designees must have proven experience, such as closing ten qualifying activities totaling $10 million or more and completing several years of training culminating in a 6 hour comprehensive exam.

SIOR Designation: SIOR is a Washington, DC-based international professional organization of 2,600 commercial real estate agents who completed at least five years of creditable experience in the highly specialized field of industrial or office real estate, meeting stringent education requirements and demonstrating ability, competency, ethical conduct, and personal integrity.

References & hard data.

Your lease always has language that describes how the rent you pay can be adjusted using the Consumer Price Index, meaning your rent payments increase at the end of each year because the rent rate you paid last year is multiplied by the index to determine the rent you pay in the next year.

The problem is that there is more than one Consumer Price Index and there are different ways to calculate each, so make sure your lease agreement contains language that is very specific. Most leases refer to the All Urban Consumers Price Index, but here are all four CPI databases:

The idea got its start in the 1970's when inflation was 20 percent and is meant to benefit only the landlord because it means the rental income to the landlord retains its purchasing power. One example of lease language referencing the CPI is:

How The CPI Is Calculated

So what is the Consumer Price Index and how is it calculated? The Bureau of Labor Statistics, under the Department of Labor, calculates the latest Consumer Price Index numbers. The CPIs are based on prices of food, clothing, shelter, fuels, transportation, doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 75 urban areas across the country from about 6,000 housing units and approximately 22,000 retail establishments (department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments).

The All Urban Consumers Price Index consists of all urban households in Metropolitan Statistical Areas (MSAs) and in urban places of 2,500 inhabitants or more. It represents about 93 percent of the total U.S. population. Nonfarm consumers living in rural areas within MSAs are included, but the index excludes rural nonmetropolitan consumers and the military and institutional population.

In calculating the CPI, the urban portion of the United States is divided into 38 geographic areas called index areas, and the set of all goods and services purchased by consumers is divided into 211 categories called item strata. This results in 8,018 (38 × 211) combinations.

What Is Included In The CPI ?

The CPI represents all goods and services purchased for consumption by the reference population with all expenditure items divided into 211 categories, arranged into eight major groups:

  1. MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services).
  2. FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks).
  3. HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture).
  4. APPAREL (men’s shirts and sweaters, women’s dresses, jewelry).
  5. TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance).
  6. RECREATION (televisions, toys, pets and pet products, sports equipment, admissions).
  7. EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories).
  8. OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Latest CPI Numbers Show a Trend Change

For the month of June 2023, the All Urban CPI rose 2/10ths of one percent and over the last 12 months increased 3.0 percent before any seasonal adjustments. This was the smallest 12-month increase since the period ending March 2021 and while some categories increased in price, others dramatically decreased. For example, the cost of shelter accounted for 70 percent of this increase because prices were 7.8 percent higher, but there was a major decline in the energy index which plummeted 16.7 percent.

CPI Data Just For The Southeast

The CPI is calculated for the U.S. as a whole but additional data is calculated for each state and also for each of the 7 regions. Louisiana specific data falls into the Southwest Region and Mississippi specific data falls into the Southeast Region. Above is the chart of CPI for the South Region which is comprised of Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia. If you wanted your lease to more accurately reflect the CPI in your region, you would substitute these region numbers for the U.S. CPI numbers. For example, the 12 month South CPI rose 3.3 percent for the 12 months ending June 2023 compared to the U.S. number of 3 percent.

Summary: The 5 Things You Need Clear In Your Lease

  1. It Is Clear Where The CPI Is Published-If rent is tied to an index, what index is used and where can you find it? For example, the lease language can spell out that the rent is adjusted by the All Urban Consumer Price Index, and points out that the data is published by the Bureau of Labor Statistics, which is found easily online.
  2. It Is Clear What Type of Consumer Price Index Is Used-There are 4 methods used to calculate the Consumer Price Index, and if the parties both agree, they can select any method that works best.
  3. It Is Clear Whether The CPI Is Adjusted For Seasonal Changes-The CPI can be adjusted for changing climatic conditions, production cycles, model changeovers, holidays, and holiday sales which can cause variation in prices. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests.
  4. It Is Clear Whether The CPI Is National or Local-The CPI publishes unadjusted price indexes at the national, metropolitan area, and regional levels. So you could drill down and calculate your CPI based on your city’s MSA. This would be more meaningful if your economy is an outlier, such as Houston, Detroit, or New Orleans.
  5. It Is Clear How The Adjustment Is Applied-The CPI adjustment can applied to a lease payment monthly, quarterly, or annually, but be clear about what period of CPI is used. It is best that landlord and tenant agree the CPI is calculated based on the previous 12 months and applied to the last rent payment.

For more information on leases, read our blog "3 Common Mistakes In Every Lease".

If you are looking to grow your business, first look at where the population is growing. Last week the Bureau of Labor Statistics released data on the fastest growing cities in the US, and this article looks at trends and where Louisiana and Mississippi rank.

The last 12 months show that the fastest growing cities for jobs were in Texas, with Midland ranking #1 at 7.7% job growth and Odessa ranking #6 at 5.5%. Both cities benefit from spending by the oil industry.

If you are looking at just the numbers of jobs, Texas grabbed first place with growth of 529,000 jobs and a 4% growth in jobs, followed by California adding 427,000 jobs but only 2.4% growth.

Which State Has The Most Fast Growth Cities?

The best chance of success for a business would be in a city with the highest growth rate in jobs, but also in an area where there are several high growth cities. Texas tops the list again, with 11 cities that have 3.3% or higher job growth over the last 12 months, followed by Florida with 8 cities, Georgia with 5, and the other 47 states have only 3 or less cities with job growth over 3.3%.

Summary

So what does Texas do that Louisiana & Mississippi doesn't to attract jobs? It can't be the education level, because only 84% of Texans graduate high school, which is among the lowest in the US. Here are the reasons companies flock to Texas:


Recently nola.com staff writer Blake Peterson reported on the future development possibilities for the largest land site to become available in Metairie, and interviewed Louisiana Commercial Realty on future possible uses and insights. The 8 acre site currently is the Haynes Academy and is one of 174 properties owned by the Jefferson Parish School Board since 1909 who will demolish the buildings at a cost of $300,000 and put the land on the market for sale. The property has an unusual boundary, with a triangle shaped 2 acres including 550 feet fronting Metairie Road connecting to 6 acres in a rectangle shape fronting the Magnolia Drive side street.

Property Surrounded By Highest Income Population

3 minute drive time

Within a 3 mile drive time, the 8,600 residents have the highest income in the New Orleans MSA, with an average household income of $145,000 annually. The median age is 46 and 54% have household incomes exceeding $100,000. This makes the property attractive to retail stores that offer high-end products and, since these products are the most profitable, this means those stores have a business model that allows them to pay higher than normal rent, which means the developer who buys the land and develops the stores then rents them to the retailers can afford to pay a higher than normal price for the land. So this land sale is destined to be the highest dollar per square foot sale in the area.

Residential Zoning Prohibits The Most Profitable Use

The property is zoned R1-A, Single Family Residential but the Future Land Use Zoning is Suburban Residential for the 6 acre rectangle and Mixed Use Zoning for the 2 acre triangle fronting Metairie Road. Zoning districts regulate the type of business that can operate from the property and Land Use dictates what goes on the land. The property also has an overlay called MRTPD, Metairie Ridge Tree Preservation District which requires a Tree Protection Plan and parish arborist review and a separate permit to be submitted.

Summary

The highest and best use would be to development the Mixed Use 2 acre triangle as retail stores since 550 feet fronts Metairie Road, providing easy access, high traffic and visibility to retailers. The remaining 6 acre rectangle would have to be single family homes, but the land could be worth twice as much to the School Board at sale if they could get the zoning changed to R-3 zoning which is multi-family and allows apartments which are more valuable than single family homes to a developer. The neighborhood would be against apartments because of the traffic but if the property could be designed to have access to the apartments from Metairie Road which would alleviate traffic, the residents might go along with it.


For more information on zoning, read our article "Commercial Real Estate Zoning For Dummies".

In this article, we examine the permitted uses in various commercial real estate zoning districts for New Orleans including Orleans and Jefferson Parishes. Zoning uses and density can determine feasibility, so gathering this information is imperative before you make an offer.

Real Estate Developers Are a Special Breed

sidnet torres new orleans developer

Commercial real estate development is not a feat undertaken by the weak. The entrepreneurs making things happen today are a special breed. They not only have a vision and an instinct of where opportunities exist, but they put their money where their mouth is, risking millions on just an idea. There is no guarantee that building a $25 million dollar apartment complex to solve the housing problem will produce the rents needed to break even and there is no guarantee that spending $6 million to make a shopping center look better will result in higher rental income, and it is really a long shot to build an office building since tenants can find current office space at $15/SF. Even with all the risks, developers are coming to New Orleans anyway and trying to make things happen because they like our culture and vibrant tourism based economy.

The Correct Zoning May Not Even Be Available

Pontalba

Many developers find our commercial real estate zoning and planning codes to be convoluted, but zoning codes are no more restrictive than in Atlanta, Memphis or Birmingham. Zoning is more lax in Covington and Mandeville than in New Orleans, but then you don't have the demographics to support a large project once you get away from New Orleans. In fact, New Orleans zoning and planning codes make sense, and it helps to know how they apply to what you are developing before you get started.

Let's examine building an apartment building in either Orleans or Jefferson Parish; ideally, you would want RM-4 zoning for the highest density, and you would need four to six acres. The first problem you'll face is finding four acres of land. It doesn't exist. The next problem is finding land zoned RM-4. Maybe you'll find a duplex or two but nothing of scale. One solution in Jefferson Parish is to use C-1 or C-2 zoning which allows multi-family use; however, Jefferson Parish requires 50% non-residential use on the ground floor of a multifamily structure over 30 units. Non-residential uses include parking, lobby, management office, mail or laundry room, and health club.

Another solution is to purchase industrial zoned land but change the zoning since multi-family is not allowed in industrial zoning.

Zoning Designation vs. Land Use Designation

new orleans zoning-map

One important issue is how the zoning code applies to the use of the space but there is also a code for land use which is easily identified by a map. The future land use map illustrates the preferred location of development over the next twenty years, and is comprised of eighteen future land use categories and provides for an adequate mix of land use types in appropriate locations. Residential categories range from low-density residential development to high-density residential development. The future land use map also provides a variety of commercial, office and retail, industrial, mixed-use, public, and recreation lands. In developing the plan, each of these uses, which are described below, are designed to protect existing neighborhoods, provide shopping and recreational uses in close proximity to residents, and to make the most efficient use of infrastructure.

Land Use Classes

new orleans land use zoning

Commercial Zoning Categories

Vieux-Carre-Area-Zoning-Map

In Orleans Parish, commercial zoning categories are:

Residential Zoning Categories

new orleans residential zoning

Orleans Parish Residential Zoning: C-2 zoning allows the same uses as RM-4, which, for multi-family exceeding 41 units, has a density of 1,000/SF lot area per dwelling unit, with a minimum 400/SF lot area for a residential planned community. In addition to the zoning, you might have a specific land use or an overlay district. The Urban Corridor Overlay is a part of B-1 zoning in Jefferson Parish which means any development must undergo a complete review by the City Planning Department, which usually takes several months. B-1 allows uses approved by RM-1, which has a minimum density of 1,800/SF minimum lot area for a three-family or more development.

Orleans Parish Residential Zoning:

new orleans zoning

Orleans Parish Multi-Family Zoning:

Developer's Dilemma: Meet With Neighborhood Group vs. Not

new orleans neighborhood associations

The fact is you'll need a simple letter backing the project from the City Council member in the district where your development is, but no City Council member will back a project that the neighborhood associations are against. A short meeting, one-on-one, with the president of the neighborhood associations (there may be more than one) will go a long way towards building support. You will need floor plans and architectural drawings to help explain the details of your project. Neighborhoods prefer developments that bring unique businesses to the area and only want two things: no increased traffic or littering. Little things like rebuilding playgrounds go a long way to getting neighborhood support.

City Council Members Have Not Encouraged New Businesses, Especially In New Orleans East

new orleans city council

Some areas allow multi-family as a conditional use, such as B-1 zoning, which means the Executive Director of the Planning Department must recommend the City Planning Commission conduct a public hearing, and the City Council is the final decision-maker. For years, New Orleans City Council members have not been willing to even meet with developers to learn how they can bring new businesses into their district, and the result of their action is a lack of growth, especially in New Orleans East.

How Do You Change Commercial Real Estate Zoning?

zoning sign

How do you change commercial real estate zoning? File the paperwork, meet with neighborhood leaders and the City Council Representative, present at a public hearing, then wait for the City Council vote. Total time: six to twelve months.

Summary

If all this zoning information seems confusing, the solution is to build a team of experts you can rely on including a knowledgeable commercial real estate agent along with a seasoned contractor and architect.


For more articles on commercial real estate, click here for our blog. 

flood map, new orleans LA

Normally when people in New Orleans ask if an area floods they are talking about heavy rains causing water to pool in the streets until the city pumps can suck the water down the drains and into the Mississippi River, but since Hurricane Katrina caused the levees to fail and flood the city with water from Lake Pontchartrain, people now include the risk of levees failing when discussing flooding and debate whether the $14 billion dollar new levee system will save us all. This article explains the various flood zones and provides step-by-step guidance on how to read a flood map and create your own flood map for any location.

Protecting residents from the financial loss due to flooding, no matter whether it is from heavy rains or levee breaches, dates back to 1968 when Congress created the National Flood Insurance Program, giving the responsibility to the Federal Emergency Management Agency (FEMA) for producing Flood Insurance Rate Maps that show areas subject to flooding based on historic, meteorological and hydrologic data.

What’s In a Flood Map?

Katrina flood areas, new orleans LA Flood Map

The Flood Map provides information that allows you to identify not only Special Flood Hazard Areas but the Base Flood Elevation at a specific site, as well as areas of undeveloped coastal barriers where flood insurance is not available.

Flood Maps provide a wealth of information, including:

100-Year Flood Zone Is Really a 26 % Chance

A 100-year flood is not a flood that occurs every 100 years, but one that has a 26 percent chance of occurring during a 30-year period, the length of many mortgages. The 100-year flood is a regulatory standard used by Federal agencies and most states, to administer floodplain management programs, and is used by the National Flood Insurance Program (NFIP) as the basis for insurance requirements nationwide. Special Flood Hazard Areas (SFHA) are those areas having at least a 1 percent chance of flooding during any one year. Flood Maps are easy to get and are found online at FEMA's Map Service Center.

Create Your Own Flood Map With Just 3 Clicks

Step 1: Finding the Property.

Let's say we want flood zoning information on the Mercedes Benz Superdome in New Orleans, so we enter the address: 1500 Sugar Bowl Dr, New Orleans, LA 70112.

flood map search, new orleans LA

Step 2: Check Interactive Map Choices.

Next, you can select from two options: 1) a Dynamic Map or 2) a Map Image. The easiest is to select the Dynamic Map.

FEMA Dynamic flood map, new orleans LA

Step 3: Match Your Address To The Legend.

national flood hazard layer, new orleans LA

Next, match the color pattern in your flood map to the legend. This legend shows the Superdome is in flood zone X, a minimal risk area. However, the area just across Poydras Street is flood zone AE, a high risk area.

The map is dated 9/30/2016 and each map has a number, called a panel. This map is panel 22071C0229F.

Optional: Select Map Image

In addition to selecting a dynamic map, you can select to download the map image of a FIRM Panel. This produces a zip folder with 3 files, a pdf read me, a tif image and a tfw file which allows the image to be viewed in a GIS application.

FEMA Flood map service center, new orleans LA

The tif formatted image can be a higher resolution showing more detail but the file size is 10 times larger which causes download problems.

Explanation of Flood Zone Designations

flood probability

Zone A: This zone has a low risk of erosion and can experience breaking waves less than 1.5 feet. No base flood elevations are calculated.

