BusinessReport.com

Talking down national recession fears can be a challenging job, particularly when you’re a real estate agent trying to convince skittish customers that the Baton Rouge metro area economy is expected to continue growing.

They maintain it won’t be a hard sell this year, despite an anticipated slowdown from continued easing off the “Katrina bump,” if you look at the numbers. Collectively, they say the market will continue to benefit from positive economic indicators that are more strongly positioning the local economy for anticipated modest growth. An estimated 14,000 new jobs anticipated over the next two years from more than $5 billion in construction projects announced or under way in the metro area [Moody’s projects 2% growth this year] tops many of the agents’ reasons for remaining optimistic about the local economy.

Hurricane Katrina also brought an estimated 30,000 new permanent residents. GO Zone tax incentives, which extend through the year, spurred considerable new construction, and the area’s diverse business mix promotes a stable economic foundation.

Still, there are market realities to consider this year.

Residential housing

Linda Fredericks, president of the Greater East Baton Rouge Association of Realtors, says this year’s outlook remains encouraging, with industries still relocating employees in the area, low interest rates and property values expected to rise more than 5% over the next two years.

Outgoing President David McKey also anticipates a good year, citing the metro area’s diverse economy and continued rising property values.

“A lot of what you’ve heard nationally, which has had some effect on our market, is old news and people are feeling a little more upbeat about the market,” McKey says. “That psychological issue hanging over everyone’s head will start disappearing as we enter 2008.”

While residential lots are not dropping in price and value, Tom Cook, owner of Cook, Moore and Associates, says they’re not selling as fast as they did in past years.

“I think we’re cooling off a little bit,” Cook says. “I don’t think Baton Rouge will suffer like the rest of the U.S., but it will slowdown and prices will stabilize. Building is slowing down, and developers are not putting up lots as fast as before because they’re not selling the ones they have.”

While Cook says it’s difficult to predict how much cooling to expect, he does foresee a softer market that will absorb considerable new space and potentially avoid oversupply.

“It’s not going to get 1980s bad,” he says. “But there’s more caution out there than there was in the 1980s. When we talk to developers, they are repeatedly saying they lived through the ’80s, and ‘I’m not doing that again.’”

Jeff Martin, Regions Bank’s commercial real estate executive for the South Louisiana market, also handles residential loans. Martin agrees this market has slowed in recent months, but he remains optimistic about this year’s market.

“We’re hopeful 2008 will be a good year. So far, we’re off to a good start,” he says, also noting a slight slowdown is an opportunity to allow housing starts to keep pace with demand. “In some ways, I see it as a positive. If you look at market data, you’ll see inventory levels of houses available for sale are up.”

Multi-family dwellings

Get ready for something this year Cook says hasn’t occurred in the Capital Region for some time—a renter’s market. Expect “move-in specials” or incentives like a month’s free rent.

Apartment vacancies will increase appreciably this year, particularly by mid-year as more complexes come online, says Wesley Moore, partner with Cook, Moore and Associates. More than 4,000 apartment units will be added in the area in response to the increased housing demand following Katrina. As these units become available, he says vacancies will gradually increase and make the market even more competitive, possibly up to 12 months.

With citywide occupancy at 97.5%, Moore says the change would simply bring the area in line with the national occupancy rate of 93%. Rental rates increased nearly 6% from 2006 to 2007, a figure he expects to hover around 2% or 3% this year.

The area has an estimated 60,000 rental units, of which 40,000 are apartments. The rest are houses, mobile homes and convalescent homes.

“2008 is the last chance to qualify for GO Zone bonus money, so there’s a great rush to finish apartment units,” Moore says. “It has been a huge factor in the new construction and a big part of the impetus for new construction in the last two years.”

Amid a national credit crunch resulting from the subprime meltdown, Moore is concerned less financing will be available for future commercial projects. “The national recessionary climate has been in place already six months, but if it lasts another 12 to 18 months it will affect most segments of the market.”

