Rolling in Katrina cash, New Orleans sees rebirth

NEW ORLEANS — Sean Cummings has developed 18 New Orleans projects, including condominiums, hotels and luxury lofts with floor-to-ceiling windows at a former rice-processing plant in a gentrifying neighborhood. Up next: a residential complex planned for a weed-choked lot currently home to an abandoned school bus.

“New Orleans was once unappealing to many investors because it was thought of as a giant bar,” said Cummings, the 48-year-old chief executive officer of Ekistics Inc. and a native of the city. Today, “more and more people choose the city for its quality of life. New Orleans has a lot to offer. It’s sexy, it’s vibrant, it’s full of life.”

Eight years after Hurricane Katrina flooded 80 percent of the city and displaced 400,000 residents, New Orleans has become one of the fastest-growing U.S. commercial real estate markets. Luxury housing, retail and office projects are under way in a construction boom after the inflow of $120.5 billion in federal money. Tourism spending is at a record, fueling hotel demand, as visitors flock to the home of Jazz Fest and Mardi Gras.

This year through May, commercial real estate transactions in the Big Easy totaled $424.7 million, up 41 percent from the $301.1 million in all of 2012, according to New York-based Real Capital Analytics Inc. New Orleans was the only U.S. market among 55 tracked by the research firm in which sales have surpassed last year’s total.

“In the past 12 months, I’ve seen a real shift,” Matthew Schwartz, principal and co-founder of developer Domain Cos., said while sitting in the crowded Sazerac Bar at the Roosevelt hotel, part of Hilton Worldwide Inc.’s Waldorf Astoria chain. “The level of interest from institutional investors and private equity is pretty significant. They used to look at me in bewilderment when I talked about this city, asking me, ‘Why New Orleans?’”

Commercial construction starts in New Orleans, excluding apartments and infrastructure developments, had a total value of $1.83 billion last year, according to Reed Construction, a unit of Reed Elsevier. That figure — which includes renovations, additions and ground-up projects — was the highest in at least a decade, surpassing the prior peak of $1.29 billion in 2008, Reed Construction said.

Domain, based in New York, is developing the $200 million South Market District mixed-use project near New Orleans’s burgeoning medical and arts districts. The first phase — a five-story apartment, restaurant and retail building known as Paramount at South Market — broke ground in June and is scheduled for completion late next year, Schwartz said.

The firm, which plans to soon announce another development in New Orleans, is banking on an emerging technology and media industry as producers including David Simon — co-creator of “Treme,” a television drama about the aftermath of Katrina that’s filmed in the city — choose the area for their projects. Louisiana is now the third-most-popular filming destination in the U.S., after California and New York, according to a February statement by the New Orleans Mayor’s Office of Cultural Economy.

More than 1,800 people died in Hurricane Katrina, which swept through New Orleans on Aug. 29, 2005, and caused widespread destruction as the city’s levee system failed. After the storm, many poor residents didn’t return “either because they didn’t have an asset to rebuild or found a new city to live in,” Pres Kabacoff, chief executive officer of local developer HRI Properties.

The population of New Orleans slumped to a low of 209,000 right after Katrina from 455,000 before the hurricane, U.S. Census Bureau data show. Today, the city’s population is expanding again, growing to an estimated 369,000 last year from 344,000 in 2010.

Federal funds tied to the storm have been spent on the city’s infrastructure, including shoring up the levees and building new roads, as well as redeveloping and reforming the schools and local criminal-justice system, according to the New Orleans Business Alliance.

Katrina reconstruction funds have helped New Orleans avoid the fate that’s beset Detroit, Schwartz said. The U.S. automobile hub, citing $18 billion in debts, filed for bankruptcy protection last month after decades of population declines and factory firings left it too poor to pay bondholders, retired cops and current city workers. The city’s housing market has been dragged down by decaying, vacant properties even as sales of existing homes on a national level are close to a three-year high.

“New Orleans could have easily hit bottom like Detroit, but instead all this money was coming in,” he said. “It’s reignited and been giving rise to this entrepreneurial spirit in the city that’s fueling new businesses, new ideas and opportunities for developers like us.”

Schwartz said he’s counting on demand spurred by such projects as BioDistrict, a 1,500-acre downtown development that will include two hospitals, research facilities, offices and retail. It’s expected to create 4,000 jobs initially and 20,000 within two decades, according to James McNamara, BioDistrict’s president and chief executive officer.

Changing demographics are motivating those considering investments in New Orleans, Schwartz said. The percentage of 25- to-34-year-olds with at least a bachelor’s degree has grown in the city to 29 percent in 2010 from 25 percent a decade earlier, according to Greater New Orleans Inc., a regional economic- development alliance.

“While Katrina was a horrible disaster, it also has provided the city with the money and the chance to reinvent itself,” Cummings, the Ekistics CEO, said during a tour of his Rice Mill Lofts building, a former grain processor built in 1892 and renovated two years ago.

The recovery can be felt even in districts such as the Lower Ninth Ward, where Katrina flooding caused the most devastation and deaths. The area, once crowded with old, dilapidated wooden houses that were destroyed when the levees broke, now has fewer, newer homes after reconstruction with the help of federal funds.

Resurfaced streets in the area run past new single-family houses and gated townhouse communities built with brick. Paved driveways and white-picket fences line manicured front yards, and some homes have rooftop solar panels.

