Hilton did more than just repair the damages related to Katrina, the company upgraded its facility to the tune of close to $50 million, including the redesign of the lobby (shown).

After last years devastating hurricanes, the Gulf Coast rebuilds

By Lorna Pappas

Last year's hurricanes brought the nation's attention to the Gulf Coast region. The devastation and despair caused by Hurricanes Katrina and Rita and their aftermath kept us riveted. Now, long after the media spotlight has turned to other issues, the focus in the Gulf Coast is not on the destruction but on the rebirth and reconstruction of a proud and vital region.

Amidst the hardships in the Gulf Coast, particularly New Orleans, there is much opportunity and optimism as reconstruction and perhaps even a renaissance has gotten underway. With rebuilding comes tremendous investment opportunities for those with vision and patience, and the first to act may be getting the best deals.

Photos from General Growth’s Oakwood Center on the West Bank of New Orleans show the damage, demolition, cleanup and rebuilding that took place at the site between September 2005 and March 2006.

Arthur Strebcow, president of Latter Blum, a 90-year-old commercial real estate brokerage and property management firm specializing in the New Orleans market, says that, for years, his company and others pursued investors, often without luck, and now they can't return investor calls fast enough.

"Never have I seen so much money being pumped into this area. Bad press may have scared off John Q. Public, but national developers with money to spend are all over down here, because they realize the enormous opportunities, especially given all the economic tax benefits being pushed into the Gulf Coast region," Strebcow says. "Investors can leverage a dollar, big time, right now. New Orleans is one of the most underpriced markets in the U.S. It's off the radar."

Strebcow himself has spent the past 30 years working and investing in New Orleans real estate. "Anyone with a three-to-five-year window will do well here," he says. "Those acting now will make the biggest profits, while those who wait may also benefit, but will have missed the low hanging fruit."

REITs, many of whom already owned property in the impacted areas, have been among the early players helping to rebuild and revitalize the region. At General Growth Properties, Inc. (NYSE: GGP), Brian McCarthy, vice president of asset management, says that real estate investors literally are on the leading edge of creating something new and dynamic in New Orleans and throughout the Gulf Coast.

"There are tremendous investment opportunities for investors who jump in now," McCarthy says. "New Orleans is not going to go away. The culture is just too strong. There are too many people who have made it their personal mission to see the revitalization of this area. They have an amazing determination and mind-set; Nothing will stop them from bringing New Orleans back to what it was—one of the world's top tourist destinations and great places to live. Their commitment and dedication—including our own at General Growth—continue to be catalysts for rebirth and growth in New Orleans and beyond."

Former Pittsburgh Mayor Thomas Murphy was recently named liaison to the Gulf Coast by the Urban Land Institute (ULI). He reports that final plans for recovery confirmed in April provide former homeowners and renters with specific financial options for returning, and that a community planning process, in place by the end of May, gives them the physical and financial parameters of neighborhood rebuilding. Also by the end of May, Murphy says a solid understanding of which agencies are in charge of which rebuilding efforts in both Louisiana and Mississippi is accelerating the entire recovery process.

"With the significant amount of public money now flowing into the Gulf Coast, this area presents one of the best investment opportunities in the country," Murphy says.

Business on the Upswing

New Orleans, which became the focal point for the area's struggles after the hurricanes, is getting back to business. New Orleans restaurants, stores and businesses continue to come back online, and every day more seems to happen than the day before. About 2,500 restaurants are ready to reopen, employing about 15,000 workers and looking for more help. At press time, more than 27,155 hotel rooms were in operation in the Greater New Orleans area, and, according to the Times Picayune, out of 81,000 local businesses in the area, about 42,170 currently are open and another 20,268 have partially resumed operation.

General Growth recently completed the rebuilding effort at Oakwood and the property is now ready for redevelopment.

Tourism has and will continue to be a major economic lifeline for the city and region. Sixteen city-wide conventions are confirmed for 2006, with more than 155,000 attendees expected during this year alone. Among them: The National Association of Realtors will hold its annual convention in New Orleans in November, bringing as much as $34 million in convention revenues. In addition, 222 conferences have been booked for the remainder of the year, totaling 362,000 attendees.

February saw Mardi Gras bring a huge emotional and psychological lift to the city. That same month brought the reopening of the Canal Place Shopping Mall and Harrah's casino; Shell Oil returned to the office sector; and most airlines as well as Amtrak and several cruise ships resumed service. The National Basketball Association's New Orleans Hornets played the first post-hurricane professional sporting event in the city in March, and The New Orleans Jazz & Heritage Festival took place in late April and early May. These were all a major boost to area tourism and a significant turning point for the city—signs that although it may have been bowed, it was not broken.

After a full schedule of summertime events, September will see the National Football League's New Orleans Saints return to the Superdome, also a major milestone given its prominence as the focal point for so much of the city's hardship.