Coastal Zone A: This zone is subject to erosion, fast and strong water movement, and wave heights of 1.5 to 3 feet during storm events. Base flood elevations are calculated for these zones and displayed on flood maps. Communities have the option of adopting more stringent building codes (up to V Zone standards) in this zone, which would give them points in the Community Rating System. This zone is relatively new, so it may not be applicable to your community’s current flood maps. On the new maps, the landward edge of the zone is marked by the LiMWA line (Line of Moderate Wave Action). An elevation certificate is required to accurately calculate insurance rates in this zone.

High Risk (Special Flood Hazard Area)

These zones make up the Special Flood Hazard Area and are in the 100-year-flood zone. They have at least a 1% chance of flooding each year and at least a 26% chance of flooding over the lifetime of a 30-year mortgage. Structures located in these zones with a federally-backed mortgage are required to purchase flood insurance. On a flood map these zones are referred to as the letters below or, collectively, as the 1% annual chance or 100-year-flood zone.

Zone AE or Zone A1-30: This zone has a low risk of erosion and can experience breaking waves less than 1.5 feet. Base flood elevations are calculated and displayed on flood maps. AE zones are present on newer maps; zones A1-30 are present on older maps. An elevation certificate is required to accurately calculate insurance rates in these zones.

Zones AH, AO, AR, A99: The flood insurance rate zone that corresponds to areas of the 100-year floodplains that will be protected by a Federal flood protection system where construction has reached specified statutory milestones. No Base Flood Elevations or depths are shown within this zone. Mandatory flood insurance purchase requirements apply.

Zone V: This zone faces an additional hazard from erosion, fast and strong water movement, and waves that may be 3 feet or greater during storm events.

Zone VE or V1-V30: These zones face an additional hazard from storm waves, and can experience waves greater than 3 feet. Base flood elevations are calculated for these zones and displayed on flood maps. VE zones are present on newer maps; zones V1-30 are present on older maps. An elevation certificate is required to accurately calculate insurance rates in these zones.

Moderate Risk

Zone X (shaded) and Zone B: The area between the extent of the 100-year-flood (1% annual chance flood) and the 500-year-flood (0.2% annual chance flood). There is no base flood elevation calculated for these zones, so elevation certificates are not necessary. Flood insurance could be much cheaper in these zones because of the lower risk. These areas are not subject to the mandatory purchase of flood insurance.

Minimal Risk

Zone X (unshaded) and Zone C: The area outside of the extent of the 500-year-flood with minimal flood risk. If a structure is located in this zone, however, it does not mean that it is out of harm’s way. The risk determination is based on probability, and the probability of a flood reaching this area is low, but it is not impossible. There is no base flood elevation calculated for these zones, so elevation certificates are not necessary. Flood insurance could be as much as 50% cheaper in these zones because of the lower risk. These areas are not subject to the mandatory purchase of flood insurance.

Undetermined Risk

Zone D: Areas classified as Zone D have not had a flood hazard analysis performed. These are often areas with very low population counts.

Flood Map Glossary Terms

1-percent annual chance floodplain

This is the boundary of the flood that has a 1-percent chance of being equaled or exceeded in any given year. Also known as the 100-year floodplain.

1-percent annual chance water-surface elevation

The height, in relation to the National Geodetic Vertical Datum of 1929 (or other datum, where specified), of the flood having a 1-percent chance of being equaled or exceeded in any given flood year (also known as the 100-year flood or the base flood).

100-year flood

The flood having a 1-percent chance of being equaled or exceeded in any given year; also known as the base flood. The 1-percent annual chance flood, which is the standard used by most Federal and state agencies, is used by the National Flood Insurance Program (NFIP) as the standard for floodplain management and to determine the need for flood insurance. A structure located within a special flood hazard area shown on an NFIP map has a 26 percent chance of suffering flood damage during the term of a 30-year mortgage.

100-year floodplain

This is the boundary of the flood that has a 1-percent chance of being equaled or exceeded in any given year. Officially termed the 1-percent annual chance floodplain.

500-year floodplain

This is the boundary of the flood that has a 0.2-percent chance of being equaled or exceeded in any given year. Officially termed the 0.2-percent annual chance floodplain.

Base Flood Elevation (BFE)

The height of the base flood, usually in feet, in relation to the National Geodetic Vertical Datum of 1929, the North American Vertical Datum of 1988, or other datum referenced in the Flood Insurance Study report, or depth of the base flood, usually in feet, above the ground surface.

Datum

A fixed starting point of a scale.

Federal Emergency Management Agency (FEMA)

An independent agency of the Federal government, founded in 1979, which reports directly to the President. FEMA is responsible for identifying and mitigating natural and man-made hazards. The agency's mission is: to reduce loss of life and property and protect our nation's critical infrastructure from all types of hazards through a comprehensive, risk- based, emergency management program of mitigation, preparedness, response and recovery.

Flood

A general and temporary condition of partial or complete inundation of normally dry land areas. For flood insurance claim purposes, two or more structures must be inundated before flood damage will be covered.

Flood Boundary Floodway Map (FBFM)

A pre-Map Initiatives floodplain management map that delineates the 100-year (1% annual chance) and 500-year (0.2% annual chance) floodplains, floodway, and cross sections.

 Flood Insurance Rate Map (FIRM)

A map on which the 100-year (1% annual chance) and 500-year (0.2% annual chance) floodplains, Base Flood Elevations, and risk premium zones (and floodway information on Map Initiatives FIRMs) are delineated to enable insurance agents to issue accurate flood insurance policies to homeowners in communities participating in the National Flood Insurance Program.

Special Flood Hazard Area (SFHA)

Area inundated by the base (1-percent annual chance) flood, identified on the Flood Insurance Rate Map as Zones A, AE, AH, AO, AR, V, VE, or A99.

Elevation

The height, in relation to the National Geodetic Vertical Datum of 1929 (or other datum, where specified) of floods of various magnitudes and frequencies in the identified floodplains of coastal or riverine areas.


For more information on flood maps, read our article Flood Zoning For Dummies.

Smart Way To Value Commercial Real Estate, New Orleans LA

The most popular method of appraising commercial real estate is not the most accurate. Usually, we compare past sales of property and apply the price per square foot, but this is valid only if all the properties compared are homogeneous, which is never the situation. This article examines three common methods of valuing commercial real estate and explains which method is best.

Valuing Commercial Property With a Sales Approach

Method 3 Sales Approach, New Orleans LA

The most common method of valuing commercial property is the least accurate, because it only works if all properties have the same characteristics. Called the Sales Approach, it requires gathering the sales price of nearby comparable property, then making adjustments for different traits. This leads to inaccuracy, since the unique quality of real estate is that location can contribute greatly to how a property is used which determines what its value might be, and no two properties can occupy the same location. Other characteristics such as floor plan, parking, zoning, ingress and egress can also contribute greatly to value.

Valuing Commercial Property With a Cost Approach

Method 2 Cost Approach, New Orleans LA

Sometimes, owners value real estate based on what they paid for it, or what someone last offered for the property, or the cost to build a new building. These valuation methods are always wrong. In reality, the market value has little to do with the cost of property, and an offer made by one buyer does not mean a different buyer would value the property at the same price. The market value is the price a property would bring in an open and competitive market, with a willing buyer and seller knowledgeable about the property condition. The cost approach only works when you have the time and financing plus a reliable contractor to build an identical structure on identical property.

Valuing Commercial Property With an Income Approach

method 1 income approach, New Orleans LA

Whether you own stocks or bonds or real estate, the best method of valuing an asset is calculating the present value of all future cash flows. The underlying principal is that a dollar one year from now is worth less than one dollar today, because you could invest that dollar today at some interest rate which will grow in one year to a value of more than one dollar.

present value future cash flows, new orleans LA

Here is the math:

discount present value formula, new orleans LA

Let’s put this information to work and say a property delivers $10,000 annually in cash flow after taxes. The current value is the sum of future cash flows. You calculate each year’s cash flow, discounted back at an interest rate you could earn on other investments. Let’s assume 7 years at a 5% interest rate and change the n value to match the number of years in the future.

YEARINCOMECURRENT VALUE
1$10,000$9,523
2$10,000$9,070
3$10,000$8,638
4$10,000$8,227
5$10,000$7,835
6$10,000$7,462
7$10,000$7,106
TOTAL $57,861

Summary

In summary, $57,861 today is the same as $10,000 for 7 years, assuming 5% interest rates. Therefore, if a property had a 7 year lease that produced income of $10,000 annually, the current value of that lease income alone would have a value of $57,861.

Can Opportunity Arise from Tragedy?

Louisiana Commercial Realty | Commercial Real Estate Experts

Unless you go back to the 1970s, New Orleans East has never been an economic driver for the area. Even though it is the largest land area in New Orleans, if you ranked all the cities over 50,000 population by income per capita, the East would rank not in the bottom 10 percent but in the bottom ten. The closest city comparable to its economy is Flint, Michigan.

There is an opportunity, however, discovered in a research report by Louisiana Commercial Realty which concludes there is a real need for grocery stores, sporting goods stores and restaurants in the East.

Using the latest technology to determine consumer spending which measures demand, then matching demand with supply, measured by sales figures from the 1,300 businesses already in the East, the research found what is called the Marketplace Gap. This is the amount of money flowing out of the area because there are not enough businesses to satisfy demand.

esri | Retail MarketPlace Profile, New Orleans LA report by Louisiana Commercial Realty

For example, businesses in New Orleans East sell $53 million of groceries annually; however, residents of the East spend $82 million annually, with $29 million leaving the area. That means there is a real need for a grocery store in the East, and forecasted sales would be at least $29 million. Businesses just have to find a way to fill the void and offer products that consumers are already buying elsewhere.


75,000 Residents In the East Buy Lots of Things

The East has a population of 75,969 with 56,089 adults in 27,142 households with a median annual income of $33,431. Where they spend their money can now be measured scientifically, by an calculation called the Market Potential Index. If the number exceeds 100, it means that a good or service is purchased more than average. The Retail Market Potential Analysis shows the number of adults purchasing specific products; for example, the index of 122 for buying cigarettes at a convenience store the last 30 days means that behavior occurs 22% more than normal, which means there is more demand, but there are only 7,488 adults making that purchase. Businesses coming into the area need a higher number of buyers, such as these purchases:

• 33,709 shopped at a convenience store the last 6 months.
• 20,807 purchased a cell phone the last year.
• 40,617 drank bottled water.
• 10,784 bought costume jewelry, but 10,697 bought fine jewelry.

esri | Retail Market Potential, New Orleans LA
Retail Market Potential Analysis

When investgated, Louisiana Commercial Realty found that residents of the East are 32% more likely to buy an Android smartphone and 37% less likely to buy an iPhone. They are big into fast food, with 23,000 visiting a fast food restaurant more than 9 times per month.

• 31,213 attended a movie even though no movie theater exists in New Orleans East.
• 21,112 dined out.
• 7,244 gambled at a casino.
• 39,809 visited a doctor and 27,274 purchased vitamins.
• 49,573 read an electronic or printed magazine.
• Of beef, chicken, turkey, and fish, 18,122 adults purchased beef at the grocery the last 6 months.
• 50,222 spent money at a fast food restaurant the last 6 months, and 40,000 visited a family or steakhouse.
• 10,273 traveled outside the US the last 3 years.
• 18,000 have homeowner’s insurance and only 8,988 have auto insurance.


75,000 Residents in the East Spend Hundreds of Millions

The Retail Goods and Services Expenditures Analysis shows how much money was spent, which can be used to determine market size for new businesses moving to the East.

esri | Retail Goods and Services Expenditures, New Orleans LA

• $138,595,522 was spent on food, with $82,390,590 spent on food at home and $56,204,932 spent dining out.
• $16,503,337 spent on cable and satellite television.
• $3,210,066 spent on membership fees for clubs.
• $10,044,806 spent on furniture and $5,562,838 spent on appliances.
• $7,639,413 spent on child care.
• $3,210,066 spent on club memberships.


What Businesses Are located In New Orleans East, Louisiana report by Louisiana Commercial Realty

Retail, Scientific & Government Are Almost 40%

Of Businesses In The East

There are approximately 1,300 businesses employing 17,000 people in New Orleans East, and the largest sector is retail where 2,488 people are employed. Professional and scientific occupations are the next highest category with 2,351 employees (14% of total), followed by 1,989 government jobs (11%), and hotel, warehousing and health care the remaining employment sectors.

Occupations BY NAICS Category, New Orleans LA

Over 50% of businesses located in New Orleans East have revenues under $1,000,000, with 34% having revenues under $500,000. This creates an opportunity for government assistance to educate small business owners on skills to improve their operations, such as marketing, social media, accounting, banking and human resources. There are 36 businesses with revenues exceeding $5,000,000 so an opportunity exists for the 256 businesses with revenues under $1,000,000 to provide services to these larger businesses, offering reduced transportation costs and a higher level of service.

New Orleans East Businesses By Annual Revenue, Louisiana

Over Half Of Businesses Have Revenues Under $1,000,000

60% of businesses have under 9 employees, with the largest size of less than 4 employees amounting to 29% of all businesses.

New Orleans East Businesses By Employee Size, Louisiana

Most Businesses In The East Are Family Owned


Nearby Universities Are a Competitive Advantage

New Orleans East is close to three Universities and Lakefront Airport. This offers an opportunity to partner with universities on housing and student activities.

Enrollment at Nearby Universities:

new orleans east universities

Over 100,000 People Drive Through New Orleans East Every Day

The Louisiana Department of Transportation shows the I-10 traffic at the Crowder Boulevard interchange in New Orleans East averages 125,000 cars per day. This equals the traffic at the CBD Poydras Street interchange, and is 80% of the traffic at Causeway Boulevard and Clearview Parkway.

New Orleans Transportation, Louisiana

What Do New Orleans East Residents Believe?

The Lifestyle Tapestry Analysis utilizes leading-edge technology of data mining to look beyond typical demographics of age, income and education level and drill down to the socioeconomic quality of the neighborhood and what residents believe is important in their life. The Tapestry Analysis recognizes that our country is diversified and uses socioeconomic and geodemographic data to organize neighborhoods into 14 LifeMode Groups and then into 67 Market Segments, which help businesses determine optimum locations for success, more efficient advertising and fly-off-the-shelf inventory that appeals to what consumers in the neighborhood want.

Top Ten Tapestry Segments Site vs. U.S., New Orleans LA

Tapestry Analysis Shows What People Believe Is Important

New Orleans East Tapestry is called Family Foundations, which encompasses 27% of the population compared to 1% normally in the U.S. Members belonging to this Tapestry Segment believe family and faith are most important, and have these traits:

• It is common for older children to continue to live at home.
• Work in health care or government.
• Style is important, and purchases important to them include smartphones and clothing, especially for children.
• Shop at Kmart, Sam’s and Dollar Stores.
• Own 3-4 televisions and use the Internet for entertainment.
• Read magazines.
• Live mostly in New Orleans, Houston, Birmingham and Atlanta.

Louisiana Commercial Realty's Summary and Recommendations

Taking into account the needs of the 75,000 people living in New Orleans East and the 1,300 businesses in the area, there is sufficient demand for these businesses to enter the market and be successful:

Actionable Items

Here are a few actionable ideas that can bring about immediate improvement:

  1. Organize leaders that can bring resources to the area, including:
    • Hotels and restaurants in CBD.
    • Bankers.
    • Churches.
    • Mayor and Governor.
    • Senate, House and committee members.
  2. Bring rapid, frequent direct bus service from a staging area such as Walmart or Lowes to the CBD where residents work.
  3. Offer emergency daycare so residents don’t miss work due to child care.
  4. Utilize existing railroad to provide transportation to/from work in CBD.
  5. Organize micro-finance startups for residents to open new businesses in the area.

 

DOLLAR IN MASK
Louisiana Commercial Realty LLC, New Orleans LA picture for Cap Rate page

Money is made in commercial real estate by having the vision to create value where none existed before. Since commercial property prices are not transparent like stocks quoted at the bottom of your screen TV, the person who accurately determines value is the one who comes out ahead. Smart commercial real estate investors use a tool called the Capitalization Rate, or Cap Rate, and this article shares the basics and how you can use it to your advantage.

