A New Orleans Project Is Missing Some Pieces
The Dominion Tower is behind the left edge of the Louisiana Superdome in New Orleans. The Hyatt Regency is to the right of the Dominion.
NEW ORLEANS, Sept. 21 — Judah Hertz, a Santa Monica, Calif., real estate investor, has sometimes been compared to Larry Silverstein, the New York developer who signed a long-term lease for the World Trade Center just six weeks before the twin towers were destroyed by terrorists.
Mr. Hertz entered the downtown office market here in late 2002, buying four prime buildings — one-fourth of the inventory — in the three years before Hurricane Katrina.
Now some people associated with another outsider, the hotel magnate Laurence S. Geller, are calling Mr. Hertz a spoiler, saying he is threatening to undermine the only large downtown commercial development project that has been proposed here since the storm. Mr. Hertz said he had been unfairly cast as a villain by Mr. Geller’s allies.
In contrast to this city’s devastated residential neighborhoods, the compact central business district along Poydras Street has mostly managed to rebound from the hurricane, despite water and wind damage.
But three buildings in one pocket near the Superdome were hit by severe gusts, maybe even a minitornado — the 1,184-room Hyatt Regency, the 26-story Dominion Tower office building and the New Orleans Shopping Centre — and they have not reopened.
In May, Mr. Geller, the chief executive of Strategic Hotels and Resorts, the real estate investment trust that has owned the Hyatt Regency since 1997, announced a plan to rehabilitate the hotel as part of an ambitious 20-acre project that would include a six-block park, public buildings and a jazz center. As originally envisioned, the park would replace the long-troubled mall, and municipal offices would move from the damaged City Hall to the 1989 Dominion Tower, the last office building to rise downtown.
But the mall, the office tower and 3,000 parking spaces belong to the Hertz Investment Group. And Mr. Hertz, the chief executive, said he never had a written agreement to sell them to Strategic — a fact not disclosed when the project was made public. Mr. Hertz said this was like claiming to buy a corporate office building and then accusing the owner of being a bad company for not selling it. “I know it sounds crazy, but that’s just what happened to me.’’
As is usually the case, the dispute hinges on price.
“He’s got something he thinks is more valuable than someone else does,’’ said Mr. Geller, who has likened his $725 million project to the acclaimed Millennium Park in Chicago, where Strategic is based. “He wants a high price — and he wants his money now, far exceeding its current value.’’
Strategic’s broker, Michael J. Siegel, an executive vice president of Corporate Realty, a regional company, estimated the combined value of the shopping center, the office building and the garage at no more than $50 million, well below Mr. Hertz’s valuation of more than $70 million. But Mr. Hertz said that rather than sell Dominion Tower, he intends to rent it to the city or find other office tenants.
Mr. Hertz said Mr. Geller may just be stalling. “I’m very surprised they think now that I was asking too much money,’’ Mr. Hertz said. “I believe he hasn’t finished his deal yet. If it’s not done, what’s the point of making a deal with me at any price?’’
New Orleans has experienced plenty of failed real estate projects over the years, and Mr. Geller’s plan to create a tourist magnet, which he said would generate thousands of jobs and pump billions of dollars into the city’s struggling economy, has met with some skepticism. He has committed $200 million of his company’s money and insurance proceeds to the project, but acknowledges that even with capital from a variety of other sources, a $225 million gap remains.
Not incidentally, the project would also improve the prospects for the Hyatt Regency, which was fighting for customers even before the hurricane because it is not near the French Quarter or the Ernest N. Morial Convention Center. Strategic owns 19 other luxury hotels.
Mr. Hertz also seemed to face many challenges when he began buying office buildings along Poydras Street, beginning with the 27-story Poydras Center. The market, though stable, did not seem to offer much opportunity for growth, causing real estate specialists to wonder, “What does he know that we don’t know?’’ said Greg Riera, a vice president at Jones Lang LaSalle, which manages two buildings on Poydras. “But the price was right.’’
Just before Katrina, Mr. Hertz bought the Louisiana Land and Exploration Company Building, a 36-story tower at 909 Poydras (one of the city’s two best addresses) and the 32-story Texaco Center at 400 Poydras — from Equity Office Properties Trust, the large Chicago REIT. Equity Office, which still owns one complex in suburban Metairie, has been streamlining its portfolio and getting out of markets without robust job growth.
Richard D. Kincaid, Equity Office’s chief executive, said that when his company bought the two buildings on Poydras Street in 1997, New Orleans was still a big regional oil and gas hub. “But then company after company exited and consolidated in Houston,’’ Mr. Kincaid said. “There was not a lot of industry other than tourism and that doesn’t generate a lot of jobs.’’ Equity Office sold the buildings for less than it paid for them, Mr. Kincaid said.
Mr. Hertz’s leasing agent, Bryan Burns III, a senior vice president at Transwestern Commercial Services, described his client as a long-term investor. “He’s an entrepreneurial opportunistic buyer,’’ Mr. Burns said. “His horizon is not short term. He felt confident there would be substantial value enhancements.’’
In the aftermath of the storm, the commercial office market has turned out to be one of the few bright spots in the city’s economy. In the prime downtown buildings, occupancy stands at 91.2 percent, up from 86.8 percent before the hurricane, according to Equity Office. Rents are beginning to rise and landlords are regaining the upper hand in the marketplace, although the higher rents are being offset by increased operating costs, especially for insurance, said Mr. Siegel of Corporate Realty.
“Our office market has been flat for the past two decades,’’ he said. “If somebody had told me in October or November last year that we would have been at this point, I wouldn’t have believed it.’’
Much of that gain can be attributed to the closing of the 487,000-square-foot Dominion Tower, which shrank the prime office market to 8.8 million square feet. Four second-tier buildings are also not expected to reopen. But most of the city’s major employers — including Shell Oil, Entergy and Dominion — returned, though usually with fewer workers. One downtown company, Chevron, is moving to the suburbs.
Some of the demand downtown has come from government agencies, construction companies and engineering firms responding to the storm, but space is being leased at a slower pace than it was initially, said Brian Rourke, a broker with Latter & Blum, a local company.
Ryan W. Sweet, an associate economist at Moody’s economy.com, said Katrina had not generated the number of recovery-associated jobs expected after a hurricane because so much of the local population was displaced and may never return.
The city’s plight makes it all the more important to get the so-called Hyatt Jazz District built, with or without Mr. Hertz’s cooperation, Mr. Geller said. He said the project’s master planner, Thom Mayne, a Pritzker-Prize-winning architect, is working on new blueprints to reorient the project so that it does not have a dead mall in the middle of it.
“I will not let the city down because of one man’s recalcitrance and belief that an asset is worth more than it’s worth,’’ Mr. Geller said.