Lack of Housing the Major Roadblock

Of course, not everything is well in the Big Not-so-Easy. Among the many challenges, a desperate need for housing appears to be a major roadblock to more rapid Gulf Coast recovery right now. Without housing, there are fewer workers, and without workers, there's a smaller service force to support the tax base. Of New Orleans's 460,000 pre-Katrina residents, only about 150,000 have returned to date—even though hourly rates at even minimum-waged jobs have more than doubled—simply because there's nowhere to live. Conventions are being scheduled, but not at a rate that could be seen if residents returned to support visitors.

"Conventions support the tax base here, but many groups are holding off until service levels are up. If the industry doesn't start to build housing then there won't be a workforce to serve the customer, and the steadier flow of convention bookings can't happen," says Kevin Regan, regional vice president of operations for Starwood Hotels & Resorts (NYSE: HOT). "The issue simply is lack of financing. The focus now is on funding the low and moderately priced housing that will bring back the workforce that supports the shops, hotels and restaurants, and serves the convention and tourist market. That's where the real opportunity is right now. The issue isn't if residents want to come back, but how fast we can get them here."

In late February, Louisiana Governor Kathleen Blanco outlined a $7.5 billion rebuilding, relocation and buyout plan for the thousands of residents whose homes remain damaged or beyond repair. It is Louisiana's first comprehensive housing proposal since Hurricane Katrina. Assistance would be capped at $150,000 per homeowner, representing a significant step in using the billions of already available federal recovery dollars. For those who don't want to relocate or rebuild in Louisiana, the plan would buy them out at 60 percent of the pre-storm home value.

Residents wishing to return are facing three factors before they come back: 1) Does my local area have power?; 2) Are the schools open?; and 3) If it flooded, is the damage repaired?

"If all the answers are yes, then sales in those markets are off the chart," Strebcow says. "My opinion is that the real barrier to growth in some areas, and to the speed of that growth, is due entirely to the government's inability to give clear direction as to where and what to build. The keys to real success are in the hands of Congress."

Most displaced residents fled to areas nearby, including Houston, Arkansas and Alabama, which helps those markets, but weakens the areas hit the hardest. To help speed relocation back to New Orleans and other municipalities, developers are getting creative. In New Orleans, there is talk of converting some office space to accommodate demand for multifamily housing.

Brian Lambert, senior real estate economist for Property & Portfolio Research, says it makes economic sense that long-vacant office towers in the New Orleans CBD that were structurally undamaged despite some ground-floor flooding and window loss may be converted to multifamily housing, either rental apartments or for-sale condos.

"As these buildings are centrally located and relatively unscathed, it would provide an answer to the housing crunch that faces the city as residents return," Lambert says. "In the end, if office towers are converted, the remaining office buildings may actually benefit, as they would have less competition to fill their space."

On the industrial front, there's limited demand for warehousing in New Orleans, despite its port accessibility. With only about 853,400 square feet total, EastGroup Properties Inc. (NYSE: EGP) is one of the city's largest industrial owners. Its properties were relatively unscathed from the hurricanes, reports Jann Puckett, vice president of EastGroup Properties.

"Our three buildings in the Riverbend Business Park and five smaller ones in the Elmwood Business Park are all above sea level, experienced no flooding and are 100 percent leased," she reports. "Several national companies—Sprint and three environmental companies—needed space immediately following the hurricane, and took our remaining 11 percent of available space."

Puckett says areas in New Orleans not along the levee look somewhat unaffected, and that someone looking to buy in those sub-markets "likely would find a seller willing to offer a good price right now."

		Rebuilding the Mighty Mississippi Gulf Coast Of the Mississippi gulf coast, Arthur Strebcow of real estate management firm Latter Blum says it was more physically destroyed by Katrina than many other areas.

Tourism Key to Recovery

As mentioned, New Orleans officials are working hard to return to business as usual. A large component of that is continuing with the events and activities that drives so many tourists to the area, which is good news for the hotel and resort operators.

Starwood Hotels operates a Sheraton and two W hotels in New Orleans, none of which were severely damaged. All three have housed police, emergency workers, major media, construction and other relief workers, and some evacuees, but not necessarily those with a discretionary income that would fuel the shops and restaurants to the extent that tourists would. That's changing as the city starts to stand on its feet again. States Regan, "Storm after storm, people always migrate back to their homes, just as they have in Florida and other U.S. areas. The same is happening in New Orleans. The heart of this city is its people, and they're starting to return," states Regan, adding that the biggest challenge is getting the government funding to support a service force.

At the Hilton New Orleans Riverside, General Manager Fred Sawyers says the city will come back "better than before."

"The political landscape will change, with more scrutiny from the state and feds, and accountability will come to the fore," Sawyers says. "The public and business sector will see the importance tourism has, and therefore will do more to support the necessary infrastructure."

The Hilton New Orleans Riverside's temporary front desk

Sawyers reports that The Hilton New Orleans Riverside, which reopened in November, will complete all reconstruction by June 1. This includes 85 percent of its meeting space, public areas including the Front Desk and Business Center, and its Health Club (already reopened). "As for the rest of New Orleans, we are encouraged by the speed of progress in the Central Business District, and the fact that it and the French Quarter were little impacted by Katrina. For the tourism industry, almost all areas frequented by conventioneers and tourists will come back by the end of spring. Tourism will be a huge economic driver in the recovery. New Orleans is unique, and its historical and cultural value cannot be duplicated. We now have a chance to make the area even better than before."

