[StBernard] THE RENT CYCLE

[Westley Annis]

THE RENT CYCLE

By Rebecca Mowbray, The Times-Picayune 

December 07, 2009, 3:16PM

After Katrina, Andre Hooper figured his apartments would stay full for the
next decade. 

Today, he's cutting deals left and right to try to keep his 325-unit
Carrollton apartment complex occupied. Right now, it's a free month's rent
and a flat screen television for signing a lease at Cypress Trace, but he's
also offered $300 gas cards and cash. In recent months, he's also started
accepting Section 8 public rental vouchers to sop up idle units.

"We've had so many specials, " lamented Hooper, a partner in Riverlake
Properties, which manages market-rate and affordable apartments, many of
which were built or renovated since the storm. "I've never had vacancies
like this until the last two years. Do we really have a housing shortage in
the city?"

The apartment rental market in the New Orleans area is under duress.
Occupancy rates have dropped from 92 percent a year ago to 87 percent today,
according to the Greater New Orleans Multi-Family Report. While that's not
as bad as during the late 1980s, it is drifting close to what complex
managers say is the break-even point of 81 percent to 85 percent occupancy. 

As a result, apartment managers are engaged in race-to-the-bottom concession
wars not seen since the oil bust. A free month's rent, reduced deposits, and
relaxed credit score requirements are becoming common, as are the gimmicks. 

Sunquest Properties Inc., a Monroe firm that until a month ago managed the
freshly renovated and centrally located Westchase Apartments in Harvey, even
tried entering new tenants into a drawing to win a Jeep Liberty if they
signed a six-month lease and stayed current on their rent payments. The
cherry-colored vehicle was to be given away once the market-rate complex hit
94 percent occupancy. But Westchase has yet to reach that milestone, and the
car still sits in the parking lot with a giant red and white bow on its
hood. 

"It's tough, " said Sean Griffin, director of operations at Sunquest, which
found that half of its prospective tenants owed money to other landlords, a
deal-killer. 

While Sunquest believes its troubles reflected worker distress in a tough
economy, others say the real culprit is the wave of swanky new mixed-income
apartments built around the city with Gulf Opportunity Zone tax credits. 

A total of 3,793 units in 34 properties have opened so far, according to
Milton Bailey, president of the Louisiana Housing Finance Agency, which
awarded the credits to developers. Another 4,075 units in tax-credit
developments are still in the pipeline, further increasing supply if those
projects actually get built. 

The new projects are high on style, amenity and vision. They seek nothing
less than to transform New Orleans from a market of singles and doubles to
one of state-of-the-art apartment buildings, offering low-income workers the
opportunity to live side-by-side with professionals rather than being
relegated to apartments that were affordable because they were poorly
maintained or outmoded. 

The Crescent Club on Tulane Avenue, for example, which has 136 market-rate
units and 92 units available to people earning less than 60 percent of the
area median income, radiates luxury. Spacious windows, green-certified
design -- with energy-efficient appliances and lights that will keep
electricity bills low -- are standard, along with a pool, a fitness center
with individual television screens and iPod jacks on the equipment, and
parking with every unit. 

Chris Papamichael, a principal with the Domain Cos., which recently won a
slew of affordable housing design awards for its projects in New Orleans,
said the Crescent Club is attracting hospital workers and students in New
Orleans, as well as drawing population from Jefferson Parish. 

"You get the amenities that you would get with a suburban property with the
pool and the fitness center, but we're a minute-and-a-half from downtown, "
he said. "A lot of them are coming from River Ridge and those communities." 

But managers of existing apartment complexes, whether market-rate or
affordable, are concerned about the shiny new tax-credit buildings. 

Even modern sites like the Saulet Apartments, built in 2001 and until
recently the closest thing to suburban apartment-style living in New
Orleans, are being affected. When the 703-unit complex in the Lower Garden
District reopened last year after extensive post-Katrina repairs, managers
were surprised to discover that the graduate students they were expecting
seemed to have been lured elsewhere by deals.