Whether you are investing in stocks or bonds or real estate or certificates of deposit, you do so to realize a greater value in the future, which is determined by two inputs: cash flow and appreciation. With stocks, you might get a dividend and hopefully capital gain, and with CD's you get income and no gain- just your principal back, and with bonds you get interest, or cash flow, and principal back at maturity and maybe a gain or loss if the value of the bond trades higher or lower before maturity. With commercial real estate, you also get rental income and maybe appreciation when you sell.

The smart way to value all of these investments is to calculate the present value of the cash flows. That is, what you would pay today for the future income generated by the investment. If you expect to receive $100 one year from now, how much would you pay for that investment today? First, you have to know your opportunity cost, or how much interest you would earn on your next best opportunity.

Let's say you could earn 3% in a CD for one year, then comparing that to an alternative investment for one year that would pay $100, you would divide the $100 by one plus the interest rate (1 +3%), or 1.03, which is the same as $100/1.03 which equals $97.08. Therefore, you would pay $97.08 today for $100 in one year. 

To value commercial real estate, you use a variation of the same principal. You start with the calculation of the Net Operating Income, which is Gross Income less Operating Expenses, including vacancy and credit losses but not depreciation. You determine value for commercial real estate by dividing the Net Operating Income by the Cap Rate, which can vary by region and by category of real estate, and below is a chart showing the history of average Cap Rates.

The chart shows Cap Rates average 5.4 percent. The way you use this is the following: divide your Net Operating Income by the Cap Rate, and the result is the value. Let's say you have a commercial property that produces $1,000,000 in Net Operating Income, and you then divide that by the Cap Rate: ($1,000,000/5.4%=$18,518,518). Therefore, you would pay $18,518,518 for the property. This assumes no increase in value due to appreciation, but you use the same strategy to calculate an additional appreciation (as an investor though, you don't pay other people for appreciation which you create).  A small change in Cap Rate makes a big difference in value, so this tool is important in valuing commercial real estate.


For more information on valuing commercial real estate, you can get workshops on Commercial Real Estate Financial Analysis at CCIM.

One of the first challenges in opening a business is to find the right location, and the most likely concerns about the location are traffic count, visibility, access and nearby consumer spending patterns. However, one thing that should be high on your to-do list should be to check out the zoning and permitted uses. If you are considering opening a restaurant on Magazine Street, read this first.

zoning permitted uses table, New Orleans LA

For example, let's say you want to open a restaurant on Magazine Street in New Orleans; should be a no-brainer, right? There are lots of restaurants already on Magazine Street and the affluent residents have a propensity to dine out often, making it a perfect location. Almost the entire Magazine Street is zoned by New Orleans Planning Department as HU-B1, shown in orange on the map above. This zoning category allows restaurants as a permitted use. Everything is a go, right? Not so fast.

Overlay Districts

Magazine Street Permitted Conditional Uses HU-B1, New Orleans LA

If you thoroughly research the zoning, you will find permitted uses for each zoning category, as shown in the table above; however, Magazine Street has two "Overlay Districts", which are additional restrictions to a permitted use that require special controls in certain areas of New Orleans that have a special character. One overlay is called CPC Character Preservation Corridor Design Overlay District, and the other is called Magazine Street Use Restriction Overlay District.

The most restrictive is the Magazine Street Overlay which requires approval for a conditional use for any standard restaurant, subject to the New Orleans Comprehensive Zoning Ordinance section 18.20, which requires:

  1. For outdoor areas: show how you will control alcoholic beverage consumption on-premises.
  2. Provide exterior security cameras.
  3. Submit a summary of the location of places of worship, educational facilities, and parks and playgrounds within three-hundred (300) feet.
  4. Submit a noise abatement plan, to be reviewed by the Director of Safety and Permits, and all other relevant City agencies.
  5. The holding bar, an area of a restaurant where alcoholic beverages are prepared and served at the bar, can be no larger than 15% of the floor area, or 300 square feet.
  6. Hours of operation should be:
    1. Sunday thru Wednesday: from 6:00 am to 10:00 pm.
    2. Thursday thru Saturday: from 6:00 am to 12:00 am (midnight).

Approval For Conditional Use Process

Getting approval for a conditional use requires a city council vote plus a detailed 50-100 page report and approval by the planning department, plus a public meeting of neighborhood homeowners within 300 feet. And once approved, an ordinance must be drafted by the city attorney, then a mandatory 21 day waiting period, then the mayor has to sign the ordinance. Then you have to submit drawings and plans to the New Orleans Planning Department who has to approve the plans and then the Clerk of Court records the plans at the Office of Conveyance. Then you can apply for the required building permits. One drawback is that the city planning commission only meets every two weeks and the city council only meets every two weeks, and each has a different schedule. The result is that the conditional use approval process usually takes about 6 months, and that is if there are no hiccups.

Developments like this can be done, and often this barrier to entry will discourage many. The end result can be a lack of competition. Restauranteurs and developers just need to factor in the lost time and opportunity cost, along with additional interest expense on funding, to determine if projects are feasible and how the zoning can affect the rate of return on your investment.

Starting a business in a new location often means you need to make some changes in the layout so the space is efficient for your business, so you will need two things for a successful project: first, a good contractor and, second, a building permit from the City. This article details the steps in obtaining a permit and why some can be issued quickly and others may take years.

Building Permit ABC's

new orleans building permit

A building permit is meant to protect the City, neighbors and the neighborhood by ensuring compliance with building codes. Just ask Joe Bruno. You need a permit for any repair that changes the structure or use, but there are different requirements for minor changes versus changes over 50% of the assessed value. The only times you do not need a permit involves simple repairs, such as:

  1. Repairing flooring. 
  2. Removing aluminum siding.
  3. Interior painting.
  4. Roofing or gutters
  5. Fences

How To Obtain Your Building Permit

Building permits are issued by the Department of Safety & Permits at City Hall, and while the application can be filed online, your contractor has to make the application.

Here is the information you will need to file for a building permit:

  1. Municipal address of the property
  2. Market value of work to be done (even if you’re doing the work yourself)
  3. Owner’s name, address and telephone number
  4. Architect / Contractor name, address and telephone number (where applicable)
  5. Recorded Act of Sale, if the property has recently changed ownership
  6. Detailed description of work to be performed
  7. Plot plan reflecting all dimensions of the lot and all structures, setbacks to property lines and the location and dimensions of off-street parking spaces. If you are building an addition the square footage of the existing structure and the proposed addition are also required.
  8. Complete plans, stamped with live seals from a Louisiana licensed Architect or Civil Engineer, are required for all new construction, additions, and structural renovations.
  9. Previous/current and proposed use of the structure
  10. Number of floors or levels in the structure
  11. Certificate of Appropriateness, if the property is within a local historic district or a designated landmark
  12. Benchmark Certificate for all new construction or projects where work exceeds 50% of the value of the existing building
  13. Copy of a current Certificate of Registration for your contractor as well as the company name and license number.
  14. Check or money order payable to the City of New Orleans.

That is just for a Building Permit. These are the other permits you will need:

  1. Electrical: if you replace any electrical fixture other than changing light bulbs.
  2. Mechanical: Any repair of the air conditioning system, gas lines or elevators.
  3. Plumbing: Any water pipes replaced or remove any plumbing fixture. Only an Orleans Parish master plumber may apply for this permit.

If you remove paint for a building, first you must notify the Building Division. The penalty for renovating before getting a permit is a fine of twice the building permit price of around $1,000, plus the normal fee.

You may also need approval from the Historic Districts Landmark Commission, The Vieux Carre Commission. If the renovation exceeds 50% of the value of the structure, here are the estimated costs for some of the items needed just to file a permit:

  1. Plot plan showing the lot and dimensions- $2,500 to $5,000
  2. Architectural plans- $10,000 to $25,000
  3. Benchmark certificate-a survey within the last 6 months. $2,000 to $5,000
  4. Foundation drawings-stamped by an architect or engineer. $2,500 to $5,000
  5. Contract for renovation stating the value. Free provided by contractor.

Keep Your Permit In Mind When Negotiating Your Lease

Permits for simple building renovations can take a few weeks but renovations valued at over 50% of the assessed value can take months and even years. Here is one example where a future tenant signed a lease and started the process November 3, 2021 and received the Certificate of Occupancy 18 months later on March 21, 2023. The moral of the story is: when you are negotiating a lease, make sure your lease payments to the landlord start when you receive your certificate of occupancy.


For more information on finding the perfect space for a new location, see our blog at louisianacommercialrealty.com/blog

percent loans denied by race in 2018

African Americans in the New Orleans/Metairie area were denied as much as 85% more loans when compared to white applicants in the same income bracket, according to research by commercial broker Louisiana Commercial Realty. Data from the Consumer Financial Protection Bureau show that 24,571 loans for New Orleans home mortgages were made totaling $5.3 billion, but African Americans were denied loans totaling $303 million, or approximately 25% of applications, compared to a denial rate of 12% for white applicants.

Reasons For Loan Denial

There are many reasons for loan denial. For home purchase applications, lenders cite low collateral as the most common denial reason. For refinance applications, lenders cite the debt-to-income ratio, insufficient cash, unverifiable information, and incomplete applications as the most common denial reasons. However, these common reasons would not fully explain why the denial rate was higher across the board for any income bracket, even those with income above the median average. Louisiana Commercial Realty researched the data as part of their efforts to revitalize New Orleans East, and commercial broker Robert Hand explains:

"My firm has focused on bringing business to New Orleans East for the last 10 years, so we were curious as to why people were constantly unable to obtain financing to start new businesses even though entrepreneurs had great ideas and the businesses were feasible. When we examined the mortgage numbers, we found that at every level of income, African Americans were denied a much higher percent of loans than whites in New Orleans and Metairie, and also denied loans at a higher rate than the national average."

The study examined 5 income brackets relative to the median income in the New Orleans and Metairie area:

Results show, even in the income bracket 100% to 119% of the New Orleans average, that denial rates were 24% for African Americans, but only 13% for whites. Percentage-wise, that's an 85% difference and totals $303 million. Since the average loan application was $155,000, that would have denied an additional 1,954 home purchases.

Where Mortgage Information Comes From

The mortgage data is available from the Consumer Finance Protection Bureau, which was established in 2010 under the Dodd-Frank Act and is an independent bureau within the Federal Reserve System, with a $500 million budget financed by up to 12% of Federal Reserve revenues. The Bureau collects the data with the power enabled by the Home Mortgage Disclosure Act, enacted by Congress in 1975 and implemented by Regulation C which requires financial institutions to maintain, report, and publicly disclose loan-level information about mortgages. These data help show whether lenders are serving the housing needs of their communities and designed to shed light on lending patterns that could be discriminatory.


For more information on the New Orleans commercial real estate market, read our other articles:

What Businesses Will Thrive In New Orleans East

Tax Incentives Will Revitalize New Orleans East

 

 

Most successful retailers looking to start a business have an uncanny instinct for a good location because nearby residents will make their business flourish. But there is a new wave of retailers that back up their gut instinct with the latest technology and utilize a scientific approach with hard data to determine the perfect location for a new business. This article explores how they do it.

Using Multiple Demographics

Let’s look at how the owner of a simple business like a laundromat determined what location would be best for them. The business owner first researched who a typical customer is for a laundromat: someone who rents rather than owns a home and has a minimum wage income. We utilized the CCIM Site To Do Business to map all the neighborhoods in New Orleans and identify both criteria: over 60% of the households rent rather than own, and have an income between $20,000 and $35,000. The map shows how the search identified the large areas shown in blue and narrowed the areas down into Block Groups, which are usually between 600 and 3,000 people. Block Groups are submarkets of Census Tracts which are submarkets of Zip Codes, and are used to pinpoint a more precise retail location.

Don't Forget About The Future

We can also use the data to compare a short list of locations to determine current population density and population growth in the future. Great locations pull from nearby residents with a propensity to buy your goods; however, having a dense population can make up for a lack of demand. Population growth should be a key factor in site selection, and the data is readily available.

Consumer Spending Data

ESRI is a research firm that collects data on consumer spending which can show not only spending in various categories but can also drill down into specific items that may be triggers for a business. Old school site selection was as simple as locating near a McDonald's because they spent the money to research the best locations. So just be near a McDonald's. Today, a small business can get the same insightful data from ESRI demographics and make decisions just like big corporations.

The map easily shows the annual coin-op spending per household by block groups with the darker circles spending the most per household. Also depicted is the block group total spending with the larger circles budgeting over $120,000,000 annually.

Summary

The best retail locations are not always the wealthiest areas. Dollar General opened 18,000 stores growing to 30 billion in revenues with locations in modest income areas. Get to know your customers and what they need, then develop your own criteria for who your best customer is. Look for areas that have a dense population that meet that criteria but also are growing. There is a lot of data available which can reduce your risk in selecting the perfect location for your business, and much of it can be obtained for free. Just ask a commercial real estate broker with the CCIM designation and access to the ESRI data to help.


For more information on starting a business, read our blog on "What To Know Before Signing a Lease".

Recently Bed Bath & Beyond announced bankruptcy and are closing all their stores. We will miss the 20% off coupons, but you had to go. Going out of business is a normal part of a free enterprise system that rewards creativity, financial sophistication and the ability to listen to your customers. The penalty for free market failure is death and Bed Bath & Beyond was fatally mismanaged. They took on mountains of debt but the stake through the heart was ignoring the obvious shift in how their customers wanted to do business. While BBY was sitting on their hands, Amazon was inventing one-button shopping and prime delivery, Walmart developed a website that sold products they did not have to inventory and Target ramped up same day delivery. Customers voted with their dollars and BBY has to go.

How Nature's Laws Apply To Business

Businesses in a capitalistic, free market economy within a democratic political system can thrive and produce amazing goods and services because of the "invisible hand", coined by Adam Smith, which states an individual's self-interest causes them to work harder and be more creative and produce a better product at a lower cost so that they reap the profits. A modicum of greed really is good. Consumers benefit and the interests of society are advanced.

Failure Stops The Misallocation of Resources

schlitz, New Orleans LA

But what happens to those businesses that can't adapt to new demands by consumers, that can't evolve and can't adopt new technology?

Like the wildebeests who are unable to outrun the lion, they must die to strengthen the species. We should cheer on their death and wish for fast failures which provide more time for success.

Failures stop the destruction of scarce resources and allow the lifeblood of any business, cash-flow, to be redeployed to a higher and better use. Failure and death stops the misallocation of time and money.

It can happen to big businesses and small. For example, in 1902, Schlitz was the largest selling beer, but couldn't stay big enough to stop an acquisition by Stroh and later Pabst.

eastern airlines, New Orleans LA

Eastern was once one of the big four airlines but ran itself into the ground financially by paying 17% to borrow money and was crushed by labor disputes. It was liquidated in 1991.

Local Brands We Fondly Miss

We feel sad for the businesses no longer here but are still part of our history and fond memories, whether the business was gobbled up because it could not grow to crush its competition, or whether it fell by the wayside because it could not keep up with its customers. There are many examples of both:

time saver stores, New Orleans LA

TimeSaver stores were ubiquitous, but most of their profits were from gas and cigarettes and in the 1980's when the economy changed and gas price margins shrank, the name disappeared when they failed to diversify.

Seafood City once owned the crawfish market and their jingle was on every New Orleanian's lips. Although the commercials were hokey, they were the best word-of-mouth advertising any business would crave. The big store at 1826 North Broad closed in 1994.

HOLMES, New Orleans LA

The list of local brands no longer around extends to Ponchartrain Beach, McKenzie's, Kreegers, Kolbs, K&B, D.H. Holmes, Krauss and Gus Mayer. They were all great businesses. They just could not evolve and adapt. They got old and sick. Then they died. We miss them fondly, but we now vote with our dollars for their successors and competitors who serve us better.

brands

For more information on economics and commercial real estate, pick from over 150 articles on our blog at Louisiana Commercial Realty.

