Contractors Brace for Hurricane Katrina Aftermath

by Mark Friedman  on Monday, Sep. 12, 2005 12:00 am  

Arkansas construction companies are bracing themselves for the aftermath of Hurricane Katrina: soaring material costs, labor shortages and rising fuel prices.

But picking up the pieces could mean more business for some construction firms.

In the days after the Aug. 29 hurricane, May Construction Co. of Little Rock picked up contracts to build two Lowe's distribution centers in Louisiana. Lewis May, CEO of May Construction Co., said it's too early to tell what the projects are worth.

The storm also ruined about 200,000 homes that will have to be demolished and rebuilt. With homes destroyed, thousands of Gulf Coast residents pushed into Arkansas, and that could mean an increase in construction as the demand for housing and other consumer services increases.

"I think we're going to be feeling the impact of this for a long time. I mean months, if not years," said Bill Hannah, CEO of Nabholz Construction Corp. of Conway.

Hannah said the first priority is assessing Katrina's damage.

"And that will be followed by the repairs to the facilities as the needs are determined," he said. "So that's the immediate impact."

Hannah said he expects a number of subcontractors and craftsmen to head south in the coming months.

Construction projects now in the pipeline in Arkansas should remain on schedule, he said. But for future projects, contractors are gearing up for the rising cost of materials.

After Hurricane Andrew destroyed more than 28,000 homes in Florida in 1992, the average price for plywood increased from $222 per thousand SF in July to $321 in September, according to a news release by the National Association of Home Builders of Washington, D.C. The price for Southern pine framing lumber also jumped from $264 per thousand board feet to $308 during the same period.

"Although the loss of tens of thousands of homes implies increased demand for, and construction of, new homes, past experience has shown that there is no massive surge in home building in affected areas," the NAHB said. "Replacing units destroyed by the storm will not begin for many months and will take place slowly, over a number of years."

In the New Orleans area, homes that were lucky enough to dodge Katrina with their roofs or walls intact were finished off by the flood that followed.

"The floodwaters carried contaminates that cannot easily be removed, and even if the water were clean, prolonged submersion would cause structures to be damaged beyond repair," the NAHB said.

Bob Shell, president of Baldwin & Shell Construction Co. of Little Rock, said the amount of work in the Gulf Coast region will overwhelm construction crews.

But he wasn't sure if a large number of contractors will leave Arkansas for the Gulf Coast because of the difficulty of working in a disaster area. Shell's firm only works in Arkansas and has no plans to try and get jobs in the Gulf Coast.

"When there's an abundance of work, we see subcontractors and suppliers raise their prices," Shell said.

Contractors now are uneasy about bidding on future projects because of the price fluctuation on building materials.

"We're writing contracts right now for a job ... and we're nervous about getting the contracts out because we don't want people backing out on us," said Bob East, president of East-Harding Inc. of Little Rock. "It's an unknown territory."

To fight off rising prices, Shell said his company buys all the materials for the project after the contract is secured.

Progressive Constructors Inc. of Little Rock will conduct bids "very carefully," said its president, Michael D. Belt. Progressive Constructors' main projects include building stores for Bentonville retailer Wal-Mart Stores Inc.

Belt said it was doubtful that his clients would allow contractors to build flexibility into contracts to help extract some of the uncertainty over the price of building materials.

While bidding may be risky, "it's better than farming," Belt said.

Construction Costs

Even before Katrina made landfall, construction costs for steel, lumber and cement, the main ingredient in concrete, were climbing.

The producer price index for new construction jumped 9.5 percent between January 2004 and January 2005, according to the U.S. Department of Labor.

"If you add on the increased demands for construction materials that are very likely to come about due to rebuilding on the Gulf Coast, you're talking about adding a significant amount onto the budget of construction projects," said Jeff Collins, director of the University of Arkansas at Fayetteville's Center for Business & Economic Research.

The increased prices, of course, will end up being paid for by building owners, he said. "If you add on the likely increase in long-term interest rates ... we're going to see rising prices for commercial and residential real estate in markets where there's strong demand," Collins said.

The markets that are going to remain hot are northwest and central Arkansas and Jonesboro, he said.

Katrina also is expected to inflict damage on the battered cement industry. New Orleans and other ports on the Gulf of Mexico were the source of 9 percent of cement imports last year.

"The disruption to ocean, barge and rail transport from Katrina, and the loss of power to cement plants in the storm's path, will cut further into cement supplies," said Ken Simonson, chief economist for the Associated General Contractors of America in Washington, D.C., in a news release. "At the same time, the urgent need to stabilize and rebuild roads, other infrastructure and buildings will increase demand for cement and other materials."

Simonson said the AGC has urged the U.S. Department of Commerce and the Southern Tier Cement Committee — a group of 23 U.S. cement producers that favors of the current 55 percent duty on Mexican cement — to reach an agreement to allow Mexican cement into the Gulf Coast states without the antidumping duty.

Katrina also may have damaged or destroyed a number of wood product facilities in the Gulf Coast, the National Association of Home Builders said.

The good news is that trees that have been knocked over will need to be harvested right away, which might help to lower wood product prices in the medium term, the NAHB said.

Worker Shortage

AGC economist Simonson said he expects construction workers to start flocking to Louisiana for short-term projects such as stabilization and recovery and to repair the roads.

Construction workers also will be needed for site clearing and eventually reconstruction, Simonson said.

Underemployed construction workers are probably going to head to the Gulf Coast states first, Collins said.

"If you're fully employed in the state of Arkansas, the idea that you would pick up and leave for a few extra dollars is probably unlikely," he said.

But East, of East-Harding, said that after Hurricane Andrew, construction workers from across the country flooded Florida.

"It affects the labor market because people can get paid a lot of overtime and usually a little bit higher wage," East said.

East-Harding doesn't have any plans to try and land any contracts in Gulf Coast states. "We've got plenty to do here," East said.

Fuel Prices

The price of fuel is expected to impact the pocketbook of contractors and consumers alike.

"The most immediate and visible impact as far as the materials and input is concerned is the huge jump in diesel prices," Simonson said in an interview. "Contractors use a lot of diesel fuel for their off-road equipment such as bulldozers and tower cranes. ... Thousands of deliveries that come to a job site all have a fuel charge on the invoice."

If the fuel prices don't back away from the $3-a-gallon high-water mark as the infrastructure is being repaired, the prices will change consumers' behavior, Collins said.

"If consumers are feeling less robust about their ability to spend, that can't possibly be a good thing," Collins said. "In terms of real estate, they would be less likely to buy new homes."

Consumers would also hold onto their money tighter.

"You don't need to build as much retail space if people aren't spending money," Collins said.

(Gwen Moritz contributed to this report.)



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