TRENDS: Pandemic throws wrench in 2020 Baton Rouge real estate market

While the economy is showing positive signs of recovery, the yearlong pandemic has created uncertainty in the market that makes it difficult to predict the future of the multifamily and commercial real estate sectors in Baton Rouge, according to experts at this morning’s TRENDS Real Estate Seminar.

“We used to factor in hurricanes and floods,” says Craig Davenport of Cook, Moore, Davenport and Associates. “With COVID, we’ve got to worry about people working from home, schooling from home and what’s the new normal? It’s difficult to say.”

In the multifamily sector, rental rates overall increased just 1% in 2020 to an average of $1.05 per square foot, after staying virtually flat for the past several years, while vacancy rates decreased slightly to 9.1%.

“We have 3,352 vacant units,” he says. “That doesn’t sound like a lot but it’s still a lot of vacant units and we still have a lot of complexes under renovation.”

COVID-19 hit student housing particularly hard. Class A complexes near LSU, which were overbuilt before the pandemic, had  an average vacancy rate last year of 17%, while older student housing complexes near LSU saw vacancy rates of nearly 14%.

By comparison, downtown and Livingston Parish were below the overall average, with vacancy rates of 8.75% and 7.33% respectively.

The pandemic and the high cost of construction slowed new construction in 2020. Just 638 units were completed last year, the lowest number since 2014. That said, some 1,400 units are under construction for delivery in 2021 and nearly 2,400 are proposed for delivery in 2022-2023.

Those new projects, in both the class A and B markets, are loaded with amenity packages, including nicer common areas, fitness centers and green space as well as pet perks like dog spas, covered runs and hydration stations.

Looking forward, Davenport says several factors will come into play that will determine how the multifamily sector fares. Among them:

  • Whether LSU brings students back full time for in-person classes in the fall. If so, that will help absorb inventory in the student housing submarket.  
  • The completion of the Amazon fulfillment center at the former Cortana Mall site. “Once that comes online, that will create a lot of jobs for the area,” he says.
  • Unemployment benefits and federal stimulus money. “How long will those benefits last? When will that stimulus money hit the market?” he says. “Those are all factors that play into making projects.”
  • Skyrocketing lumber costs, appliance shortages, rising labor rates, and increasing interest rates. “Those will all make it a lot harder to build new apartment complexes,” he says. “Some of those proposed complexes may not move forward.”

The Baton Rouge office market is also coming off a rough year and faces more uncertainty, says Ty Gose of NAI/Latter & Blum.

“Last year was just a disaster,” Gose says. “I’m going to talk about COVID and then I never want to talk about it again.”

Overall, Baton Rouge saw commercial occupancy rates fall slightly more than 2% in 2020, to an average of just 77%, though there was considerable disparity among types of office properties and subsectors of the market. 

Multistory buildings saw occupancy fall to 74%, while garden office condos averaged a healthy 93%.

Similarly, class A office buildings in the Acadian/College area averaged more than 91%, while buildings in the Airline/Florida corridor averaged just 35%, dragging down the overall market average.

“If you take that area out, our occupancy was actually 80%, so it’s not as bad as it appears,” Gose says.

Average rental rates were flat overall, though they varied greatly by subsector. The newest buildings on the Water Campus have average lease rates of $34 per square foot, compared to the overall downtown average of $25. 

The overall class A average rate marketwide is nearly $22.50 per square foot, while class B and C buildings fetch an average of $16.58 per square foot.

“I want to point out just how flat our rental rates are,” Gose says. “Rent growth is vital for investing in office. You cannot have robust investing in office without it.”

Among the other key takeaways:

  • Office tenants are taking a “wait-and-see approach,” to long-term leases. Most new leasing activity is for short-term deals.
  • Lease rates are likely to continue to decline, especially given the large amount of sublease space–1 million square feet—adding to existing inventory on the market.
  • The handful of office building sales in 2020 were mostly owner-occupied.
  • The trend toward garden offices is increasing.
  • Experts predict a future comeback for the office sector that will vary among professions. “There is evidence the work-from-home honeymoon is over,” Gose says. “We’re starting to see some swingback. There is a future for office … it will just look different than it has for the past 20 years.”