 

This blog reviews the sale trends the last 3 years in the 4 major sectors of New Orleans commercial real estate, with an explanation of why some sector prices have remained flat while other sectors have seen price increases.

Industrial Sales

prices of industrial sales

The number of industrial listings for sale has declined the last 3 years from 106 totaling 3.5 million square feet to 54 totaling 1.4 million square feet. There has been an average of 3 sales per month at $70/SF on the market for 316 days and 30,000 SF in size. Prices defied the law of economics since supply declined 50% but average sale prices have not increased. The reason is that while square footage declined, so did demand which went to areas outside New Orleans, missing out on the nationwide explosion in warehouse space driven by Amazon and the ecommerce industry.

Office Sales

sale prices of office sector in new orleans

The number of office listings for sale has declined the last 3 years from 135 totaling 1.2 million square feet for sale to 103 totaling 1.1 million square feet, but ranging as low as 700,000 square feet to a high of 1.47 million square feet. There have been an average of 7 sales per month at $133/SF and on the market for 282 days. The average sale size was 10,600 square feet.

Retail Sales

Retail sale listings declined from 174 totaling 1.9 million square feet to 134 listings totaling 1.1 million square feet. The average size was 10,000 SF, on the market 286 days and sold only 6% below the list price. There have been an average of 7 sale transactions per month at $167/SF, but prices have ranged from $47/SF to $200/SF, with an October 2022 outlier peaking with 7 transactions averaging $674/SF. 

Shopping Center Sales

Only 25% of shopping center sale prices are reported, so substituting the list price, the average price was $123/SF for the 17 shopping centers total sold the last 3 years. Listings are scarce, with a monthly high of 15 on the market to a low count of 7 listings available monthly  during the summer of 2022. Total square footage averaged 280,000 with the average size shopping center at 26,000 square feet and taking an average of 449 days to sell. 

There is no training from LREC or NOMAR on how to use technology to comply with email requirements, but here is how to have your required broker name, city & state and license jurisdiction automatically added to the bottom of every email.

For Microsoft Outlook:

email signature

 

1. Go to File.

2. Then select Options.

 

 

 

 

 

 

 

 

 

 

3. Then select Mail.

4. Then Signatures.

signatures

 

5. Then under the Email Signature tab select the New button.

6. Type in the name for your New Signature.

 

 

 

edit signature

 

7. Highlight Select Signature To Edit.

8. Type in signature information under Edit Signature box.

9. Click OK then OK.

 

 

 

Now every email you send will automatically add in the required information.

For IPhone:

  1. Settings
  2. Mail, Contacts, Calendar
  3. Signature
  4. Select Per Account
  5. Type in your information
  6. Select top left button "Mail" then "Back", and your information is saved.

From the LREC Rules and Regulations:

All advertising must contain:

All emails must include on the first or last page:

All website advertising must include on every page:

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ccim logoThe Certified Commercial Investment Member (CCIM) designation is the premier recognition earned by the top 10 % of commercial real estate agents. With 13,000 members in 55 chapters, both in the United States and in 30 countries, the organization provides training in the most complex strategies of commercial real estate. The organization is the PhD of real estate, taking several years to complete and culminating in a 6 hour final exam on every aspect of commercial real estate.

CCIM recently interviewed Louisiana Commercial Realty on the state of the New Orleans commercial market in 2023:

CCIM:

The New Orleans/Louisiana area has seen its share of difficulties in the past few decades—from natural disasters to broader economic troubles. What is the state of the commercial real estate market in early 2023?

Louisiana Commercial Realty broker Robert Hand:

Actually, the New Orleans commercial real estate market has been evolving since the 1970’s. When the oil economy was strong back in the 60’s and 70’s, there were lots of new jobs in the oil industry which created demand for office space over the next decade. In the 1980's, downtown New Orleans saw vibrant new construction of Class A office towers and towns near the Gulf of Mexico witnessed the explosion of industrial space. Our biggest building was One Shell Square, a 51 story, 700 foot tall, office tower.

one shell square

Then the oil industry started regionalizing and New Orleans downsized while Houston upsized. There hasn’t been a large office tower built since then in New Orleans and even today we have high vacancy rates in Class A office towers. The smart thing city leaders did in the 1980’s was build a large convention center so we were able to compete with tourism based economies like Las Vegas. Basically, we swapped $150,000 petroleum engineers for $35,000 waiters and waitresses, but today we are one of the smaller markets that can feed, board and entertain 25,000 dentists having a national convention. Even though the tourism market has ebbed and flowed, we have the nation’s best restaurants and the perfect work force for tourism, so the hotel and restaurant market has been vibrant despite the Covid hiccup.

CCIM:

You’ve handled deals in all major sectors of commercial real estate: Office leasing, Shopping Center, Apartment and Hotel sales, Industrial sales and Retail leasing. What’s the key to staying flexible and agile enough to be active in industrial, retail, multifamily, and so on?

Louisiana Commercial Realty broker Robert Hand:

You have to be an expert at what drives each market and know what your clients want. You have to be creative. We negotiated one of the largest office leases a while back but the tenant wasn’t an office user. They were a hotel. We figured out how to market 3 floors of vacant office space in a soft market to a hotel franchisee. And last year, one of my competitors, SRSA, figured out how to transition a boring shopping center’s vacant Sears store into a major hospital in a $50 million dollar investment.

CCIM:

Your firm emphasizes its use of new technology and data as a way to gain a competitive edge. How important is it for your business to stay on the cutting edge of tech?

Louisiana Commercial Realty broker Robert Hand:

It is vital and I wish we would have caught on to it earlier. There is lots of technology out there for the real estate industry. Wal-Mart, Target and Amazon have it but not mom and pop businesses in small towns. That’s where CCIM can help. We can bring well-thought out analysis to small and mid-sized businesses so they make smarter real estate decisions, using the same technology that the big businesses have.

CCIM:

We heard about a property you handle in New Orleans. How did you leverage technology to help you in this transaction and what insights did you and your clients gain?

Louisiana Commercial Realty broker Robert Hand:

Every marketing plan and marketing presentation I do now has CCIM's demographic data jam-packed in it, and clients love the technology because it gives them valuable information they cannot find anywhere else. We can show them what businesses would be successful at any address. That is vital information and many property owners do not know that data exists and do not have access to it. But as a CCIM, we have access to the data that can help client sand tenants make smart real estate decisions.

We had one listing in New Orleans East, which is an unloved area of New Orleans, but there are 30,000 residents within 5 minutes and 60,000 residents within a 10 minute drive time. We used the CCIM database of consumer spending produced by research firm ESRI to show the property owner and also potential tenants that residents spend $20 million annually on food but food businesses only sell $14 million, so $6 million is purchased outside the area by residents. There's more: $5 million is spent on sporting goods by residents but there is no sporting goods store. There's more: $3.7 million is spent on jewelry but there is no jewelry store. From that demographic insight, we know what potential tenants to target and businesses know what the market share would be and can more accurately forecast sales.

CCIM:

With such a broad scope of work across property sectors and a long successful resume in the industry, what would be your advice to other CRE pros looking to grow their business this year?

Louisiana Commercial Realty broker Robert Hand:

Be an expert and help your clients by educating them on the market and how to make smart real estate decisions.

CCIM:

On a personal note, your bio mentions a gig you had selling dictionaries door-to-door to pay your way through college. What lessons did you learn back then that you still use today? What would you tell young folks curious about commercial real estate to prepare them for a career in this field?

Louisiana Commercial Realty broker Robert Hand:

Selling dictionaries door-to-door paid for my college but required long hours and taught us to work smart. We all wanted to get that award for working 100 hours a week. I got the award but after a week, I wanted to work smarter so I tried using referrals. I would ask my prospect if they knew the neighbor across the street. They would always say yes but we don’t talk much. I would share the names of the families I had sold to. I would say, well the Smiths across the street bought the full dictionary set, the Thomases next door bought the educational set, the Joneses at the corner bought the book on new math, and soon they got the idea that they might be missing out. Today, you can target certain industries and use media like LinkedIn to connect with people you can help. You have to work smarter. (more…)

Whether you rent office space in a Class A office tower, warehouse space to store inventory or retail space for your coffee shop, your lease probably includes terms that are not good for you but that you agreed to anyway. This article exposes common lease mistakes and explains that unless your lease language is clear on every detail, even small mistakes can be very costly.

CPI 1914 TO 2022

 Leases Tied To The Consumer Price Index

Your think inflation is high? We have been there before. The history of linking rent payments to inflation became strategic in the days of 1970’s high inflation when the OPEC oil embargo caused oil prices to skyrocket. Higher oil prices combined with the wage-price spiral to produce a surprising jump in inflation from 3.2% in 1972 to 11% in 1974. This caused landlords to realize that rental income did not retain its purchasing power, which is the economic theory that a dollar in the future should buy the same amount of goods as it does today. Today it is common practice for leases to include consumer price index (CPI) language to protect landlords, but the problem is that there are four consumer price indices and there are different ways to calculate each. Even sophisticated tenants and landlords depend on experts to advise them in lease negotiations.

Will The Real CPI Please Stand Up?

inflation and prices

Here is an example of the lease language used by $2.6 billion market cap Regus PLC  in 3,000 locations:

If this agreement is for a term of more than 12 months, the Provider will increase the monthly office fee on each anniversary of the start date. This increase will be by the local Consumer Price Index or such other broadly equivalent index where a consumer price index is not available locally.

This Regus lease language leaves lots of room for dispute because the consumer price index has several ways of being calculated. The CPI index is produced by the Bureau of Labor Statistics, under the United States Department of Labor and the four types of consumer price indices are:

All Urban Consumers (Current)-Consists of all urban households in Metropolitan Statistical Areas (MSAs) and in urban places of 2,500 inhabitants or more. Nonfarm consumers living in rural areas within MSAs are included, but the index excludes rural nonmetropolitan consumers and the military and the institutional population.

Urban Wage Earners and Clerical Workers (Current)-Consists of clerical workers, sales workers, protective and other service workers, laborers, or construction workers. More than one-half of the consumer income has to be earned from these occupations, and at least one of the members must be employed for 37 weeks or more in an eligible occupation.

All Urban Consumers (Chained)-The urban consumer population is deemed by many as a better measure of the general public because 90% of the country’s population lives in urban areas. Using chained CPI means the rate at which Social Security benefits tick up would be slower, because it reflects substitutions consumers would make in response to rising prices of certain items. It utilizes a basket of goods and services that are measured changes from month to month; much like a daisy chain. If the cost of a certain form of transportation goes up, people might switch to another kind and this kind of “substitution” is part of what is factored into chained CPI.

Average Price Data– Calculated for specific items such as, household fuel, motor fuel, and food items.  Average prices are best used to measure the price level in a particular month, not to measure price change over time.

The most common CPI Index is the All Urban Consumers Index, but it has two methods used to calculate the numbers: one uses a base period 1982-1984 as 100, and the other method uses a base period of 1967 as 100. Most leases make the mistake of not being clear about which index is used. In addition, the data can be seasonally adjusted or not seasonally adjusted (which is released faster).

consumer price index

 

Make Your Lease Clear On How The CPI Is Calculated

Here is another example; this language for a medical property that makes the CPI data source very clear:

Consumer Price Index: It is further understood and agreed by and between Lessor and Lessee that, commencing with the first day of the second year of lease, the monthly rental as set forth above will be adjusted upwards at the beginning of the second lease year, and every year thereafter until expiration or termination of the lease using the all urban consumers (CPl-U) United States City Average, All Items, (1967=100) published by the Bureau of Labor Statistics, United States Department of Labor (referred to as "Consumer Price Index").

Compound Your CPI Adjustments or Add Together?

YearCPIRent Annually
03.00%$100,000
13.00%$103,000
23.00%$106,090
33.00%$109,273
43.00%$112,551
53.00%$115,927

Always compound if you are the landlord and never compound if you are the tenant. When adjusting for the CPI, it makes a difference if you add the inflation rate for each year rather than multiply the rate by the previous year. Assume a 5 year lease renewal where the CPI was 3% each year for the previous 5 years. Some landlords multiply 5 years times 3% to get 15% for the increase. For a large property with rent income of $100,000 annually, the adjusted rent would be $115,000; however, if the lease is written so the CPI is compounded, meaning each new year is applied toward the previous year’s CPI, the result is rent of $115,927 in year 5. Your lease renewal should spell out how the CPI is calculated.

How CPI Affects Property Value

cpi adds property value

Our economy today is driven by a different wage/price spiral, due to Covid shortages because almost all of our goods are made in China so when they stopped manufacturing, the shortage caused inflation. Inflation hurts landlords and savers. Most leases build in a fixed rate adjustment in addition to a CPI adjustment because the challenge for landlords is that the CPI since 2000 has averaged 2.5% and 2.4% since 2010. Even 3.6% CPI increase the last 5 years doesn’t keep up with skyrocketing medical care increases.

One strategy that benefits landlords is to include lease language stating the rent adjusts based on the CPI or a fixed rate, whichever is higher. The 30 year table shows how a 4 percent increase versus a 3 percent increase in net rents annually can increase the value of property by 10 times the initial year lease income. Your lease should include language with adjustments based on the CPI but also compared to a fixed rate, whichever is higher. This example in the table shows, assuming current rent income of $100,000, if the higher CPI or a fixed rate difference was just 1 percent, that at an 8% cap rate adds $1,020,168 more market value to the property over a 30 year lifetime.

Summary

In conclusion, make sure your lease language details how your rent is adjusted. You can design your table data at the Bureau of Labor website and, if you need help, their phone number is shown on the data release. If you call the number on the press release, the analyst who produced the CPI report will answer any questions. If your property is in outlier data cities such as Detroit, Houston or New Orleans, you can even produce a local Consumer Price Index. Remember to make sure your lease is clear about what CPI is used, how it is calculated and whether you compound your rate, which is why many tenants and landlords hire an expert to advise them. Remember, lease mistakes can be costly.


Read our nationally published articles:

Using Technology To Make Better Real Estate Decisions

There are 22,544 real estate agent stories in the naked city. This is one of them. We've virtually hired James Franciscus to narrate the story and give insight to the Louisiana real estate industry, ranging from what city has the most agents to how long have most agents been licensed and how was the industry affected by Covid.

How Many Years Have You Been An Agent

map issuance year

The oldest living Louisiana real estate agent was licensed in 1950, and only 37 joined during the next 20 years. Licensing then took off, doubled in 1970, then tripled by 1971, just in time for the nastiest recession ever from 1973 to 1975 when OPEC made oil prices increase four-fold, unemployment rose from 4% to 9%, and mortgage rates rose from 7% to 18% the next 8 years.

mortgage rates since 1970

Covid Was Good For Real Estate Licensing

The first case of Covid was January 20, 2020, in Washington state, but real estate licensing in Louisiana skyrocketed by 6700 people, or 30 percent, during the next two years. Covid was good to real estate agent licensing. The Louisiana Real Estate Commission received $1.7 million from license fees, plus if you wanted to post your listings you had to join the National Association of Realtors, which Louisiana agents paid $1.3 million, and if you wanted to post commercial listings, you had to pay $720 to LACDB or MLS listing fees of $1,270 which included $59 to lobby politicians.

50 Agents in California Licensed in Louisiana

Louisiana real estate agents live all over the U.S., with 50 real estate agents in California to 138 agents in Florida, totaling 1,403 Louisiana licensed agents that do not live in Louisiana.

map agents by city rev

Louisiana Real Estate License Types

The 16,185 Louisiana licensees the Real Estate Commission calls salespeople are managed by 2,815 brokers in 238 branches. There are still 81 time share developers with Louisiana real estate licenses.

pie license type

Over 50 percent of Louisiana real estate licensees live in 3 cities: New Orleans, Baton Rouge and Metairie.

pie city agent count shadow bevel both 1.2

Last But Not Least: Which Firm Is The Biggest?