The New Orleans renaissance hasn’t benefited everyone equally, said James Perry, executive director of the Greater New Orleans Fair Housing Action Center and a former mayoral candidate. Most of the spending in the city has been made outside its poorest areas, he said.

“The majority of the investments post-Katrina have been in the neighborhoods that have suffered the least damage, and they tend to be the neighborhoods with the highest income and the neighborhoods that are the least diverse,” Perry said in a telephone interview, adding that a full recovery of the Lower Ninth will probably take at least 10 years more. “The hardest hit, low-income, majority African-American neighborhoods are suffering dramatically and are nowhere near recovery.”

The city also is grappling with the issues of poverty and crime that have plagued it since well before Katrina. People living at or below the federal poverty line stood at 25.7 percent in 2011, compared with the U.S. average of 14.3 percent, according to the Census Bureau.

The total number of crimes in New Orleans climbed to 16,647 last year, up 9.2 percent from 2010, data from the New Orleans Police Department show. That includes a 10 percent increase in murders, to 193, and a 23 percent rise in thefts. The number of rapes dropped to 136 from 144, and auto thefts fell 8.1 percent.

“Crime and poverty continue to be very difficult issues for this city,” said Peter Ricchiuti, a finance professor at Tulane University’s Freeman School of Business. “To snuff out poverty takes a long, long time. It’s about reforming the school system to help the next generation of lower-income students. The good thing is it really works and they are making great strides. The bad thing is it takes a lot of years.”

While lower-income areas are still hurting, the development boom going on elsewhere in the city will help to bolster progress — by creating jobs, attracting more residents to New Orleans and, ultimately, expanding the tax base, Perry said.

“Investment in the city sends a clear message to people that the city is open for business,” he said.

Improving demographics and economics have attracted Dallas- based Gatehouse Capital Corp. The company last week was chosen by a five-member city committee to refine a redevelopment plan for the former World Trade Center, a vacant 33-story building. The project may include a hotel and apartments.

“Katrina brought in lots and lots of money,” said Kabacoff at HRI Properties, which has a residential-and-hotel property under construction. “And every planner and developer in the world got suddenly interested in New Orleans because it’s giving them the chance to work on a blank slate.”

The commercial real estate recovery also is driven by record demand for hotel rooms, according to Leonard Wormser, managing director at the hospitality division of New Orleans real estate brokerage Latter & Blum Inc. Tourists are drawn to the city’s French Quarter, where they catch beads tossed from balconies on Bourbon Street, eat beignets at Cafe Du Monde and carry their Hurricanes from Pat O’Brien’s to the Old Absinthe House in go cups.

This year through June, hotels in the city were 71 percent occupied, higher than the 62 percent national average, according to Hendersonville, Tennessee-based research company STR. Convention bookings for the last part of 2013 are up almost 60 percent from a year earlier, and the city had 9.1 million visitors last year, the most in a year since Katrina, with travelers spending a record $6 billion, according to the New Orleans Convention & Visitors Bureau.

“It’s become more comfortable for Wall Street to put money into New Orleans,” said Wormser, who was preparing to show a hotel to a New York-based institutional investor later in the morning. He said a hotel property recently on the market was toured about 50 times and ultimately had more than 20 offers from both locals and out-of-towners.

Cummings, the loft developer, also has two boutique hotels in the city, International House and Loft 523, both of which have been benefiting from rising demand from visitors who include such high-profile guests as actors Johnny Depp and Nicolas Cage, Cummings said.

In the seven months through July, 15 hotels have sold in downtown New Orleans, and eight more are expected to sell by the end of the year, according to Wormser.

In April, Annapolis, Maryland-based Chesapeake Lodging Trust bought the W New Orleans on Poydras Street for $65 million, and in May Sunstone Hotel Investors Inc., based in Aliso Viejo, California, purchased the Hilton New Orleans/St. Charles Avenue. In March, Summit Hotel Properties Inc. of Sioux Falls, South Dakota, completed the acquisition of five New Orleans properties.

“New Orleans is now a well-diversified business market,” Kenneth Cruse, chief executive officer at Sunstone, said in an email. “Now the traditional leisure and convention demand for hotel rooms is being supplemented by solid growth in energy and medical-related business. The city is well-positioned for continued economic growth as an international hub for education, medicine and energy.”

Interest from investors “started to slowly emerge probably right when the national economy went down in 2010,” said Henry “Skip” O’Connor Jr., a lawyer and real estate investor who developed nine Marriott-branded hotels in the city. “We were a world apart from the national economy with all that federal money coming in. Back then, New Orleans, maybe for the first time, started to look like a good idea.”

Investment in such industries as bioscience, technology and media production has helped attract employers including TurboSquid, a maker of online three-dimensional models, and Gameloft, a Paris-based video-game developer that opened a local studio in September 2011, said Rod Miller, president and chief executive officer of the New Orleans Business Alliance. Miller said he’s had recent conversations with five “Google- type” companies about relocating to the area.

Cummings said he has faith in the city’s reinvention and high hopes for his next residential project after his Rice Mill Lofts was fully leased within five months. He said he expects his new 220-unit, ground-up development next door to benefit from soaring demand from an influx of young workers looking for high-end housing.

Such residents have been drawn to the Rice Mill lofts, with its swimming pool, giant Buddha statue on the back patio, and exposed brick walls with graffiti left over from when the property was vacant.

“As New Orleans is reinventing itself, it’s attracting new talent, new ideas and new investments in actual numbers,” Cummings said. “I’ve not seen it this way in this city before.”