Martin agrees larger project financing has been in flux and tighter at least six months. But the 16-year bank veteran also says financing still is available, although projects are receiving more scrutiny. An encouraging sign is loan applications are slightly up so far this year, but he says borrowers should not expect the same terms they may have gotten at this time a year ago.

Commercial

“The Katrina rush is over,” says Branon Pesnell, associate broker with Beau Box Commercial Real Estate, of the area’s commercial market. “People are rethinking values. We’re getting a gut check. There was a tremendous value after Katrina, but now they’re rethinking what their properties are worth. Transactions are taking longer with people scrutinizing deals more thoroughly, and bankers and appraisers also questioning these deals harder than in the Katrina fog.”

But Pesnell also agrees a slowdown will bring the market back to a healthy place.

“It had gotten difficult to find land and build on it because land prices had gotten so exorbitantly high, as well as construction costs, and then still justify what you can charge in rent,” he says. “We’ve reached the peak of that, and everyone will have to realize this market can only go so high.”

Pesnell foresees commercial prices dropping in a “light correction” by mid-year, But “the consensus is things are moving in the right direction” so they’re expected to improve for the rest of the year. He also anticipates sellers becoming more willing to negotiate again, as well as landlords becoming more flexible in dealing with tenants.

Class A rental rates will stay around $20.19 a square foot, Pesnell says, and Class B rates may drop because of more vacancies. The Florida-Airline corridor has considerable vacancies, which he doesn’t anticipate improving this year. The hot spot is anything in southeast Baton Rouge along Perkins Road, Corporate Boulevard and Essen Lane. Downtown Baton Rouge is healthy with Class A space close to 100% and Class B space about 73% leased, although he considers lack of parking a major ongoing problem for the area.

Cook says “suburban offices”— smaller ones going up in areas like Bluebonnet Boulevard and Perkins Road—will continue doing well.

Brian Andrews, owner of Andrews Commercial Mortgage, doesn’t foresee a slowing national economy affecting anticipated larger office building construction in established areas like Corporate Boulevard. He doesn’t anticipate lease rates dropping because businesses are not leaving the area and office space supply is meeting demand.

Andrews also foresees a learning time approaching for sellers, who he says are accustomed to California investors paying “outrageous” cap rates. “They’re holding out for those kind of prices though that money’s not coming anymore.”

Retail

Cook says centers like Mall of Louisiana and Perkins Rowe are primarily leased, while softening has begun in smaller mall retail like strip malls.

Andrews says today’s retail trend is mixed-use lifestyle centers, which make shopping a destination. Retailers are going to projects like Perkins Rowe and the Mall of Louisiana’s new Boulevard to tap the buzz. Strip shopping centers are still appealing because they’re convenient and closer to shoppers, so they should hold their market share.

Dottie Tarleton, vice president of Stirling Properties in Baton Rouge, says while strip malls and chain stores will continue popping up this year, expect fewer announcements for more centers with more than 300,000 square feet—like Perkins Rowe—this year.

“It’s not the economy; it’s because we’re full,” Tarleton says. “The market is pretty saturated.”

She forecasts a market that will remain healthy. Numerous sizeable projects are under way like Perkins Rowe, The Boulevard and the Juban Crossing mixed-use project in Livingston Parish. Considerable land is being optioned for potential projects, and growth will continue in Ascension and Livingston parishes. Cabela’s and the Bass Pro Shop are becoming magnets for surrounding commercial development.

As Baton Rouge solidifies as a trendy, higher-end shopping hub, Tarleton says it will continue drawing more shoppers from surrounding areas

“Parts of the country are suffering, and the mortgage problem is a problem in a lot of places, but it’ll correct itself,” she says. “Assuming we don’t have anything bizarre, like another Katrina, I don’t see any slowdown. We needed some flattening after Katrina because it was crazy. You couldn’t keep up the pace. Slow but steady growth is always the best way.”