Latter & Blum is the biggest, of course. Real estate companies are called Supervisors by the Real Estate Commission, and Latter & Blum controls 7.8 percent of the market. The top 2 percent of real estate companies control 50 percent of the market.

pie top 10 supervisors3

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front 5501 crowder

Louisiana Commercial Realty was recently hired to bring a business to the vacating Family Dollar Store at 5501 Crowder Boulevard in New Orleans East, having worked for the last decade to promote and revitalize the area. Commercial broker Robert Hand explains:

"This property is the least expensive 14,000 square foot, good-looking, retail building anywhere from MSY airport to Slidell. The rent is only $12 per square foot for a stand alone structure, plus it offers 70,000 square feet of paved parking. There is opportunity for the right business, and we have utilized the latest technology to research what businesses will do well in this location."

Opening a Business Is An Expensive Gamble

The retail area on Crowder has lots of new tenants including Planet Fitness, Pizza Hut, Dollar General, Subway, Little Caesars, and the largest church in the South: Franklin Avenue Baptist Church. One of the criteria that businesses look for before they invest millions in opening a new location is population: businesses need to know if the neighborhood has enough spending power to make it feasible. Louisiana Commercial Realty provides businesses with that research, including how much nearby residents spend on goods the business sells.

Long gone are the days where a business opened up and hoped they would have customers, because it is very expensive to open a business. There are costs of lease payments, advertising, setting up inventory, plus permits and construction to convert the space into a layout that works. These costs can add up to millions, which makes it a big risk to open a business.

Louisiana Commercial Realty reduces the normal risk in a business trying to revitalize an area by providing a Retail Marketplace Profile, which uses the latest technology to determine consumer spending and retail sales, which determines the supply and demand, and allows a business to look for gaps in spending by consumers (demand) and sales by existing retailers (supply). From that data a business can determine the Leakage Factor which presents a snapshot of retail opportunity.

Retail Marketplace Profile Reduces Risk

Retail Marketplace Profile

The Leakage Factor is a measure of the relationship between supply and demand that ranges from +100 (total leakage of dollars) to -100 (total surplus). A positive value represents 'leakage' which means consumers are spending money on goods and services but not within the target area, resulting in dollars flowing outside the area.  A negative value represents a surplus of retail sales, which means consumers are drawn in from outside the trade area. Leakage presents an opportunity for a business to capture those dollars flowing outside the trade area, and the Retail Gap column in the table shows the difference between demand and supply which can be an estimate of annual sales for a business in this location.

When Louisiana Commercial Realty did the research they found within a 5 minute drive time for 5501 Crowder, that general merchandise stores sell $20 million annually but there is $35 million spent by consumers. That $15 million gap provides an opportunity for that type of business to operate from 5501 Crowder. Within a 10 minute drive time there is enough demand to support a fine jewelry store since $3.7 million is spent annually, and $10 million spent outside the area on sporting goods and musical instruments. The data show that these businesses located at 5501 Crowder will be very successful:

successful businesses identified in new orleans east

For more information on the Retail MarketPlace data, view the Methodology Statement.

Demographics Only Tell Half The Story

When we analyze demographics, usually we identify 3 areas within a 3, 5 and 10 mile radius from the target site, but this does not work in New Orleans because we have Lake Ponchartrain to the north and the Mississippi River to the south which biases that data. Instead, we utilize drive times, which is the time it takes to drive those distances. In the 5, 10 and 15 minute drive time map, the 5 minute drive time covers between the Industrial Canal and I-610 and above Almonaster Boulevard to the south. The 10 minute drive time extends into Gentilly Terrace to the west and Michoud to the east. The 15 minute drive time extends to include the French Quarter and Veterans Boulevard to Causeway.

income profile table

Summary

Within a 5 minute drive time, the 2022 New Orleans East population of 28,139 has an average household income of $53,864 and a median age of 32. In addition, 31% of households had income over $50,000 and 87% of the 11,914 housing units are occupied with 46% of households owning homes.

pie income

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the wildebeest must die

The beauty of a free market economy is that you can own a business, grow it and benefit from your work because capitalism allows ownership of property, but it's not like that in other countries. Some still remember how government in Cuba took over property overnight, from homes to casinos, that was never recovered. China and Russia have similar histories, but there is a downside of having a free market economy: owning a business does not guarantee it will survive.

Businesses Must Adapt

Recently, Covid brought misery to many businesses in our New Orleans tourism-based economy, but it also forced businesses to adapt, learning more about what their customers wanted and thinking outside the box to find a way to stay in business. For every restaurant that closed, there was another who treated staff like family who helped them keep the doors open. For example, the Winn-Dixie on Veterans blocked off part of their parking lot, not for customers, but for employees to get gas.

Restaurants learned to schedule work time according to when employees could promise to show up and work. Some restaurants shed paying for delivery since Uber took away profits, and developed their own delivery service. Other restaurants learned to prepare meals and have containers that kept foods hot during delivery. So the creative businesses must adapt to survive but the unimaginative, set-in-their-ways business fail, and fail they must so not to allocate resources inefficiently. And so was the Esplanade Mall in Kenner, Louisiana.

Esplanade Mall Was Sick Long Before It Died

esplanade mall

Esplanade Mall was sick long before it died. Mall owners failed to see a sea of change in demographics after Katrina. Back then, if you needed a roof repaired on your house, you couldn't get it done for months and months. There were not enough roofers to do the work.

Thank goodness we had help from Texas contractors who had the employees willing to do the work. I had contractors asking me to help them lease 20,000 square foot warehouses so they could have space for storage of roofing materials and for 20 roofers to sleep. "That's against code", I reminded them, but it was a clear example of what was happening.

Some of the workers who repaired your roof after Katrina were from Honduras who came here for a better life. They ended up living in Kenner which was the only place you could buy a house for $125,000. Kenner was affordable for the minimum wage residents we had. Thirty years later, we are still struggling to have enough affordable apartments for the minimum wage restaurant workers that drive our tourism economy.

The Job Of Mall Owners Is To Get Successful Tenants

dead stores

The Esplanade Mall was 20 years old by that time but there was a demographic shift of residents in Kenner, and the Esplanade Mall owners failed to see it and adapt. Anchor tenants then were DH Holmes, Godchaux's, Mervyn's and Macy's a year later. Over the next decade, Macy's, Mervyn's and Godchaux's filed bankruptcy, Holmes was bought out, and the Mall owners failed to see the change in consumer spending and buying power of nearby residents.

Mall owners should have brought in tenants that offered goods and services that residents wanted. But rather than research what people would buy, they brought in tenants that sold what they wanted to sell. The result is that Esplanade Mall had to die.

New Owner Brings New Life

This month the Esplanade Mall was purchased by Eddie Ni who has 20 years' experience with Windfall Group in Cleveland, Ohio, developing over 6 million square feet of commercial property. Eddie will convert Esplanade Mall into 800 apartments and new retailers. Nola.com asked Louisiana Commercial Realty broker Robert Hand about the $10 million purchase price financed by a $5.2 million loan from the seller:

"The good news for Kenner is that somebody has confidence enough to loan the money for this to happen," Hand said. "And ironically, the only person that had confidence is the person that didn't want the property anymore".

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3401 west esplanade office and retail building

This is a story about property and people but also protecting the income of a retiring couple. In 2010, Louisiana Commercial Realty was asked by a residential agent to help find a buyer for a 2 story commercial retail and office property in Metairie, near Lakeside Shopping Center. We marketed the property and advertised heavily, selling the property for $830,000. Then we helped the new owner lease two vacant spaces, one space to a nail salon and the other to a dentist. Recently, that new owner sold the building for $1.5 million to a working couple investing their retirement savings in hopes of having rental income that would last their lifetime.  The income would come from the nail salon and dentist who are still paying rent to this 3rd owner, but missing is the now vacant 2nd floor space, so the retirement income is $82,000 less than expected. The owner reached out to Louisiana Commercial Realty, finding us online and looking to benefit from our higher level of services to property owners. Here is how we started working on the project.

Step 1-Leasing Office Space

floor plan

The first step in leasing office space is to put thought into the property to determine what the competitive advantage is. This means determining the strength of the property, which sometimes could be location but also could be the layout of the floor space, or parking, or proximity to highways, or humidity and temperature control, but not price-don't make price the only thing that is attractive.

Looking at this vacant space floor plan, the 13 offices are unusual in today's hyper-cyber work force. Long gone are the private offices because in demand today are open working areas where teams can collaborate and bosses can take a big conference room, put in 3 picnic tables, and have 20 employees working in the space previously for one. So this private office layout is antiquated, but there are industries that still prefer privacy. These 13 offices allow for 7 senior workers and 6 support staff, which is preferred by: attorneys, accountants, insurance and financial advisors. In this 1st step, we prepare a 10 page Marketing Plan which identifies these target markets, how we are going to reach them, and how we can reduce the normal 6 months time of lost rental income.

Take the first target market: attorneys, who we believe don't read their emails, so we snail-mail them a letter. There are 2,300 attorneys in New Orleans so we culled the list down to 600 for those with 7 or less partners and mailed each a letter and followed up with a phone call to let them know the space is available. We execute the same process for all four target markets. We don't know any other commercial real estate firm in the state that offers this accelerated process to their clients.

Step 2-What Is The Competition

There are 201 spaces for lease in Metairie that compete for tenants for this vacant space, and the map shows there are 12 properties near Causeway and West Esplanade, three pockets of 4 vacant properties near Veterans and I-10 and 2 available properties on West Napoleon.

listed for lease

 

Step 3-How To Price Vacant Space For Lease

A decision on pricing must include an analysis of the market which is every nearby property that a tenant might consider when shopping for commercial property. The most difficult thing for owners to do is put themself in the tenant's shoes. Everyone thinks their kid is the smartest. As advisors, we provide valuable information to help our clients make better decisions, so in step 3 we survey the market and determine every single property that someone might also consider, then condense that data into something easily understandable. The result is a chart of the frequency of rent rates:

Frequency of Rent Rates

The data show that the lowest rents bundle at $15.80 to $16.60 per square foot, the middle group is around $19 per square foot and the top of the range is $23 to $24 per square foot.

Step 4-What Is The Metairie Lease Market

In the Metairie Office market, as of December 2022, there are 255 properties totaling 957,000 square feet for sale at $149 per square foot and for lease at $20.22 per square foot and have been on the market an average of 250 days.

 

market statistics metairie

 

Of the 255 properties, 243 are for lease totaling 884,000 square feet and only 12 are for sale. The month of December saw 8 of those 243 spaces leased at a 5 percent discount or $19 per square foot.

Days On The Market Table

Step 5-Commercial Databases

You can reach tenants 90% of the time as they search online for space for lease, and get in their search results on page 1 using these 3 main commercial databases:

LACDB

The Louisiana Commercial Database (LACDB.com) reaches 1,500 commercial agent members in Louisiana who have posted 8,539 listings, divided into 4,007 properties for sale and 4,532 for lease. The database also has 314 commercial listings in Mississippi, with 187 for sale and 127 for lease. Costs for subscribing to the database are $700 annually and agents must pay approximately $450 annually to join the local Association of Realtors before they can subscribe to the database. This database reaches Louisiana and Mississippi agents and brokers because subscriptions are the least expensive.

Loopnet

Loopnet.com has 1,100,000 properties listed by 300,000 commercial agents nationwide. The marketplace gets 11,000,000 unique visitors monthly. For its massive size, Loopnet.com only has 656 listings for sale and 981 for lease in Louisiana, but this database brings in tenants and investors both locally and nationwide. Loopnet offers subscribers just 10 listings for $8,400 annually and promises subscribers page 1 search results for a diamond subscription of $30,000 annually, making it out of reach for most local agents.

CREXI

CREXI.com has 1 million commercial real estate agent subscribers but an average 2 million buyers, brokers, and tenants each month exploring over $2 trillion of property value nationwide. Crexi has 2,561 for sale in Louisiana and 3,126 for lease. Crexi Pro cost $2,700 annually.

Step 6-Execute The Plan

Our 5 core marketing tools, called “channels”, work in a cohesive fashion to bring maximum exposure to commercial property. For example, office tenants reach us about 90% of the time through internet searches so our marketing process drives that traffic to our Louisiana Commercial Realty website, plus commercial databases such as LoopNet, CoStar, Crexi and LACDB. The databases promote your listed space for lease, which gets the space in front of qualified prospects and entices them to ask for more information.

Normally we get your space in front of 4,000 to 5,000 office prospects. We capture the contact information of prospective tenants and follow up. Our direct targeting of prospects in addition to our affiliations with thousands of CCIM and SIOR members, who are the top commercial agents nationwide, tend to shorten the marketing period and deliver results more quickly, saving time and restoring income that normally is lost.

marketing channels

We provide regular reports showing the activity, which brings accountability to the marketing process. Property owners will know how many people are searching for property in this market and, of those, how many have inquired about their property and, of those, how many have reviewed the marketing presentation and toured the space. We update clients whenever the property needs to be toured and we always accompany prospective tenants.

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logo ICSC

ICSC Is Where Shopping Center Owners and Tenants Meet

ICSC is the premier organization for shopping center owners and real estate professionals, with over 70,000 members in 100 countries, so  Louisiana Commercial Realty is excited to promote New Orleans at their Dallas conference this week and encourage national companies to bring their business to the Big Easy.

ICSC Conference  Over 2,000 shopping center owners, big and small, attend the Texas oriented conference where property owners and prospective tenants are able to connect and discuss doing business together. Almost every city in Texas and these well-known companies are represented:

ICSC

Adaptive Reuse

Adaptive Reuse

Since New Orleans is over 300 years old, Louisiana Commercial Realty zeroed in on the "Adaptive Reuse" session, where developers shared their secrets to getting old properties back into commerce. Wildcat Management explained how they were able to buy a historic building from the city for $1 and move it brick by brick to a impoverished neighborhood and put the property back into commerce and make the project feasible. Every developer shared that none of their projects would have been feasible without tax incentives and help from local economic development.

Louisiana Commercial Realty first put Adaptive Reuse into action several years ago with three projects in New Orleans.

Grocers Always Adapt

Kroger, represented by Rita Williams, Director of Economic Development, shared how grocers are integrating technology into future plans. RFID's are dead because artificial intelligence can now analyze a shopping cart full of items and determine a price of an item by the shape of its box. Grocers all shared they are working to be nimble and always adapt. For example, Kroger is testing a social hour with a wine bar and local music in concert. The hope is to attract shoppers to the store for events they enjoy, and they will end up buying groceries. One challenge to adapting is how to reinvent at 120,000 square foot store.

Finding Solutions To Labor Woes

 

Kroger explained that labor is still costly and hard to keep, but what employers are learning is how to be flexible, such as asking workers what schedule can they commit to working, and offering tuition reimbursement. Online sales are up 10% at Kroger, but Amazon has exploded with online visit growth 10 times that of Kroger.

 

 

 

 

It took over two years for Louisiana Commercial Realty to finally sell 18 acres of land in Covington, but there were some big obstacles to overcome including a wetlands determination, city council resistance, lawsuits between family owners and even a breach of an agreement by the city to provide utilities. The $2.2 million sale of the Privette land site at highway 25 and 190 was one of the largest parcels sold that was zoned as Regional Commercial and allowed a wide variety of commercial uses including medical clinics, multi-family, hotels, nursing homes and drive-thru restaurants.

Originally Covington Airport

The 18 acres comes with an interesting history, having been part of a 100 acre site owned by Richard Privette and his brother in the early 1900’s and was originally Covington’s first airport. The brothers built an airplane powered by a model T engine and flew it successfully in the 1930’s until it was destroyed by hitting a stump on the land where the Taco Bell now stands.

Grandpaw Privette's Model T Engine Airplane

Grandpaw Privette's Model T engine airplane

While the average time it takes to sell vacant commercial land in Covington is 12 months, Robert Hand, a broker with Louisiana Commercial Realty, explains why it took almost 3 years to secure a buyer:

“We started by creating a marketing plan that included advertising the land to developers locally but also nationally. We stressed the strengths of the site, which were the size and demographics. Of the 122 vacant properties for sale, only 6 were this large and zoned for apartment development. We got the property in front of thousands of potential buyers and had the land under contract within six months, but that buyer was not able to secure financing, and after tying up the property for 18 months, they terminated the purchase. The silver cloud is that because we draft our own purchase agreements, we were able to get the buyer to pay $100,000 to our client for time extensions, and they were able to keep that money even though that sale fell through. We then re-marketed the property and were able to bring in two more offers within 8 months.”

