by Robert Hand, MBA, CCIM, SIOR
In business school we are taught when the supply of any good or service increases, it will cause prices to fall, but even if you haven’t studied economics you know when there is more of something, prices eventually drop. This is a basic law of economics, introduced in 1691 by philosopher John Locke and refined by Adam Smith in 1776 ; however, somebody forgot to tell New Orleans because for the last 4 years, despite the increase in supply of office space for lease, prices have actually gone up. This is bad news for entrepreneurs looking to move their home-based business out of the guest bedroom and into professional-looking offices so they can grow their business; and it is bad news for expanding businesses with lots of employees looking to add a New Orleans’ location.
New Orleans/Metairie Office For Lease Snapshot February 2018
There are 912 office properties with vacant available space for lease in New Orleans including Metairie, and in February 2018, 23 of those were leased at rates from $15 to $18 per square foot. But that is just a snapshot, and much like an income statement it does not really tell you the trend in price. So we researched 1,109 reported office lease transactions from 2014 to February 2018, and discovered supply, as measured by square feet listed of lease, increased from 1.6 million to 4.6 million square feet, but prices also increased from an average of $12 per square foot to $18 per square foot. The chart compares office square feet for lease in the X-axis with price per square foot in the Y-axis. The blue trendline in the chart above shows the formula for the data comparing change in supply in square feet to lease price:
Using the slope of the trendline to determine the relationship between increasing square feet and price, we conclude that 8E-07x means for every 1,000,000 square feet of new office space available for lease that prices increased 80 cents per square foot.
How Can Prices Increase When Supply Also Increases?
The increase in prices despite the increase in supply can only be attributed to a corresponding increase in demand to lease office space. This could be explained by demographics of more businesses starting in the New Orleans’ area which drives the demand for leasing office space, or an increase in office lease prices in Metairie, which can compete with the New Orleans’ market. In August 2015, The Data Center researched the trend in business start-ups in New Orleans and discovered new business start-ups doubled in the seven years post Katrina, flooding the city with entrepreneurs needing office space for their employees.
There are a few additional reasons why entrepreneurs are migrating to New Orleans, including a desirable low-cost of living, especially compared to San Francisco, a diverse culture, and hip events with a vibrant night life to keep millennials entertained. New Orleans offers a 25 percent tax credit for qualified digital media expenditures and 35 percent tax credit for qualified angel investors, which was capped by a senator in Lafayette but in 2017 revitalized interest from movie producers and software companies.
For more information on the office sale market in New Orleans, go here for our article: Office Lease Rate Trend vs. Sale Prices In New Orleans and Metairie