"We were not anticipating that this many new units would come on line. It
has definitely affected us, " said Kristen DeVon, regional property manager
at Greystar Real Estate Partners Inc. in Houston.

New Orleans was not previously a market of concessions, DeVon said, but now
it is. Her company is trying to advertise and reach out to firms with
business in New Orleans, such as Army Corps of Engineers contractors. "All
we can hope for is that more people move to New Orleans soon, " DeVon said. 

The Saulet's challenges highlight the notion that in order to build
affordable housing in the preferred mixed-income style, developers have to
build market-rate units, regardless of whether they're needed. It is unclear
to what extent the competition will also affect the many mom-and-pop
landlords around the city who supplement their incomes with the proceeds
from a few rental properties. 

In the affordable housing world, A.K. Gordon, president of the Louisiana
Affordable Housing Management Association, fears the worst. 

Tenants of existing affordable properties are moving to the new tax-credit
properties because of the amenities, Gordon said, even though the old places
are hardly dumpy, since most of them were gutted and rebuilt after Katrina.
Cutting deals doesn't ultimately stabilize the situation, because the
incentives create a churn of the most transient, deal-seeking tenants. High
vacancies could mean that landlords can't afford to maintain their
properties. Neglected properties add to the city's blight problems and
ultimately could fall into foreclosure. 

"You can't exist for too many months below your break-even point before your
lenders and owners are upset, " Gordon said. "I see a wave of foreclosures
coming up. It will be worse than in the mid-1980s."

So far, debate over the impact of the tax-credit properties has been most
extreme in St. Bernard Parish, where a federal judge found that the parish
had violated fair housing laws in its efforts to block the construction of
an apartment building with affordable units. But with the population slow to
ramp up in New Orleans, debate over the economic impact of mixed-income
projects is likely to intensify as more units open.

With volatile conditions facing market-rate and affordable properties, there
are conflicting perceptions of the housing market in post-Katrina New
Orleans. As more apartments have been rehabbed around the city, and storm
victims are vacating distant rental units and moving home, some people
believe that the apartment market is becoming overbuilt. 

But a recent analysis by the Greater New Orleans Community Data Center and
the Urban Institute says that the city still suffers from a dire shortage of
affordable housing because salaries are too low for many people to afford
even the units that are reserved for people making 60 percent of the area
median income. Demand for housing is greatest among people making even less.


Even as rents fall in the private market due to lack of demand, prices are
unlikely to fall to where many workers can afford them, because rents can't
fall below the landlord's costs without properties falling into disrepair.
Meanwhile, even competition for tenants making 60 percent of area median
income could be keen, because the bulge of people needing housing is found
at lower wage levels.

Bailey, from the Louisiana Housing Finance Agency, said that concerns about
the fate of landlords are misplaced when the city should be celebrating that
workers finally have opportunities for nice places to live. That trend
supports movement toward a healthier, more stable community, he said. 

If longtime apartment owners are discovering through rising vacancy rates
that their properties are not competitive, they should do something to
upgrade them, Bailey said. "We live in a very capitalistic society. If the
product I'm offering is better than the product that you're offering, figure
out how you can compete, " he said. 

Hoping to help resolve the debate, the Housing Finance Agency and the
Louisiana Recovery Authority have hired the University of New Orleans to
analyze the region's affordable housing needs. 

Meanwhile, the Affordable Housing Management Association has suggested the
U.S. Department of Housing and Urban Development should issue more Section 8
vouchers, which make up the difference between market-rate rent and what a
tenant can afford to pay. More of the vouchers would help meet the region's
affordable housing needs while giving private landlords the money they need
to keep up their properties, the group says.

But Larry Schedler, author of the Greater New Orleans Multi-family Report on
the rental market, said the problem of falling occupancy rates and rents
should take care of itself because tight commercial lending means that few,
if any, additional units will be built. "We're going to get a breather, " he
said.