The airport is long gone, and the land now is scattered with fast food restaurants, apartments and grocery store shopping centers, as a result of a growing Covington population. One of the common ways to measure population growth is by traffic counts, and the data show the intersection of highway 190 and 25 sees approximately 22,000 cars per day which is the highest count of any highway that feeds from Interstate 12.

Drilling Down Into Demographics

Developers looking for potential sites will closely analyze population trends and this makes Covington an attractive location for retail and multi-family development. According to ESRI, a demographic research firm, the Covington population within a 5 to 10 minute drive time of the site is projected to exceed 14,500 in 2023, with 5,434 households that average $58,000 household income.

Covington 5-10 Minute Drive Time Demographics

covington demographics

Since developing a large parcel of land can include apartments, retail stores and shopping centers, with a total investment between $25 and $50 million, buyers first examine population trends to make sure their development is feasible. Broker Hand explains:

“We use the latest technology to determine what developments are feasible by examining consumer spending patterns; for example, within a 5 minute drive time of the site, the population spends more than average on gluten-free labels, asthma and arthritis drugs, contact lenses, and visits the ear, nose and throat doctor or their gastroenterologist more often than others in St. Tammany Parish. We discovered that health care spending was a major expense, with an average $39,000 annually spent on nursing home care, which was not only higher than the parish average but also higher than the national average. That research allowed us to target those markets as buyers.”

Where Do Nearby Residents Spend Their Money?

Where Do Nearby Residents Spend Their Money?

Tapestry Analysis Helps Buyers Reduce Risk

In addition to income, age and population trends, the latest technology allows buyers to understand the lifestyle of the nearby population, which in turn helps visualize what businesses are feasible to serve the existing population and therefore might be the most successful. This technology, called Tapestry Analysis, breaks down the entire U.S. population into 62 categories, depending on leisure activities, spending, interests and a person’s goals and desires. The 3 most common tapestry groups for this site are Soccer Moms, Family Foundations and Salt of the Earth.

Tapestry Groups

Tapestry Groups

Soccer Moms is defined as an affluent, family-oriented market with a country flavor. Residents are partial to new housing away from the bustle of the city but close enough to commute to professional job centers. Life in this suburban wilderness offsets the hectic pace of two working parents with growing children. They favor time-saving devices, like banking online or housekeeping services, and family-oriented pursuits.

What Is A Soccer Mom?

What Is A Soccer Mom?

Summary

In summary, gone are the days of just putting a sign up to sell commercial property. Today, buyers can use sophisticated technology to determine consumer spending which determines what businesses will succeed, allowing them to be more confident about investing their $50 million.

After a two year search for the perfect location, the owner of Sukho Thai restaurant finally found a permanent home, with some help from commercial real estate broker Louisiana Commercial Realty who researched potential locations and provided data on which neighborhoods spent the most money dining out.  Broker Robert Hand with Louisiana Commercial Realty explains how they got started, “We helped Sukho Thai in the past when they wanted to expand to the French Quarter and we negotiated the acquisition of the 2200 Elysian Fields location which has been very successful, so they asked us to help them purchase a building rather than continue to rent space at their Magazine location.”

Sukho Thai Pivots During Covid

While many restaurants closed due to Covid and everyone struggled with finding employees, Sukho Thai pivoted and focused on take-out and delivery. During Covid, their revenues actually increased, with take-out and delivery increasing more than in-house dining decreased. They even adapted delivery to in-house since Uber Eats, DoorDash and Waitr costs were shared by the restaurant and almost eliminated any profit.

The Search For The Perfect Location

The search for a permanent home initially included every building listed for sale on Magazine Street and even a few unlisted buildings that Louisiana Commercial Realty knew could be a good fit. After flushing out those possibilities, which took about a year, the search expanded to the Lakeview area with a few possibilities on Harrison Avenue. Negotiations with property owners hit a dead end, so Louisiana Commercial Realty widened the search to Harahan and then to the Kenner area, which showed as having a population that spends less money on dining out annually per family but offers a larger population, so the total spending numbers are attractive for a restaurant. The table below is one example of the research, showing the Williams Boulevard target site as having the lowest household income but has the highest total spending at dinner and lunch due to the higher total population.

Comparison of Total Spending on Dining Outtable comparing locations showing spending dining out

Louisiana Commercial Realty also provides a "Restaurant Market Potential Report" that includes what restaurant brand residents visit most often, how much they spend, and how that compares to a national average. The table below shows an analysis of Sukho Thai's current Magazine Street location. Broker Hand says, "The data available to restaurants today is spectacular. We can not only tell the total spending on dining out, we can discover how many adults visit a restaurant, how much the average family spends per visit, how often they visit, and the brand of restaurant they visit most often, and we can zero in on any 1, 3, 5 and 10 mile radius or drive times for any location."

Drilling Down In The Data

The data show that at this location, 2,111 adults, which are only 11 percent of the population with one mile, spent $101 to $200 per visit, which was the highest spent at a family restaurant. Also, within the last 6 months, we know that the most popular type of restaurant served pizza. This is measured by the Market Potential Index (MPI) which tells the relative likelihood of the adults in the specified trade area to exhibit certain purchasing patterns compared to the United States.  An MPI of 100 represents the U.S. average, so a score of 154 tells us that a pizza type restaurant in this location is visited 54 percent more than average.

Dining Out Spending-Detail Analysis

Mississippi Commercial Realty, a Hattiesburg based commercial real estate brokerage firm, announced the sale of the 60,000-square-foot River Ridge Shopping Center in Picayune, Mississippi, to Rouses Markets, which is the fastest growing family-owned grocer in the United States. The Picayune store will be the first venture for Rouses north of the Gulf Coast in Mississippi and adds to Rouses’ 64 stores stretching from Lafayette to Orange Beach, Alabama. The new Rouses Market store will occupy the 36,000 square feet within the property that was previously home to a Winn Dixie grocery store.

The new location was made possible because Winn Dixie closed their Picayune store and the space has been vacant for years. That’s when the shopping center owner, who was unsuccessful in leasing the space, hired Mississippi Commercial Realty to find a tenant. Commercial real estate broker Robert Hand, with Mississippi Commercial Realty, explained how they do things differently: “Gone are the days of just putting a sign up. In this market, the data show the average time to sell or lease commercial property is twelve months, so we offer a more aggressive marketing strategy that tends to shorten that lost time. We use the latest technology to identify the most qualified buyers and tenants. For example, with the Picayune property, our research showed consumer spending within a 15-minute drive time was $56 million in the ‘Food at Home’ category (See Table)”.

Retail Demand Table by Mississippi Commercial Realty

How Much Do People Spend On Food Within 15 Minutes Drive Time?

Hand explains, “So we reached out to all the grocers and made sure they knew the vacant space would make a feasible location. Within three to six months after starting, we were able to get two offers to buy the shopping center and also two offers to rent all the remaining space.”

Initially, Rouses was interested in just leasing the vacant space, but when they looked at the value they would create by occupying the vacant space, they realized owning the entire shopping center was a smarter business decision. Rouses plans to make significant improvements to the entire shopping center and expects customers will also enjoy the services of the other stores: Subway, Century 21, CVS Pharmacy, Mississippi Home Care, Ciao King Restaurant and Nail Expressions.

New Orleanians always ask why we can’t get businesses to move here. The answer is that people don't move here. Businesses follow population but population comes first. If you want to revitalize areas such as New Orleans East, you need more people to move there and New Orleans businesses to stop leaving. The numbers are backed up by solid research from The Data Center in their publication: New Orleans Population Shifts.

population change, New Orleans LA - New Orleans Businesses page

People Have Been Leaving New Orleans Since 1980

New Orleans has over 150,000 fewer residents than in 2000 and remains at less than 80% of its pre-Katrina population. Jefferson Parish’s population is relatively stagnant, gaining 8,229 residents this past decade but remains just under 15,000 shy of its pre-Katrina total. St. Tammany Parish continues to boom, adding 30,830 residents this last decade after gaining 42,472 between 2000 and 2010.

We need a plan to grow New Orleans. It’s easy to do. We built a tourism economy based on people coming to visit to enjoy our music and food and fun but we aren’t doing what is needed to get them to stay. We just need to do what other cities are doing to attract people and take positive action. If you look at Atlanta, Austin, Houston and Nashville, they are focusing on taxes, crime and education and the results are jobs and population explosion which leads to business growth.


For more information on what businesses are feasible for the new New Orleans, read our article: What Businesses Will Thrive In New Orleans.

CPI CHART for Critical Inflation Theory page

A few weeks ago the U.S. Bureau of Labor Statistics announced inflation rose 7.9 percent from February 2021 to February 2022, the highest increase since January 1982. That was the month Dwayne Wade, Pete Buttigieg, Kate Middleton and the Commodore 64, an 8-bit home computer, were born, and the year Michael Jackson released "Thriller", Epcot opened and the movie ET made its debut. Unemployment in 1982 was 9.7 percent, the prime rate was 17 percent and Ronald Reagan was president. It was 40 years ago, so today's high inflation period is more of an outlier than a persistent trend. In this article, Louisiana Commercial Realty looks at the components of inflation and how the way you quote it can be misleading.

12-month percentage change, consumer price index, 1980-2022, New Orleans LA for Critical Inflation Theory page

Groups That Comprise The Consumer Price Index

Price increases for gasoline, shelter, and food were the largest contributors to the Consumer Price Index, which is how we measure inflation. The chart above shows inflation over the last 12 months and the major components that comprise the index. Here is how those components have performed:

For the month of February 2022:

For the 12 months ending February 2022:

The table below shows the components of the CPI and their performance each month from August 2021 to February 2022, plus each component's price increase for the last 12 months. Notice how each month can have a wide variety of price increases but can also have price decreases. Don't be misled when your TV news announces an inflation number for one month and extrapolates that into an annual CPI number. You cannot do the math that way.

components of consumer price index from August 2021 to February 2022, New Orleans LA

Food

The food index increased 1.0 percent in February and the food at home index increased 1.4 percent over the month. All the major food group indexes increased in February:

  1. The food at home index rose 8.6 percent over the last 12 months, the largest 12-month increase since the period ending April 1981.
  2. The index for food away from home rose 6.8 percent over the last year, the largest 12-month increase since December 1981.
  3. The index for meats, poultry, fish, and eggs increased 13.0 percent over the last year as the index for beef rose 16.2 percent.
  4. The index for full service meals rose 7.5 percent.
  5. The index for food at employee sites and schools, in contrast, declined 40.7 percent over the past 12 months, reflecting widespread free lunch programs.

Energy

Price increases for the month of February varied for these components:

For the last 12 months:

All Items Less Food and Energy

The index for all items less food and energy rose 6.4 percent over the past 12 months, with all of its major component indexes rising. The shelter index rose 4.7 percent over the last 12 months, its largest 12-month increase since May 1991. Several transportation indexes showed large increases over the past year, including used cars and trucks (+41.2 percent), new vehicles (+12.4 percent), and airline fares (+12.7 percent).

For February 2022:

In Summary

Consumer Price Index 1914-2021, New Orleans LA

The Consumer Price Index is calculated as a single number but is actually 8,018 items grouped into major components which are each affected by supply and demand in their own way, resulting in some components increasing in price rapidly while at the same time others can decrease in price. Since 1914, the CPI has only been above 7.9 percent 12 percent of the time, so the inflation period we have only experienced the last 6 months will not last much longer. In the last 108 years, there have only been 7 periods when inflation was 7.9 percent or higher, with the average period lasting 26 months. These were all periods experiencing an imbalance of supply and demand due to external forces of world wars or a sudden OPEC oil embargo. The beauty of a free market economy is that these supply and demand imbalances are eventually corrected by entrepreneurs and businesses, each acting in their own best interest and motivated by ownership which provides an incentive to compete to provide the best product at the lowest price, which results in bringing prices back into equilibrium.

For more info on how inflation affects commercial real estate, read our article:
3 Common Mistakes In Every Lease

CPI CHART SINCE 1914, New Orleans LA  Real Estate Lease

Whether you rent office space, a warehouse, or a retail store, your real estate lease probably has language that ties the rent you pay to the Consumer Price Index. The idea is meant to benefit only the landlord, and helps the rental income retain its purchasing power. The problem is that there is more than one Consumer Price Index and there are different ways to calculate each, so make sure your lease agreement contains language that is very specific. One example of lease language referencing the CPI is:

example of  Real Estate Lease language referencing the CPI, New Orleans LA

Five Things Every Real Estate Lease Should Make Clear

  1. It Is Clear Where The CPI Is Published-If rent is tied to an index, what index is used and where can you find it? The above lease language spells out that the rent is adjusted by the Consumer Price Index, and tells the information is published by the Bureau of Labor Statistics, which is found easily online.
  2. It Is Clear What Type of Consumer Price Index Is Used-There are 4 methods used to calculate the Consumer Price Index, detailed below.
  3. It Is Clear Whether The CPI Is Adjusted For Seasonal Changes-The CPI can be adjusted for changing climatic conditions, production cycles, model changeovers, holidays, and holiday sales which can cause variation in prices. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests.
  4. It Is Clear Whether The CPI Is National or Local-The CPI publishes unadjusted price indexes at the national, metropolitan area, and regional levels. So you could drill down and calculate your CPI based on your city’s MSA. This would be more meaningful if your economy is an outlier, such as Houston, Detroit, or New Orleans.
  5. It Is Clear How The Adjustment Is Applied-The CPI adjustment can applied to a lease payment monthly, quarterly, or annually, but be clear about what period of CPI is used. It is best that landlord and tenant agree the CPI is for the previous 12 months and applied to the last rent payment.

The 4 CPI Calculation Methods Explained:

CPI Databases, New Orleans LA

Method #1-All Urban Consumers (Current)-Consists of all urban households in Metropolitan Statistical Areas (MSAs) and in urban places of 2,500 inhabitants or more. Nonfarm consumers living in rural areas within MSAs are included, but the index excludes rural nonmetropolitan consumers and the military and institutional population.

Method #2-Urban Wage Earners and Clerical Workers (Current)-Consists of consumer units with clerical workers, sales workers, protective and other service workers, laborers, or construction workers. More than one-half of the consumer units income has to be earned from these occupations, and at least one of the members must be employed for 37 weeks or more in an eligible occupation.

Method #3-All Urban Consumers (Chained)-The urban consumer population is deemed by many as a better representative measure of the general public because 90% of the country’s population lives in urban areas. Using chained CPI means the rate at which Social Security benefits tick up would be slower, because it reflects substitutions consumers would make in response to rising prices of certain items. Therein lies the “chained” part of the name. The metric utilizes a basket of goods and services that are measured changes from month to month; much like a daisy chain. If the cost of a certain form of transportation goes up, for example, people might switch to another kind. This kind of “substitution” is part of what is factored into chained CPI.

Method #4-Average Price Data-Calculated for specific items such as household fuel, motor fuel, and food items from prices collected for the Consumer Price Index (CPI). Average prices are best used to measure the price level in a particular month, not to measure price change over time.

Consumer Price Index-Average Price Data

How Is The CPI Calculated

In calculating the CPI, the urban portion of the United States is divided into 38 geographic areas called index areas, and the set of all goods and services purchased by consumers is divided into 211 categories called item strata. This results in 8,018 (38 × 211) combinations.

The CPI is calculated in two stages. The first stage is the calculation of basic indexes, which show the average price change of the items within each of the 8,018 CPI item-area combinations. At the second stage, aggregate indexes are produced by averaging across subsets of the 8,018 CPI item–area combinations.

