Uneven Improvements Mar
Recovery for New Orleans

Battered buildings, population loss and high insurance costs are still holding back New Orleans' commercial real estate from a broad-based recovery.

Nearly two years after Hurricane Katrina slammed the city, improvements are uneven. The surge in emergency workers and the return of many companies have helped the region's office, warehouse and apartment sectors fare better, with falling vacancies and rising rents, according to Property & Portfolio Research Inc., a Boston-based real-estate research firm. But the hotel and retail sectors are still suffering from slower tourism business and the loss of the local shoppers.

Geography is key. Some suburbs located on higher ground, such as Covington, are drawing new employers. Chevron Corp. will move more than 500 workers from New Orleans into a 300,000-square-foot office now under construction north of Lake Pontchartrain in Covington. Meanwhile, many buildings in storm-ravaged parts of the city, particularly in the poorer neighborhoods, remain empty.

"There are pockets of good recovery in all the sectors," says Ivan J. Miestchovich Jr., director of the Center for Economic & Real Estate Development at the University of New Orleans. "But I don't think anything is happening as fast as people would like to see it happen or as fast as people thought it could happen." One challenge for all types of real estate: escalating insurance premiums are making it cost-prohibitive for many companies to build or rebuild, he says.

Downtown's Class A office market also has been helped by a drop in supply as some properties that would otherwise be competing for tenants still are sidelined by storm damage. The Dominion Tower, a 26-story building near New Orleans' Superdome, comprises roughly 5% of downtown New Orleans' high-end office space. Santa Monica, Calif.-based Hertz Investment Group, the tower's owner, is just now getting ready to repair the severe wind damage after several efforts to sell the building fizzled.

Nearly one-quarter of the malls, stores and restaurants remain vacant, and hotel occupancies are falling this year after an initial surge in emergency workers boosted demand, PPR says. Even some landlords of stores in the city's famed French Quarter are lowering rents to help tenants make it through what is expected to be an unusually slow summer season, says Richard Stone, vice president at NAI/Latter & Blum, a New Orleans-based real estate firm.

If New Orleans is to get back up to speed, most agree the area is going to need more people and jobs. While estimates vary, Moody's Economy.com puts the area's first-quarter population at about 1.08 million, still about 17% smaller than before the storm. Jobs rose at a rate of 6.9% in March over the year-earlier month, but analysts say the area's growth, driven in part by leisure, tourism and education and health-services sectors, largely reflects the resumption of pre-Katrina employment rather than new job creation. There are still approximately 100,000 fewer jobs than before Katrina, according to the Bureau of Labor Statistics. While the city is slated to get more luxury condos, Mr. Miestchovich says lack of affordable housing for service workers could damp the economy's future growth.

Some analysts say the unprecedented scope of the natural disaster and the lack of certainty has soured investor appetite for the market -- interest that was already tepid before the storm because of the area's slow-growing economy. Clint Myers, a real-estate economist at PPR, says the research firm has seen a post-Katrina drop-off in interest in the region from its clients. Some investors are skittish about a potential inability to sell properties later, Mr. Myers says.

There are believers. San Diego-based Equastone Real Estate Investment Advisors purchased the 28-story Pan-American Life building last year, one of the first sales of high-rise office properties to outside investors since Katrina. Hertz, which owns about three million square feet of office and retail space in the area, recently paid more than $4 million for the 23-room Hotel Maison de Ville in the French Quarter. "The city will absolutely come back," says Hertz President Gary Horwitz.

Email your comments to rjeditor@dowjones.com.