Sawyers says that housing will remain an issue in the city for some time, but has no doubt both the government and private enterprise will move quickly to address it.

What has surprised Sawyers most about current activity in the area? "The spirit of the people. Despite all odds, they are resilient and determined. This alone gives me hope every day. New Orleanians will not let the city die. Owners and developers should invest now for the long run. Nothing great ever comes easily, but the best always comes to those with vision," Sawyers says.

Most of the hotels in the CBD and French Quarter, where minimal flooding took place, are finishing repairs and getting up and running, reports Strebcow, but, like Starwood's properties, have not been filled with the tourist trade that yields the discretionary income that retail and restaurants desire. "Tourists are coming in but not at the pre-Katrina level. But that will change. The prevailing wisdom is that by the end of June, hotels in the CBD and most other tourist oriented facilities and venues will be up and operational, perhaps not full speed, but enough to have a great time here."

Retail Coming Back

Lambert, whose company's recent economic overview of the area was less than optimistic, says that with the active rebuilding and construction process comes a strong demand for big-box stores that can be built quickly to satisfy retail demands for the market. "A large uptick in stores like Home Depot and Wal-Mart is extremely likely in the near term," he reports. Lowe's is also expanding in the area, as is Circuit City, among other big-box retailers.

HRI Properties' AmericanCan suffered significant hurricane flooding damage.

As the city plans for increased tourism, "retailers are asking the Downtown Development District to focus on retail in its revival plans, and as tourism becomes an even more vital slice of the local economy, this pressure will continue to build. Tourism-driven retailers, including Canal Place, which garners up to 60 percent of its sales from tourists, and the Riverwalk Market Place, which garners up to 90 percent of its sales from tourists, will experience massive slowdowns this year but will benefit from this changing dynamic in the long run."

The General Growth-owned Riverwalk Market Place, with pre-Katrina gross leasable area (GLA) of 189,000 square feet, reopened in November with about 35 percent of its tenants, reports McCarthy.

"Why did we open for the holidays when our primary target, the tourist trade, wasn't here yet?" McCarthy says. "Our position is that re-establishing a business requires a long lead time. You have to find employees to work, and those employees need housing. Retail distribution lines must be reinstated. In order to open for the first major tourist attraction, which was Mardi Gras, a retailer can't begin in February and expect to host tourists effectively."

By reopening the Riverwalk, McCarthy says General Growth's asset management team is hoping to buoy other business toward redevelopment, as well as help re-establish New Orleans as a tourist attraction.

"We saw this move as a conduit to getting New Orleans up and running. We are looking to take a leadership role in the revitalization of New Orleans," McCarthy says. "It's all about leading by example. The question is, what comes first, the market or the rebuilding? In our case, our employees are the market. So by getting our business up and running, we contribute not only to creating an amenity the city can now offer but have done our part in re-establishing the market."

Just south of the downtown area, General Growth Properties' Oakwood Center shopping mall, with 360,000 GLA, sustained significant damage, not from the hurricane, but from looters who set fires to light the area and see what they could take.

"That property has a much longer lead time, taking us more than a year to restore. We are going as fast as possible in an effort to meet the market demand of returning residents," McCarthy says. "If there is a yin and a yang to this disaster, it's that the undamaged properties have been the beneficiaries of dramatic market growth." McCarthy adds that no other General Growth Properties sustained damage during or after the hurricanes.

Retail is a significant part of River Garden, a 12-acre mixed-use development planned on high ground by New Orleans-based HRI Properties, a full-service real estate development company and a national leader in the adaptive reuse of historic structures. River Garden is a master-planned community located in the Lower Garden District of New Orleans. The development, slated to be completed by 2008, is comprised of approximately 60 acres bound by the Mississippi River on one end and Magazine Street on the other.

Pres Kabacoff, president of HRI, says that though 30 percent of his company's overall portfolio of New Orleans housing, office and hotels was flooded or otherwise severely damaged during Katrina, he expects all properties to be back in service this spring. Asked his outlook for New Orleans, Kabacoff states, "We have a strong need for housing as well as retail on high ground, and a tourist community that must overcome some bad press, since the older part of the city, where tourists traditionally flock, is still intact—but the world needs to know this.

"I think New Orleans will come back as a boutique city, more densely developed on the higher ground, with some infill development in some lower-lying areas and along the light rail system. We should see some interesting seaside villages along the Gulf Coast, including Mississippi, where an extensive planning process is underway for some urban seaside village concepts."

His advice for other owners/developers in the region? "Study the market, because it's unpredictable," Kabacoff says. "It's hard to envision exactly how long recovery will take and whether we'll get all the financial incentives necessary, but I do see a lot of good thinking and positive changes taking place."