A number of plans for towering construction projects in New Orleans have been announced, but reality has taken its toll and some have fallen off the books

Sunday, October 15, 2006

By Greg Thomas

Hurricane Katrina sped along plans for a spate of new high-rise residential towers, but more than a quarter of the proposed housing units have already been killed or put on hold.

Out-of-town investors "are circling like eagles" with capital ready to invest in downtown projects, said Kurt Weigle, executive director of the Downtown Development District. And inquiries from outside developers have increased five-fold, possibly because of special tax incentives being made available to building projects in hurricane-impacted areas.

But not all of the residential projects will be built, experts say. The pricetags on most of the announced projects have risen 30 percent due to escalating prices on labor and building materials, developers say. That big of an increase is giving pause to both the developers behind the condo towers and the potential condo buyers who, in some cases, are backing out of sales contracts when presented with the higher prices.

Furthermore, the Gulf Opportunity Zone Act, which created billions in subsidy programs to assist in the rebuilding of New Orleans , has been less encouraging of condominium projects, which enjoy no tax benefits under the program, said Gary Elkins, a local attorney specializing in tax credits.

As a result, of the nearly 4,000 high-rise condo units that have been proposed since the beginning of 2005, more than 1,400 have been either dropped or put on indefinite hold.

"There's a lot of work people thought they'd have after the storm. The reality is these projects they were talking about are never going to happen," said Clifford Mowe, a Pensacola Beach developer involved in plans to construct Trump International Hotel & Tower on Poydras St. , a project that is still moving forward.

Widespread shortages

Rising material and labor costs are a national phenomenon not limited to New Orleans .

A rash of building projects across the country -- Miami alone is in the process of building 70,000 new condominium units -- has sucked up materials and labor creating shortages.

At the same time, a construction boom in China is driving up prices of cement and steel.

"The prices that have run up are related to the following items," said Paul Flower, head of Carl E. Woodward LLC, a major general contractor. "Labor (costs) have increased, material and manufactured products related to the world economy have increased and a loss of productivity among (an influx of less skilled) workers has caused an increase in labor costs." Though there are lots of laborers in the area, Flower said he has to pay overtime to get the most skilled workers.

Flower and other developers, including Mowe of the Trump Tower project, say labor costs and building material prices are subsiding somewhat.

"We think when the dust settles the substantial (costs) we're hearing over the last couple of months will come down," Mowe said. "The (subcontractors) are high because they anticipated far more work" in the Gulf Coast region than is actually taking place."

Still, the high prices have slowed construction of the Trump tower.

The development team behind the tower has pushed off construction for at least another three to six months in hopes that building material costs will subside, Mowe said. In the meantime, the building's design has been tweaked to both trim costs and incorporate more units into the project.

Gone are numerous balconies on the tower, as is deck space for some condo units, Mowe said.

When announced over a year ago, developers expected to sell their condos for an average of $450 per square foot. Now, units are expected to average $600 to $700 per square foot, an increase that is being driven by both rising building prices and the premium added when Trump officially joined the project. The price of building the Trump tower has more than doubled from what it would have been just a few years ago, Mowe said.

The Trump International Hotel & Tower will comprise 450 condos and 250 condo-hotel units. Buyers of condo-hotel units can stay there as often as they like. But when the owners are away, their rooms are rented out on a nightly basis like any other hotel room. Owners of condo-hotel units typically get a percentage of the room rate whenever it is rented.

Trey Cefalu, who is developing Vantage Tower , a 25-story residential complex at Girod Street and O'Keefe Avenue , said he built a steeper-than-usual premium for building cost inflation into the pricetag on his condo project.

While most contractors incorporate a 2 to 4 percent allowance for construction over-runs into the price of their project, Cefalu used a 10 percent allowance when pricing theVantage Tower complex.

Buyers begin to resurface

The New Orleans condo market is usually dominated by two groups of buyers: out-of-town buyers looking for a second home and investors who plan to eventually sell the property for profit. Rising condominium prices have left both groups skittish.

"The out-of-town buyer for the second home and the investor -- we lost them both," said Bobby Talbot of Talbot Realty Group, which is marketing Vantage Tower . "But we're just now seeing them slowly coming back."

Shaun Talbot, also of Talbot Realty, said that Vantage Tower had 105 reservations within months of announcing the project last year. The project includes a total of 197 units.

But at the beginning of this year, some potential buyers backed out when told that the prices of their units were rising. The project also lost some reservations this summer when buyers backed out, citing fears about the hurricane season and the uncertainty surrounding the city's levee system.