Percent changes for periods other than 1 year often are expressed as annualized percentages. Annualized percent changes indicate what the change would be if the CPI continued to change at the same rate each month over a 12-month period. These are calculated using the standard formula for compound growth:

How CPI Is Calculated, New Orleans LA

What Is Included in the CPI

The CPI represents all goods and services purchased for consumption by the reference population with all expenditure items divided into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

  1. FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks).
  2. HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture).
  3. APPAREL (men’s shirts and sweaters, women’s dresses, jewelry).
  4. TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance).
  5. MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services).
  6. RECREATION (televisions, toys, pets and pet products, sports equipment, admissions).
  7. EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories).
  8. OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

What The February 2022 CPI Tells Us

The Bureau of Labor Statistics, under the Department of Labor, releases the latest Consumer Price Index numbers, using the All Urban Consumers Index which increased 0.8 percent  in February 2022, but this was for only one month. The seasonally adjusted CPI number for the last 12 months increased 7.9 percent, due mostly to an unadjusted 38 percent increase in gas and a 41 percent increase in used car prices.

Some categories increased prices dramatically the last month while other category price increases were small, which is why the CPI can be misleading. The categories of gas and fuel oil increased the most; however, the categories of medical care and food away from home increased only slightly and electricity and used car prices actually fell. These numbers are only for one month, and a commercial real estate lease should use the annual number. The all items index rose 7.9 percent for the 12 months ending February 2022, but the index for all items less food and energy rose 6.4 percent. The food index rose 7.9 percent while medical care prices only rose 2.4 percent.

CPI TABLE FEBRIARY 2022, New Orleans LA for  Real Estate Lease page

Inflation is not what it used to be. In the 1980s the CPI approached 20% and the greatest economist alive said it was going to 25 percent. It went to 2 percent. Our economy today has been driven by a different wage/price spiral over the last 40 years, resulting in low inflation which helps borrowers but hurts landlords and savers. Building in a CPI adjustment can still make a difference in a long term real estate lease, as shown in the table below which compares a 1 percent CPI to a 2 percent CPI adjustment over a 25 year time frame. In the scenario below, 1 percent incremental rate increase annually results in $378,000 additional income over the 25 year span, and assuming a 10 percent Capitalization Rate, increases the market value of the property $338,000, or 26%.

How a One Percent Increase in CPI Affects Property Value, New Orleans LA for  Real Estate Lease page

Summary

In leasing any type of property, whether you are the landlord or the tenant, make sure your lease is clear about what the rent is, and what inflation adjustments apply to the rent. Even though some parties say they use a standard lease, there is no such thing. A lease is an agreement between two parties, and you should revise it to include language that works for you. As always, consult an expert.

Present Value in real estate Allows You To Compare Cash Flows, New Orleans LAPresent Value in Real Estate Allows You To Compare Cash Flows

The best single tool that you can use over and over again in a variety of situations to help you make smarter real estate decisions is a mathematical formula called Present Value. You can use present value in real estate whenever a deposit is made on the property to determine the lost income, or when a buyer agrees to pay money sometime in the future to a seller, or in terminating a lease prematurely, or in determining how rent payments might apply toward a purchase price, or in deciding whether to lease or purchase, or in figuring how much to pay for property that produces income. It works not only in real estate but also in valuing investments and anytime you need to put into current dollars a flow of money that lies in the future.


Present Value in Real Estate and Beyond, There's An App For That

Present Value is used anytime you have money paid in the future but need to know what it is worth today in order to make the right decision. Present value helps you put different scenarios of cash flows on the same playing field so that you can compare the options. Even though there are templates and apps that can do the work for you, it helps to understand the basics. The Apple Store has dozens of Present Value apps. Even the US government will give you a template to use for GSA contracts. But the best way to understand how the math tool helps is to use a simple spreadsheet.


How To Get Out Of A Lease

Let’s set up an example and work it through. One real-life example is how to get out of a lease. A lease commits the tenant to a long-term payment, in return for the predictability of having space in which to operate. Just ask the New Orleans Roly Poly sandwich shop owners, previously on Tchoupitoulas and Jefferson, why a lease commitment is important. You’ll have trouble finding them though because they did not have a long term lease and when the property owner wanted to build a Regions Bank branch, Roly Poly is no more. They shut down Roly Poly entirely, lost their income and the building was demolished by the landlord. So leases are good things to have. The commitment when obtaining a lease is that you will lease the property for several years. More often than not, you will personally guarantee the lease and the property owner will come after any personal assets if you terminate the lease prematurely.


Real Life Present Value in Real Estate

Example: Lease Buyout

Let’s examine a situation where you lease the property but want to cancel the lease. Maybe you are moving to a bigger space in Elmwood. Maybe you are moving to do more government contracts in Baton Rouge. Maybe you are closing down your business and retiring but don’t want to subject yourself to a lawsuit from the property owner who now will not have income from the lease payments to pay the bank the mortgage on the property and faces the bank coming after his personal property because you no longer can pay the rent.

Present Value is the following formula:

Real Life Lease Buyout Example present value, New Orleans LA

Don’t let the denominator throw you. The Present Value (PV) is the Future Value Payment (C) divided by the Assumed Growth (1+i) where i is the interest rate expressed as a decimal, times the number of periods money is paid (n).


Here's How To Make It Understandable

Assume you have a 5-year lease with monthly payments of $10,000 and you want to get out of the lease that started January 1, 2021. You are obligated to make 12 monthly payments totaling $120,000 per year for 5 years or a grand total of $600,000. But you don’t offer to pay the landlord the entire $600,000 now to terminate the lease because he would normally have received that in future monthly payments, and a lump sum now can be invested over the next 5 years to grow to more than $600,000. So how much is $600,000 over the next 5 years worth in current dollars as a lump sum? So our spreadsheet starts like this:

present value in real estate step 1, New Orleans LA

 

In the Present Value cell, enter the formula: =120,000 ÷ (1+.05) where .05 is 5% which is an assumption of the interest rate or growth rate of that money. Our (n) value equals 1. If you were earning your MBA, the professor would instruct you to use the Treasury Bill rate for n, but we are not in MBA class so in this case it is 5% which is an assumption factoring in risk to come up with an interest rate that the landlord would need to earn on your lump sum to replace the lost income you are no longer paying. So now our formula looks like this:

present value in real estate example step 2, New Orleans LA

The result shows the Present Value which is the amount of money it would take today if invested at 5% to grow to $120,000 in 12 months. Double check by multiplying the growth ($114,286 times 5%, or $5,714) and adding it back to the principal ($114,286).

To get more accurate you can compound the cash flows monthly, and assume you get all the income at the midpoint of the year, but in that case you would want to use a template. Now we have to carry this out for 5 years to determine the total amount, so our spreadsheet looks like this:

present value real estate example step 3, New Orleans LA

The only change is that in each subsequent year the present value formula adds another (1+.05) to the denominator.

All you do is add up each year’s Present Value for a total of $519,537. This is the amount in current dollars invested at 5% that grows to $600,000; therefore, this is the maximum amount a tenant would offer a landlord today to cancel a 5-year lease with payments of $10,000 per month.


warwick hotel sale, new orleans LA

In 2020 it was reported that the vacant-since-Katrina 197 room Warwick Hotel at 1315 Gravier in New Orleans sold for $8 million, but like so many commercial properties in 300 year old New Orleans, it has a fascinating history including the mysterious death of an owner, a $300 million dollar fraud, Israeli organized crime, a grisly double murder, connections to the president of Israel and also a local prominent attorney, not to mention an uncanny ability to avoid any fines for building code violations for 14 years.


Warwick Hotel:
How to Turn $1,300,000 into $8,000,000

City Hall warwick hotel map, new orleans LA

The Warwick Hotel is a 12-story, 120,000-square-foot dilapidated hotel and vacant since Katrina. It was originally constructed in 1952 but renovated in 2000 and previously under the Ramada Inn and Comfort Inn flags. The 176 room property includes 22 oversized one-bedroom suites, 8 junior suites, rooms with one king or two queen beds and handicap-accessible rooms. The hotel is closed and rooms are gutted and some have mold.

The property records date back to 1951 when it was leased to the Warwick Corporation until sold in 1997 by owners Warwick Exchange, LLC and Rosary Hartel O’Neill for $1,300,000 to Warwick Corporation with Rob Mouton as the attorney at that time helping with the purchase. Recently the attorney was changed to Marc Dorsey who is related to a prolific developer in New Orleans owning retail centers in New Orleans East and hotels downtown.

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Organized Crime Ownership

Warwick Hotel organize crime, New Orleans LA

The primary owner of Warwick was Joseph Soleimani, who also owned the Sea Club Resort in Ft. Lauderdale, but in 2013 ownership of the Warwick was transferred to Shimon Levy. Soleimani died the next year. Levy was reported by David Kidwell at the Miami Herald as having ties to Israeli organized crime and spent a year in an Israeli prison. Levy was also convicted of tax evasion. His business partner at the Sea Club was Zvika Yuz who was shot in the face as he parked his car at the hotel. Yuz was an Israeli native who lived in Miami and was instrumental in one of the largest fraud schemes in Florida history, masterminding his 36 employees who bilked 1,800 investors out of $300 million. Yuz was believed to have been connected to the “List of 11”, known as the top 11 Israeli organized crime figures. Yuz’s business partner, Shimon Levy, spent a year in prison in 1981 after he helped hide two top organized crime figures wanted in a grisly double murder in Israel.

Warwick owner Levy was granted a visa to enter the US because immigration officials were unaware of his Israeli conviction as an accessory to murder since former Israeli president Chaim Herzog ordered Levy’s records destroyed.

Shimon Levy decided to let the Warwick Hotel sit vacant for 14 years, willing to forgo millions in lost income if the hotel had been in commerce. The common belief was that the purpose of Levy owning the hotel was simply to park illicit profits from crime and drugs, not so much as to make money.

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Warwick Hotel - From $18 Million Offered
to a Sale at $8 Million

Warwick Hotel, New Orleans LA

The daily business operations for the vacant hotel were left to Yoram Moussaieff, who also operated Revolt which was affiliated with Federal Jeans, an outlet in New York with reported $15 million in blue jean sales. Yoram and I discussed putting the property back into commerce several times over several years, and he arranged a tour in 2017. The building was dilapidated with mold and stripped of any copper wiring which was common for neglected buildings after Katrina, but not so common 14 years later. After walking through each of the 12 floors with a contractor, we estimated it would take approximately $10 million to put the 197 rooms back into commerce, so our price for the property was $12 million. The owners thought it was worth $20 million, as-is. So the building sat vacant for another year.

Then the general manager called to report he had an offer for $18 million but would sell for $20 million to anyone else. The numbers just don’t work at that price, but it appeared none of the principals listed by the Secretary of State for the Warwick Corporation (Shimon Levy, Eldad Israel and Yoram Moussaieff)  had been to the property in 14 years since Katrina destroyed it, so they were unaware of a realistic value.

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Here's How a Buyer Sees the Building:
Best & Worse Case Scenario

As a commercial real estate broker in New Orleans, I regularly analyze financials to determine a property’s appropriate market price. After touring the Warwick and walking through each of the 176 rooms on the 12 floors, I prepared the best and worse case scenario below and other financials. This simple analysis gives you an insight into how a buyer approaches a valuation by working through the numbers backward. First you calculate the revenues you would generate after the project is finished. Then you back in expenses. What is left over is how much you can pay for the property now.

Financials Worst Case Scenario Warwick hotel, New Orleans LA

In the worst-case scenario, the most elastic variable is the occupancy rate. For hotels, a bad number is 60%, which we saw a lot of during the 2008 recession. Room rates for high-end hotels can average $150, but during the August hot month, even good hotels drop their rate to $100. This is a $50 drop, which is 33% and a disaster for hotels. So assuming the worst 60% occupancy but keeping the rate at $150 per night, the pro-forma revenues total $5.7 million and expenses average 60% at $2.3 million for a profit of $2.3 million annually. That values the hotel at $28 million, so you never want to have more than $20 million in an investment like that, because you have to allow for at least $8 million as compensation for putting your capital to work in this project versus something like an oil well. Hotels are so risky that recently on a different project, 5 local banks refused to loan $5 million to a buyer who had $1 million deposit on a $6 million dollar renovation loan. So buyers have to be compensated for their risk especially when financing is difficult. That makes this scenario really a break-even transaction which scares most buyers away.

financials Best Case Scenario warwick hotel, New Orleans LA

The best-case scenario is what developers hope for but never count on. What if the occupancy rate rose to 80%? They survive on a night when a convention in town, Essence Festival, Jazz Fest, Mardi Gras, or any other reason we hope to have 13 million visitors like we did before Covid. If occupancy rises above 80%, the room rate could climb to $225, then the revenues jump from $5.7 to $11.5 million and the net operating income approximates $4.6 million, valuing the business at $57 million. A well-run hotel can be very profitable, but there are very few who can run one well, which is why no bank wants to loan money to buy one.

how tariffs work

Every college business student learns tariffs are bad for economies that believe in free markets and competition and textbooks are filled with charts showing how tariffs suck money out of consumers’ pockets.

At first glance, imposing tariffs or quotas seems to be the perfect solution to get American industries back on track to prosperity, but the reality is that tariffs steal money out of consumers’ pockets by increasing prices, stifling creativity, rewarding inefficiencies and destroying the competitive drive that allows a free market economy to deliver cheaper, smarter and innovative products to you. If you skipped college or avoided a business degree, you missed the most basic economics course that explains why tariffs and quotas work in communist countries but never work in a free market economy. This article refreshes you on Econ 101 and explains why tariffs in America cost you over $70 billion every year.

Price is the Intersection of Supply and Demand

Price is the Intersection of Supply and Demand

The price of a good is the intersection, or equilibrium, of the demand and the supply.

The chart above illustrates the interaction between increased quantity and increased prices for buyers (demand curve) and suppliers (supply curve). The supply curve always rises since as prices increase, providers of goods want to sell more, and the demand curve always declines, since as prices rise, consumers always want to buy less. The intersection of supply and demand tells us the long term equilibrium of price and quantity.

Tariffs & Quotas

A tariff is a tax on imports, paid to the government.

Domestic producers are exempt from the tariff. A quota is a limit on the quantity allowed to be imported. The result of both is an increase in the price of the good, from the market price to the new tariff price. American manufacturers get to charge the new price, but manufacturers overseas receive the market price but pay the tariff to the US government. The government gains area “D” in the chart below (the revenue from the tariff); however, American consumers pay the higher price measured by areas A+B+C+D. Even if the government passes along to consumers the revenue from the tariff, the loss to consumers is still area B+D.

A tariff is a tax on imports, paid to the government

Tariffs and quotas are BAD public policy. Tariffs undermine competitive discipline which forces industries to always reduce cost and increase efficiency, driving creativity and invention. Protectionism has a narcotic effect, allowing sick industries to avoid facing up to their problems. These 3 reports explain in detail how our responses in the past only made things worse:

  1. The Effect Of Quotas On The US Steel Industry: Congressional Budget Office’s 95 page report
  2. Policy Responses To The Steel Crises: Organization For Economic Cooperation and Development Report
  3. Effects Of US Trade Protections For Autos and Steel: Brookings Industry Report.

What Can We Learn from 1950s Steel Industry Tariffs?

America has many precedents that teach us tariffs are bad policy, and the most obvious is the steel industry, promoted over the last 4 years as an example that tariffs would help. Going back 70 years, the steel industry was an oligopoly, with just a few manufacturers and little competition, allowing the industry to raise prices 9% annually in the late 1940s (twice the rate of wholesale prices). In the early 1950s, steel prices increased 4.8% annually at a time when the wholesale price index was falling. In the late 1950s, steel prices increased 7.1% annually, three times wholesale prices. In 1969, quotas were imposed and steel prices increased 14 times greater than they had in the previous 9 years, during a time of recession that caused 25% of industry capacity to be idle. The result was a lag in technology. American steel companies failed to introduce the oxygen process and continuous casting which put them at a disadvantage. Their oligopolistic pricing policy kept American companies from competing in the world market and eventually allowed imports to erode their market by producing a better product at a lower price. We can learn from history that tariffs are as un-American as you can get.

