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Commercial Leasing in a Down Market

In some cities with recently booming economies – Miami comes to mind – a great rush of development, both commercial and residential, led to a large inventory of vacant space that went begging when the economic downturn and credit squeeze gripped the country. This exerted strong downward pressure on rents and a weak market for developers and landlords, although a very good market for tenants. There were reports of first-class, never-lived-in condos and apartments in high rises in very desirable sections of the Miami area going for $1,500 a month, a fraction of their rental value a year or two earlier. There were similar reports of declines in the commercial leasing markets in other southern cities such as Atlanta and Houston.

The situation in New Orleans is a little more complex. The commercial leasing market was always smaller and less expensive, at least for Class A office space. Then Hurricane Katrina dealt its catastrophic blow to the City in 2005, scattering a large part of the population and dealing a serious blow to the inventory of commercial leasing properties in the area. While it is true that some tenants downsized or simply disappeared after the storm, in time there was also something of an influx of businesses and people trying to participate in the rebuilding and recovery of the area. That limited movement of new people and businesses into the city, plus the reestablishment and in some cases modest expansion of existing businesses, all occurred in an environment of reduced property inventory and little or no new construction, certainly not of Class A office space, where the cost of a new project would dictate an initial rent well in excess of market rate for New Orleans.

So the bottom line for the New Orleans area is that this might indeed be a troubled market for developers trying to get new projects going in a hostile credit and economic environment (leading to a decided lack of all the construction cranes that were supposed to be dotting our skyline long before now). The situation is also a little dicey for tenants, looking for suitable space and good deals in a reduced inventory of available properties. But landlords of existing properties, especially existing Class A properties, are the beneficiaries of these same trends. They certainly have credit and other economic concerns of their own, but they are in a better negotiating position compared with recent years and can look forward to the future with a measure of optimism.