Notes from Jim Haughey

Jun 19 2006 1:00PM | Permalink | Email this | Comments (0) |
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Here is what we learned last year about the impact of severe hurricanes on the construction market. We will need to apply these lessons if the 2006 hurricane season destroys buildings and facilities on anywhere near the same scale as last year?

First, the amount of damage will be little more than half of the first estimates you hear. This is based on the amount that insurance companies eventually paid to their policyholders. Second, post-hurricane rebuilding will be much slower than proclaimed by public officials seeking taxpayer money to pay for it. Construction starts fell 20% in New Orleans in the six post-clean-up months compared to the six months before Hurricane Katrina. Third, much of the rebuilding will be someplace else. It will be where there is less risk of hurricane damage or where owners of unusable buildings commit to leasing or buying immediately available space.

The immediate impact of a destructive hurricane on contractors and their supplier will be on materials availability and prices. This will be relatively brief, measured in weeks. The biggest impact will be the flip-flop in the economy which impacts all contractors anywhere in the country, although more so in the hurricane impact area. There will be an immediate decline in spending that will be offset by a later spending surge within the next 6-9 months.

Although some will consider it impolite to bring this up, what activity went on in the destroyed buildings has a major impact on the pace and completeness of rebuilding. Nearly complete restoration begins immediately for the buildings and facilities that formerly housed self-sustaining economic activities whose fortunes are closely linked to still usable buildings in the hurricane damage area. This is why railroad, waterway and port facilities as well as oil, gas and chemical facilities plus tourist destinations were restored quickly. Many of the construction workers who did this camped out wherever they could find a floor and a roof because building facility owners paid them well to get their business reopened quickly. However many national or regional office operations left for Baton Rouge or Houston and have not come back. They do not need to be in New Orleans.

It is also why the restoration of buildings that housed non-self-sustaining economic activities has been so slow. This includes housing and the related commercial and public services for people who do not work, get paid too little to support themselves without subsidies or work in local service industries where the need for workers shrinks in proportion to how many former residents do not return. The restoration of these buildings is still awaiting decisions by insurance adjusters, charitable organizations, legislators, regulators and judges.

This social/economic distinction was made very clear in New Orleans because such a large share of buildings made unusable did not house self-sustaining economic activities. Compare New Orleans to the Mississippi coast, also hit by Katrina. Construction employment in the Pascagoula metro area is now 17% higher than before Katrina while it remains 37% lower in New Orleans. You can make the same comparison to the Texas/Louisiana border region hit by Hurricane Rita or the Florida Hurricanes in recent years. Compared to New Orleans, a larger share of the buildings initially unusable in these regions housed activities or workers that supported themselves and had close economic links to activities in still usable buildings, such as workplaces or suppliers.

The closest parallel to Katrina is Hurricane Andrew south of Miami in the early 1990’s. Bluntly, a community that was not self supporting suffered severe damage, much of which has not yet been rebuilt.

So it makes a difference whether the next severe hurricane hits the golf course or the marina or the wrong side of the tracks.