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Buys just before Katrina

California real-estate developer 'bullish' on New Orleans

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Just months before Hurricane Katrina hit, Judah Hertz made a big bet on New Orleans real estate.

The president of Hertz Investment Group, a Santa Monica, Calif., real-estate firm, bought one downtown office tower in May for $45 million and another in July for $49 million, making him the city's largest owner of high-quality office buildings. The two deals culminated a three-year buying spree in which he snapped up roughly $200 million worth of commercial real estate in New Orleans, in some cases buying from established investors eager to get out of a city with stubbornly high vacancies and languishing rents.

This week, Hertz is catching glimpses of those buildings on the television news and wondering just how bad the damage is. "I know this is a very dark moment in their history," he said of the city. "I like to look past that and think of all the good things that are going to happen there."

"I am very, very bullish on New Orleans," he added.

Hertz has no choice but to be optimistic. After all, he made a big gamble on New Orleans and will likely have to make the best of it. He said insurance will cover the repairs, and he's hired a restoration team that has begun assessing the damage and planning renovations. Indeed, the future of the city could hinge on whether investors like Hertz decide to stick around and rebuild.

Call him the Larry Silverstein of New Orleans. A New York real-estate developer, Silverstein famously signed a 99-year lease on the office buildings at the World Trade Center just weeks before the 9/11 attacks four years ago. Even though Mr. Silverstein received billions of dollars in insurance payments, the conflicting demands of the site have made rebuilding a struggle.

Hertz said he was attracted to New Orleans by the low prices of a weak office market. Rents trailed the national average and vacancies were relatively high. The local economy showed a glimmer of growth, but largely from its tourism industry. The city's population was declining. The oil industry had shrunk and was moving to Houston, according to Property & Portfolio Research, a Boston real-estate research company.

Over the spring and summer, Chicago-based Equity Office Properties Trust, the biggest owner of office buildings in the country, sold two downtown office buildings to Hertz's group. Equity Office, whose chairman is well-known real-estate investor Sam Zell, said the buildings had low occupancy. "When we looked at all of our markets, this was one market we decided we wanted to exit," said Richard Kincaid, chief executive officer and president of Equity Office.

Equity Office still owns an office complex called the Lakeway Center in Metairie, La., that has broken windows and damaged roofs. One building had a windowless "hurricane room" that was fortified with food and water prior to the storm and functioned as a command center for local officials. A small team from Equity has been hunkered in this room since the storm and has begun assessing damage. As to whether Equity Office will sell the property, Kincaid said, "we will continue to watch that."

In the late 1980s, Hertz did his first deal in New Orleans, converting an industrial warehouse into condos. He returned to the city about three years ago and started buying offices and the New Orleans Centre -- with 65 retail and specialty stores and a 3,000-car garage -- across from the Superdome. His privately held firm now owns about 3 million square feet of property in New Orleans.

Gary Horwitz, the company's chief financial officer and chief operating officer, said it has hired Belfor USA, a major disaster restoration company, to begin work, but information about the buildings' condition remains spotty.

The Texaco Center, a 32-story office tower that Hertz purchased from Equity Office in July, may have sustained substantial wind damage. "It blew out the windows on one side and went through to the other side," he said. Other properties owned by Hertz include: the 36-story 909 Poydras Street; Dominion Tower, a 26-story building located adjacent to the Superdome; and Westpark Office Building, located in a suburb. The firm doesn't know the extent of the damage to those buildings.

The Hertz group has set up a chat room on its Web site for its 300 tenants -- including law firms and oil-related businesses -- to swap information and get updates on their offices.

Other landlords are wondering whether it makes sense to rebuild quickly. Build too soon, and they might lose money. Build too late and returning refugees won't have shops and services.

David Lichtenstein, chairman and principal of Lightstone Group, a real-estate company in Lakewood, N.J., said his company's mall in Gulfport, Miss., was heavily damaged in the storm. The roof was torn off and looters ransacked stores. "We're trying to salvage it," he said. "I've got guys down there trying to put tarps on it." He also hired security guards to protect the mall from further looting.

Like most commercial real estate, the mall has business-interruption insurance, which will cover his lost revenue for a while. But with the city of Gulfport virtually wiped out by Katrina, there's not much of a population to serve. "It may be in our best interest to not do anything and see what happens," Lichtenstein said.

Katrina will likely produce a further shrinking of the commercial real-estate market in New Orleans, and that may work in Hertz's favor. After the big Mexico City and Northridge, Calif., earthquakes in the 1980s and 1990s, many lower-quality buildings were culled from the market because it wasn't worth it to salvage them, said Bruce Rutherford, a managing director who oversees corporate services in the New Orleans region for Jones Lang LaSalle Inc. (NYSE: JLL), a Chicago commercial real-estate services firm. "Although a lot of businesses that don't have to be in New Orleans will not return in the same strength, the destruction in office space and industrial space will result in a much tighter real-estate market than before," he said.

Plus, New Orleans has one of the busiest ports in the world, and shipping and commodities companies need office space, Rutherford said. The city's huge amount of industrial space related to shipping will be cleaned up fairly easily.

Hertz said he will stick by the Big Easy. "I have always loved that city," he said. "It has a very special way of life, and there is no question in my mind that once they get the water out and the sewer operating, the city will come back even stronger than it was."

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