Katrina Raises Building Costs

With Hurricane Katrina bearing down on the Gulf Coast, Gary Brandon’s thoughts turned to sand.

The Springdale developer learned to worry about such things after hurricanes blew the beach off his Crystal Beach, Fla., condominium project — twice.

“When the project got hit by Hurricane Ivan, it took our beach away and our dunes, and we had to replace them,” he said.

Then, the next year, Hurricane Dennis hit the same area, wiping out the 25-foot-long sand dune a second time.

“We were 90 percent complete,” Brandon said. “It took our beach away, our dunes and it blew out a portion of a wall and a parking deck.”

The total loss from the two hurricanes was about $390,000, said Adam Russell, project coordinator with Gary Brandon Enterprises.

The amount covered by construction insurance is still being worked out. That’s in addition to the time delay, which amounted to about 45 days.

Brandon was lucky this time, though. Hurricane Katrina caused minimal damage to his projects when it hit the Florida coast on Aug. 29.

Brandon currently has four condo projects under way in Florida that are in various stages from dirt work to closing the sale. The units on Crystal Beach, which were all pre-sold, will be turned over to owners this month.

Russell said buildings on the Gulf Coast are now designed to sustain Category 5 hurricanes. Engineers design the buildings with a “frangible” parking deck, meaning it will break apart during a storm and limit damage to the adjacent building.

Hurricane Insurance

Dave Perdy, branch manager with Shelter Insurance Cos. of Springdale, said typical storms do not cause an insurance rate increase.

“Most [state] insurance departments aren’t going to let companies insure beyond their means,” Perdy said. “That’s the responsibility of the state insurance department.”

Perdy said on bigger construction projects such as hotels, a consortium of companies would come together to insure the job, so that the risk is mitigated.

“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 he expects a number of subcontractors and craftsmen to head south in the upcoming months.

Construction projects now in the pipeline in Arkansas should remain on schedule, he said.

Within the destruction, construction opportunity awaits local contractors.

Brentt Tumey, director of operations for Managed Subcontractors International Inc. of Rogers, knows a hurricane’s destruction on a larger scale. MSI will probably be sending more than 400 workers to help with reconstruction of several hotel and casino properties in Biloxi, Miss.

As of Sept. 7, when gas was selling for $4.47 in Biloxi, MSI had about 45 workers in town and had taken orders for 300 more.

Year-round, the company has a database of about 3,500 phone numbers of workers it contacts to supply labor for subcontractors of commercial metal stud framing, drywall, acoustical and painting jobs nationwide.

He said in the past, his company has set up “tent cities” in hurricane ravaged areas such as Pensacola, Fla. MSI hasn’t gained clearance to do just that in Mississippi because debris hadn’t been cleared. When asked about the price, Tumey said it costs “a lot.”

With a pass from the Federal Emergency Relief Agency, Tumey drove to Biloxi on Sept. 6 to survey the damage of a near-complete job in town, the Hard Rock Hotel and Casino. That was the second trip for Tumey and another MSI co-worker, who were turned away the week Hurricane Katrina hit because he didn’t have an address in Gulf Port or Biloxi.

The MSI pair slept in the car that night, since there was no place to stay.

“I’ve never seen anything like it in my life,” Tumey said of the destruction. “It looks like a big pile of wood and trash.”

Tumey said he heard some construction colleagues estimate there is more than 90,000 SF of work to do in affected areas.

The main concern was securing shelter and giving cash to his workers already in Biloxi.

Tumey said MSI workers are now staying in a hotel in the area, but instead MSI is being charged a daily rate versus the weekly rate it was charged at the same hotel before the hurricane.

He will probably have to rent vans to drive the workers in from hotels in surrounding towns.

He said along the way of his Sept. 8 trip to Gulfport, Miss., he saw lines curling around gas stations that were three to four miles long, partially because he estimated it took a full minute or two to pump one gallon of gasoline.

He saw a man selling generators out of a truck on the side of the road for double the going rate.

But before Tumey even loaded up his truck with a 55-gallon drum of gasoline, stocked up on cash for his workers in Biloxi, or packed cases of water, he got on the phone to one of his suppliers to discuss securing future materials.

Construction Crunch

In some ways, Katrina will already exacerbate the current pricing and availability of construction materials.

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’ 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.

Ken Simonson, chief economist for the Associated General Contractors of America in Washington, D.C., said 23 states reported cement shortages in June. In August, 32 states reported shortages. In addition, the Producer Price Index of cement rose 14.5 percent from July 2004 to July 2005.

The price of concrete products rose 12.5 percent during that same time.

“I think Katrina will have a two-fold impact on those prices,” Simonson said. “Cement will become scarcer and more costly, and secondly, the energy needed to transport cement will increase the price of concrete and cement.”

After Hurricane Andrew destroyed more than 28,000 homes in Florida in August 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.”

Simonson said for the last year or so plywood and other wood products have been in a “down cycle,” meaning demand is strong, but producers have responded by increasing production.

“I would expect a very short term crunch for plywood,” Simonson said.

Contract Questions

And then there is the cost to deliver materials.

Eric Wolfe, vice president of BNSF Logistics LLC of Springdale, said based on the U.S. Department of Energy fuel-price estimates, fuel costs have probably jumped about 10 cents per mile.

“I think the spike [fuel price] we saw related to Katrina was easily a 5 to 7 percent increase in the cost per mile that is just fuel-related,” Wolfe said. “It depends on the job, the origin of the destination and what the equipment was.”

BNSF Logistics is a third-party transportation and logistics firm. It has shipped orders of bottled water, generators, wet/dry vacuums, FEMA shelters and Home Depot lumber and wall board to the areas in Katrina’s wake.

Wolfe said issues in affected areas such as reduced outbound traffic and unloading delays could ultimately push prices higher.

Jim Minor, senior project manager for Baldwin & Shell Construction Co. of Rogers, said his firm isn’t sure what the impact will be. He said he hasn’t seen any pricing impact directly related to Katrina yet.

“We’ve seen prices fluctuate during a national disaster before,” Minor said. “I think the market makes corrections. As the price increases, the cost of building increases proportionately.”

Minor said Baldwin & Shell locks in its prices with suppliers and those prices are honored.

Minor explained that many times it is up to the subcontractor to estimate materials costs accurately when the job is bid.

“For example, if an electrician has to buy steel conduit and the price of steel goes up, they are affected,” Minor said. “They buy those supplies. The general does not.”

Usually, a supplier will hold a price for 30 to 60 days, Minor said.

Minor said it is extremely rare for Baldwin & Shell to go back to a client and tell them the cost of the job has increased.

For example, if a supplier says a price has increased by five percent after the holding window, then Baldwin has to pay that cost.

“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.”