Despite high interest rates and rising inflation, experts say the outlook for the property market in Baton Rouge in 2022 is bright.
The domestic residential, industrial, multifamily and retail markets are expected to remain strong in the coming year, according to speakers at the Trends in Real Estate Conference on Thursday. And although the Federal Reserve is expected to raise interest rates several times in the coming years, rates will remain fairly low, historically.
“The market has calmed down a bit since the last couple of years,” said Tom Cook, an appraiser at Cook, Moore, Davenport & Associates. “But if something turns from 1,000 degrees to 500 degrees, you can say that it cools. We cool off from the red heat.”
During 2021, Cook said, the demand for homes was so great that in crowded areas like Livingston Parish, homes were sold before they were actually listed as for sale. The average number of days a home was on the market before it was sold decreased from 34 days in 2019 to 7 days in 2021.
Several factors have caused the demand – Millennials moving home, people who have more money to buy a home because of the money they saved during the COVID pandemic and the government aid that was saved, and the wealth being transferred from family members who died during a pandemic. But Cook said the biggest factor is lower interest rates.
Cook said that with 30-year mortgage rates hovering around 3% through 2021, meaning a $300,000 mortgage, $45,000 of income was required to qualify. That comes to a monthly note of $1,265. About 135,000 families in metro Baton Rouge have annual incomes ranging from $42,000 to $150,000 a year.
If mortgage rates rise to 6% this year, Cook said, that means that in order to qualify for the same $300,000 mortgage on a mid-priced home, an annual family income of $62,000 would be required. This means that there are likely to be around 100,000 potential buyers, or 25% less eligible.
In response to rising home costs and interest rates, Cook said he expects more builders to start building homes this year, smaller homes worth between $175,000 and $225,000.
Limited inventory is a problem in the industrial market, which was strong due to demand for warehouse space, said Evan Scruggs of NAI/Latter & Blum. The vacancy rate for industrial spaces locally decreased from 6.2% at the end of 2019 to 3.1% at the end of 2021.
But Scruggs said the industrial space locally is “100% functional,” because much of the empty space is outdated and outdated.
“Having this kind of very low vacancy rate means that tenants from outside cannot move in the market,” he said. Unlike markets like Dallas, Houston, and Atlanta, there are no national companies looking to build speculative industrial developments on 250,000 square feet or more. Warehouse space for industrial developers here executing projects in the 15,000 to 25,000 square feet range.
“We’re out of sight, out of mind,” Scruggs said.
While higher interest rates and higher gas prices are a cause for concern, Charlie Colvin of Momentum Commercial Real Estate said he expects the retail market to remain in good shape.
“There has been a lot of interest from restaurants, car companies, fitness centers” — all items that can’t really be sold online, he said. The retail vacancy rate fell from 10.5% to 8.8% in 2021, which Colvin said is a sign of health.
Even the fact that Town Center plans to demolish a building once occupied by Books-A-Million and replace it with a 286-unit high-end housing development is a good sign, Colvin said. Towne Center uses proximity to retailers and restaurants, such as Whole Foods, PF Chang’s, Nike, and Walk-On’s Bistreaux & Bar as points of sale for apartment tenants.
After several years of steady growth, the apartment market rebounded in 2021, said Craig Davenport of Cook, Moore, Davenport & Associates. Rental rates jumped 9.4% from 2020 and vacancy rates fell from 10.4% to 4.8%.
Several factors have driven this growth: lower vacancy rates in areas like Ascension Parish, increased enrollment at LSU and a return to in-person classes.
Positive numbers have attracted the attention of investors from outside the country. Prior to 2021, one apartment complex other than the LSU area sold for more than $190,000 per unit. Last year, there were eight deals that went this far and 12 housing projects that sold for more than $24 million.
While higher interest rates and construction costs are expected to calm the market slightly, Davenport said there are still good signs.
“There is a lot of money to pursue deals,” he said.
The Trends Symposium began in 1988 as a joint project of the Department of Commerce and Investment and the LSU Real Estate Research Institute. The goal of the program is to educate department members, their clients, and other real estate practitioners in the greater Baton Rouge area about what is going on in the local market.