REIT shops New Orleans portfolio

Real Estate Alert, April 14, 2004

Equity Office Properties is shopping its entire New Orleans portfolio, which consists of three office properties with a total value of about $200 million.

The properties--two downtown and one just outside the city limits--encompass nearly 2.4 million square feet. The Chicago REIT is trying to sell the properties as a package. It's unclear if it would consider bids on individual properties. Eastdil Realty has the listing.

The largest property is the 1.2 million-sf Lakeway Center, on Lake Pontchartrain in Metairie, near New Orleans International Airport. An Equity Office predecessor acquired the three-building complex, along with a Sheraton Doubletree Hotel on the same campus, in 1993 for $122.8 million. It then flipped the hotel, now the Doubletree Hotel Lakeside, for about $52 million.

Lakeway Center is 92% occupied, with average rents of about $19/sf and asking rents of $21/sf. It was built from 1981 to 1987, and renovated in 1996. Local brokers estimate that the property is worth up to $100/sf, or $120 million. Metairie has seen only a handful of small office trades since 2000. In the most recent transaction, BGK Equities in December paid $10.2 million, or $102/sf, for the 100,000-sf building at 3501 Causeway.

Equity Office's offering also includes the 620,000-sf Texaco Center, the 545,000-sf LL&E Tower and a 766-car garage at 601 Tchoupitoulas Street. The buildings are worth about $65/sf, of $75 million in total, while the garage is valued at roughly $10 million. That's far less than the $133.4 million that Equity Office paid in 1997 when it bought them from Columbus American Properties.

The decline in value reflects the fact that downtown New Orleans is one of the weakest office markets in the country. While the central business district maintained an occupancy level approaching 90% over the past couple of years, it has a hefty amount of space available for sublease. The asking rent for subleased Class-A space is as low as $10/sf--dragging down the overall market. That has put a ceiling on property values.

Texaco Center, at 400 Poydras Street, is 85% occupied. Rents average about $16.75/sf, while asking rents are $15.50/sf. The 32-story building was constructed in 1983. LL&E Tower, at 909 Poydras, is 92% occupied, with rents of about $17.75/sf and asking rents of $16/sf. The 36-story building was constructed in 1987.

Recent sales downtown include Stewart Enterprises' $32 million, or $63/sf, purchase last month of the 509,000-sf building at 1615 Poydras; IPC US REIT's $78.5 million, or $103/sf, purchase in December of Energy Centre, a 762,000-sf building at 1100 Poydras; and Hertz Group's $34.2 million, of $70/sf, purchase last September of the 492,000-sf Dominion Tower, at 1450 Poydras.