New buyers are slowly stepping up to the plate, said the Talbots, who point out that it is not unusual to lose a good percentage of reservations on a project because the time between agreeing to purchase a unit and actually receiving the finished product can easily take two years. People change their minds, find other projects, or move on for other reasons, they said.

But often, price is a significant factor.

Earl Weber, who is one of the developers behind a plan to demolish the former Houma Apartments in Metairie and build in their place two mid-rise condominium buildings, said he believes both location and price can be critical to a project's success.

The prices in Weber's unit are coming in between $200,000 and $300,000, slightly lower than some of the new condos being proposed downtown, which often start between $250,00 and $300,000.

"I think folks can afford that," said Weber of the prices on the condos he is building. "But when you get into the $450 to $500 per square foot range (downtown), there's not enough buyers in this city for all the projects being announced."

There are still other challenges to developing high-rise residential complexes.

One issue that is that the Gulf Opportunity Zone Act, which created billions in subsidy programs to assist in the rebuilding of New Orleans , is of limited use on condominium projects. The Go Zone offers accelerated depreciation, which allows a commercial entity to write 50 percent of the value of the project off his income taxes in the year the project is completed. However, while the depreciation works for office buildings, apartment complexes and retail sites, it excludes condominiums, Elkins said.

Go Zone bonds for commercial projects are also of no use to condominium developers, he said.

Two projects suffering

Two projects are clearly dead: Neal Hixon has dropped his years of work to build a 331-foot tower at the Woolworth building site on Canal Street and Tommy Spinosa of Baton Rouge is no longer pursuing plans to build an 180-foot tower with 250 apartments on what is now a parking lot at Julia Street and St. Charles Avenue.

Hixon voiced frustration in putting his deal together, in particular opposition from then City Councilwoman Jackie Clarkson and French Quarter residents over the height of the project. Further, he said the city approval process is cumbersome and long. In fact, he's selling some of his more popular developments -- including the Whole Foods Market in Metairie .

Hayden Wren, a broker with Corporate Realty who was involved in Spinosa's deal, said Spinosa decided to focus on his projects in Baton Rouge instead of moving forward with the New Orleans tower. Hurricane Katrina raised concerns about the New Orleans market, Wren said.

Flower of Carl E. Woodward LLC has taken over Spinosa's lease on the site and is considering pursuing his own development there. Flower is doing business on the site not as Carl E. Woodward but as Woodward Interests LLC.

Still other projects are moving forward:

-- New partners have taken over plans to convert the asbestos-plagued Plaza Tower office building into Crescent City Tower .

E.J. Maysonave, a long-time veteran broker in the condo market, and head of marketing and sales for Crescent, is confident their project has an advantage -- they're not building from scratch, but rather gutting the existing structure from top to bottom, a savings other large-scale projects that will be built from the ground up don't have.

-- Tracage Tower, a 24-story high-rise planned for 1100 Annunciation St., is also moving forward under the direction of Tracage Development LLC, a partnership of Rob Tatum, Roth Walsh and T.J. Iarocci III.

-- Nouveau Carre, a 30-story complex, is being developed by Tom Bauer. He has proposed putting a 500-unit condo project on the parking lots near the Winn-Dixie store across Basin Street from the Municipal Auditorium after downsizing the project from 900 units

-- Developer Elie Khoury has proposed a 530-unit Felicity Place condominium and apartment complex in Central City He's also moving forward with plans to develop 98 units in the old Texaco building on Canal Street. But, he said, with prices they way they are, Felicity Place is "long range," more or less land banked until other projects wrap up and the market proves itself.

-- Brewster Stalter II has proposed demolishing two small buildings near the corner of Julia and Carondelet streets in downtown New Orleans to make way for a 17-story condominium tower. The $70 million project, Riverview at Julia, would include 98 condominiums on 11 floors.

-- The First National Bank building at 210 Baronne St. is being converted by developer Mohan Kailas into 108 condos and 140 apartments. Though the project did not originally involve apartments, Kailas recently added them so that the development will qualify for historic tax credits.

One real estate broker says that while a plethora of projects have been announced, and while several may fall to the wayside, five, 10 years from now, things will be different.

"Success breeds imitators, said, Larry Schedler of Larry G. Schedler & Associates, who specializes in the multifamily market.

"If someone can sell at $450 a square foot someone else will take that concept and refine it more. I'm encouraged by the developers who are making a commitment and try to make something work in this marketplace."

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Greg Thomas can be reached at gthomas@timespicayune.com or 504-826-3399.