Whether you are a landlord or a tenant, lessor or lessee, you need to take action now to keep your business alive in the future and stop events from affecting your lease. First, read your lease. Lock yourself in your bathroom for an hour and don't come out until you finish reading your lease. Twice. No need to call your attorney. Keep them out of it. Tenants, call your landlord. Landlords, call your tenant. Communicate what you want and work out a plan of action.

5 Things To Do Now To Prevent The Virus From Affecting Your Lease, New Orleans LA


Self-Isolate With Your Lease

All leases include language that describes what happens if there is a fire and the time period the landlord has to make repairs. Typically the lease will state " If the Premises or the Building is damaged by fire or other casualty and rendered unsuitable for use...." then goes on to state the landlord makes repairs, usually allowing a 180-day period, and if the landlord cannot make the building inhabitable, the Landlord or Tenant may cancel the lease. Tenants might have a reasonable position that a state-mandated self-isolation renders the space unsuitable. Nobody is going to end up in court over this because it will take years to decide, so the landlord and tenant have to work something out.

The language used, especially if a force majeure is mentioned, could go a long way in affecting your lease. This usually takes effect when there is an unpredictable disaster or Act of God. We saw it during Hurricane Katrina in 2005. This usually allows the landlord to cancel the lease. Big deal. Why cancel a lease when the market doesn't have anyone else lining up to lease your space? Maybe for years.


If You Are A Landlord

first

If your tenant can't pay the rent, your risk is that they will go out of business. Realize you won't have anyone else to rent to, and it may take you several years to get the space leased back up.  Reduce the tenant's rent for a portion or all of the term left on the lease. The usual forms of rent reduction are to reduce the base rent, operating expenses, or both.

second

In this case, the landlord can defer a portion of the tenant's rent but would require them to repay the rent deferred at a later time, either in a lump sum or by increasing subsequent payments. A variation of rent deferral could be to cap or set a base year to operating expenses for a short or extended period of time. Landlords with large retail tenants are asking for a March and April financial statement to show revenues were reduced.

third

If a tenant is significantly past due on rent payments, a landlord may agree to forgive a certain amount of the past due rent if the tenant remains current thereafter. Rather than abating past due rent, a landlord may agree to convert the past due rent into a loan payable over time. The tenant would, however, continue to pay the current rent.

fourth

If the landlord holds a deposit, this amount could be credited against the tenant's current obligations.

fifth

Bringing in a new tenant (for part of or all of the rented space) could reduce or eliminate the rent obligations while replacing revenue for the landlord.


If You Are A Tenant

first

What are the basics of your lease? Is the language used affecting your lease? Review your lease to see if your rent is simply base rent or it includes pass-through expenses. How much are these expenses and are they set to increase?
When does your lease end? What constitutes a default of the lease? What tools are available to the landlord in such a case (penalties, eviction, interest, etc.)?

second

Does your landlord hold a security deposit? Speak to your insurance agent to see what coverages you have.

third

Arrange a meeting with your landlord and be prepared with data to have an open conversation to identify a solution or combination of solutions.


Different Strokes For Different Folks

lightbulbs
Retail:

Retail will see a bifurcated reaction to this economic downturn. Storefronts selling consumer staples - like Walmart, CVS, and grocery stores-will thrive, while dine-in restaurants, for example, could remain closed for the foreseeable future.

Hospitality:

Unsurprisingly, hospitality has been decimated by the national response to the pandemic. CCIM Institute Chief Economist K.C. Conway recommends those in the sector ask themselves some basic questions. “For those that own hospitality assets and invest in that space, you need to step back and reflect on what brought you to that property type. Why? Where were you going into this particular period? The market had near record revenues per available room, average daily occupancy, and rental rates. … Whether I'm a hospitality REIT, hotel owner, or I've got properties, I want to negotiate with my lenders for some debt restructuring.”

Office:

The office leasing market is likely to suffer in the short-term due to COVID-19 as layoffs diminish tenants' overall need for space and, in many cases, set aside expansion plans they may have had. In addition, tenants who remain in the market for additional space will have a difficult time touring properties. Office workers' pushback against the open office environment is likely to accelerate, as illness is more easily transmitted in an open environment. Many employers already had recognized that in a competition to attract and retain top talent, squeezing workers into increasingly tight spaces was not a sustainable strategy. Now, an emphasis on social distancing and good health practices - continuing in some fashion even after the crisis has passed - may help reverse the densification trend, with less shared space and fewer workers per leased square foot.

Multifamily:

Similarly, the multifamily sector could see significant upheavals as unemployment rises. Businesses that are closed employ people who now will struggle to pay rent. It's a similar situation to retail, only in this case the tenant is an individual or family who lost its source of income. Tellingly, Freddie Mac announced a nationwide relief plan for current multifamily borrowers and residents.

Industrial:

Industrial, meanwhile, is in a two-pronged situation similar to the retail sector. Grocery and medical items, for instance, are flying off the shelves, so properties in this supply chain are humming along. But other industrial sectors could be in store for tough times, depending on what areas of the national economy slow or stop.


Free Lease Review

We can help. We are offering a free lease review and, if needed, help to negotiate your lease so that landlords keep their tenants and tenants keep their business going. Having a commercial real estate broker who is a trained professional negotiator can help you execute your plan and save time and money, while lifting a burden off your shoulders. Knowing what events—present and future— affecting your lease is critical.


For Additional Information On Leases, Read Our Articles:

Why Negotiating Is Like A Tennis Match

The Office Lease Market


Want Expert Opinions?

Download the Colliers economist's report, The Coronavirus, the End of the Cycle and US Commercial Property Markets: Early Thoughts.

negotiating and leasing commercial real estate is like a good tennis matchBuying, selling and leasing commercial real estate requires lots of different skills, including knowledge of financing, zoning, supply and demand, income statements, and demographics but the most valuable skill is good negotiating. What makes a good negotiator? It is helping all parties involved, who bring to the table different and opposing objectives, agree on the one objective of buying, selling or leasing a property with terms that they may not like but to which they can agree. A good negotiator embraces conflict and works through it, discovering the motivations of each party and helping them achieve goals they may not have initially thought important.

Leasing Commercial Real Estate: Good Negotiating Is Always A Short Volley In A Tennis Match

Negotiating has an ebb and flow, a rhythm that is similar to a tennis match. If you make it too short, both parties didn't give their best, but if you make it too long, both parties tire out and make stupid mistakes. Negotiations always have several terms that both parties have to take into account. There is an offer, then a counter-offer and negotiations should never go past the counter-offer. There has to be some agreement at the 2nd change in terms, even if you have to reduce the number of issues under negotiation. This is where a good negotiator can add value to any transaction, by working with each party to identify issues that are minor and those that are deal-breakers. Negotiators need to understand why certain terms are important to people and help them understand the concept that if they can't get one thing they want, maybe they can get a different thing that will also help them.

Leasing Commercial Real Estate: The Hard Part Of Negotiating Is Not Walking Away

the hard part in negotiating leasing commercial real estate successfully

Any negotiation eventually has conflict, because there are always various interests involved, called stakeholders, that have their own objectives which can often oppose other stakeholder's interests:

The Buyer or Tenant-the buyer and tenant want the property as cheaply as possible and more. Sometimes the buyer wants a long inspection period or time to arrange financing. The tenant sometimes wants the landlord to build out the space and always wants several months of free rent.

The Seller or Landlord-both want as much money as possible with little initial investment. The seller doesn't want to make any repairs on the property being sold, and the landlord doesn't want to give free rent or spend money building out space that may be unusable should the tenant leave in the middle of the night, skipping on the rent.

The Government-whether the property falls under the jurisdiction of a city planning department, city council, mayor, or just the neighborhood association, each group wants to represent its constituents and get credit for any progress. The mayor wants a press conference, city planning wants all zoning laws complied with, and the neighborhood association wants services for their members even if it doesn't make good financial sense.

The 4 Strategies Good Negotiators Utilize

negotiating leasing commercial real estate sometimes depends on little things

The easy thing to do when a conflict of interest arises is to walk away. It is the most comfortable and normal reaction for many. But a good negotiator doesn't take conflict personally, stays calm and utilizes 4 strategies, especially when it involves leasing a commercial real estate property:

  1. Takes all stakeholder's interests into account and works behind the scene to address all concerns while reminding those with opposing goals of the benefit of achieving the main goal, which is to put the real estate back into commerce. Sellers and landlords need to understand what buyers and tenants are worried about. Buyers and tenants often have no idea of the complications sellers and landlords are up against. Good negotiators help all parties reach common ground.
  2. Identifies and separates the big issues and lets the other party have things that don't matter. In any commercial property negotiation, there are a wide variety of contingencies, including inspection and closing period, financing, deposit, occupancy and closing costs and price. The average person can only grasp 3 of these in any one situation, so a good negotiator will determine which 3 have the highest priority and methodically works to get an agreement on the big issues first.
  3. Solves problems with creativity. For example, if a tenant wants 3 months of free rent, the landlord could offer one month up front and 2 months at the end of the lease. That way if the tenant doesn't stay the entire term of the lease, the landlord has taken less risk. Or if a buyer is unable to obtain financing, the seller could increase the deposit and finance part of the transaction. What if the buyer wants an extraordinarily long inspection period? If the buyer eventually cancels, then the seller may have missed other buyers while the property was under contract. In economics, this is called opportunity cost, and this increased risk can be offset by a deposit that becomes non-refundable, or an additional non-refundable deposit to purchase more due diligence time.
  4. Keeps communications from getting personal. It is never a good idea for buyers and sellers, or landlords and tenants, to meet initially and conduct negotiations. Personalities always get in the way and people say things they shouldn't and statements get taken the wrong way. A good negotiator keeps all parties logical and rational, identifies the major issues and keeps all parties focused on the benefits to them of a successful transaction.

For more information on negotiation, read our article The Insanity of Inspection Renegotiation and our reality article on Successfully Negotiating the Largest Class A Office Lease.

commercial investment, New Orleans LAYou can run the numbers to calculate gains or losses from various scenarios, but there is nothing like a visual depiction of risk/reward tradeoffs, especially when it comes to risk in commercial real estate. The hard part is transitioning numbers to something you can see that displays probability and the risk involved with adopting various strategies that may or may not result in a gain.

 Visualize commercial real estate risk, New Orleans LA

Making decisions in commercial real estate often involves more than just calculating a capitalization rate or net present value, because there is always a component of unknown risk. In the office leasing sector, risk is created by local market factors, such as supply and demand for space, asking and effective rents, and absorption rate. Other factors contributing to risk in commercial real estate are the specifics of the situation. Learning how to quantify and illustrate such risks to clients is a challenge, especially in small or mid-size markets where office demand can still be somewhat stagnant.

This article discusses how to quantify the risk of a real-life decision: Should an office tenant write a check for $1.5 million to accept a lease buyout offer, or continue to market a sublease for 56,542 square feet of class A downtown office tower space in New Orleans?

The Dilemma When There Is Risk In Commerical Real Estate

As a byproduct of a merger between two large oil companies, a decision was made to relocate 250 employees from New Orleans to Houston, leaving 75,000 sf -- four full floors of fully furnished class A office space -- vacant with an obligation to pay rent at $18.25 psf for 54 more months.

The situation is compounded by two issues: The space represents the largest contiguous class A office space in New Orleans, and with only 54 months left on the lease, it is not feasible for the lessee to offer any build-out allowance. This means the sublease space cannot compete with market-rate space.

The lessor has presented an offer to take back 56,000 sf -- three full floors -- for a lump sum payment of $1,500,000 rather than the current obligation of $1,022,000 per year. The decision for the tenant is whether to pay the $1.5 million and gain the difference or try to sublease the space to produce a greater income. The dilemma is how to analyze this risk in commercial real estate.

Market Factors

The New Orleans class A office tower market is approximately 9,000,000 sf, with 1,000,000 sf currently available for lease. Building occupancy rates range from 73 percent to 97 percent and 2013 absorption was 133,000 sf, or 13 percent of available lease space. Asking rents range from $16.50 to $21.00 psf, including build-out payments ranging from $10 to $30 psf. In competing buildings, 15,000 sf of sublease space is available at $15.00 psf and 90,000 sf was just renewed at $12.50 psf.

The Decision-Making Process When There Is Risk In Commercial Real Estate

At first glance, the answer appears to be a no-brainer: Accept the offer to pay a lump sum of $1,500,000 rather than pay $1,022,000 annually for 54 months, equal to $4,599,000. However, calculating the numbers on subleasing the space at the average asking rate of $18.50 psf produces a profit of $63,609 for the remaining period. (See Table 1.)

leasing profits commercial real estate, New Orleans LA

 

Such numbers are compelling to clients wishing to make the most of a difficult decision. However, just because the market rate is $18.50 psf, we can’t assume that we can immediately lease the entire space at that price. Instead, the analysis should focus on the risk of not paying the $1,500,000 and trying to sublease the space. What price do we need to sublease the space for and how long can we take before we are worse off than just paying the $1,500,000? How do we show a client that risk visually?

Thus, the critical data are how long will it take to sublease the space and at what price. If the current market lease rate is higher than the current obligation net of build-out allowance, the space would command a payment to the lessee rather than a $1,500,000 payment from the lessee. But, like many markets, the New Orleans market has a wide variance, with some class A office tower downtown space subleased at a low of $12.50 psf and listed space quoted up to $21.00 psf.

 

sublease rate scenarios, New Orleans LA

Analyze the Risk in Commercial Real Estate

The best way to analyze the decision is to first examine the worst, average, and best outcomes, as shown in Table 2, which compares the income from a range of lease prices psf compared to various periods remaining on the lease. The three price levels are the actual low, middle, and high rates for class A office tower space in downtown New Orleans.

Each combination of time remaining and assumed sublease price should be compared to the net savings from the buyout offer of $1,500,000. The current obligation is for a lease payment for 54 remaining months at $18.25 psf on 56,542 sf, for a total of $4,643,511. The buyout offer requires a one-time payment of $1,500,000, which is a savings of $3,143,511. ($4,643,511 minus $1,500,000 paid).

If the lessee could sublease the space for $12.50 psf, the space would have to be subleased almost immediately in order to reap more income than the proposed offer. At $15.00 psf, the space would have to be subleased within 12 months, or have 42 months remaining in which to earn enough income. At $18.25 per square foot, the space would have to be subleased within 18 months, in order to have 36 months remaining to produce the same savings.

The Boxing Decision

The information in the table can best aid the decision-making process by illustrating it in chart form, with the dotted line depicting the savings from the proposed offer to buy out the lease.

Chart 1 shows that any situation above the dotted line represents a better alternative than the proposed offer, and any situation below the dotted line represents a worse scenario.

lease rate comparisons, New Orleans LA risk in commercial real estate

Going one step further to incorporate risk into the analysis produces a more-reliable decision. We might have a higher confidence level that the space will sublease around the $15.00 psf level, but we still don't know how long it will take to get it subleased. Of the 133,000 sf leased last year in New Orleans, the subject space represents 42 percent of that supply. Of the 133,000 sf, only three leases were 17,000-sf full floors. So the decision compares a finite cost of $1,500,000 against several likely outcomes.

Risk In Commerical Real Estate

Risk in Commercial Real Estate—The Conclusion

Chart 2 further incorporates risk in commercial real estate by comparing the area in a blue box of all possible outcomes above the known savings (which is a better outcome) to a red box of all possible outcomes below the known savings (which is a worse outcome). Since the blue box is smaller than the red box, it is less risky to pay $1,500,000 to terminate the 56,542-sf lease than it is to try to lease the space for more income. By visualizing not only the numbers but the risk of all likely scenarios, you can make complicated decisions easier.


This article was written by broker Robert Hand and is a reprint from the August 2014 national publication Commercial Investment Real Estate, published by CCIM, an organization of the top commercial real estate brokers in the world with a membership of 13,000 in 30 countries.

Read the original publication at CCIM Archive CIRE magazine.

Louisiana Commercial Realty

Commercial Real Estate Experts
Robert Hand, MBA, CCIM, SIOR
robert@louisianacommercialrealty.com
Licensed in Louisiana & Mississippi
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