Hurricane Aftermath Just Beginning To Lift Multifamily Building Costs
By Caitlin Jones & A. J. Johnson
6 min read
Tax Credit Advisor January 2006 This summer’s hurricanes could add significantly to hard construction expenses in 2006, affecting the costs of multifamily building more than those in the single-family sector.
The fallout from Hurricanes Katrina, Rita, and Wilma is just now beginning to put added pressure to the prices of non-wood materials such as steel, concrete, and gypsum, according to Michael Carliner, Vice President of Economics at the National Association of Home Builders.
The price increases for these materials, he said, could have a disproportionate affect on multifamily construction, which makes greater use of non-wood products than does single-family building, where lumber is the favored building material.
Carliner noted that the price of lumber is back to normal after spiking in September now that production and delivery bottlenecks after Katrina have largely been resolved, and the immediate task of repairing damaged housing after the hurricane has eased up, lessening heavy demand for lumber. Demand for wood products has also fallen off as single-family building has slowed nationwide.
Price Increases Gain Steam
The price of non-lumber materials, on the other hand, has had a very different dynamic, the economist said. For example, steel prices actually fell in September, he said, as developers were forced to defer beginning projects in the four-state region affected by the storms. But construction is now beginning to pick up again in Louisiana, Mississippi, Alabama, and Texas, helping spur price increases.
In the last three months of 2005, structural steel prices have increased by 2.4 percent, according to the U.S. Bureau of Labor Statistics. This compares with a 3.9 percent increase over the entire 12-month period between August 2004 and August 2005. Concrete products have risen by 2.3 percent since August, following a 10.3 percent increase in the 12-month period ended August 2005. Gypsum products have risen dramatically, increasing 9.8 percent since August, following a 12.6 percent increase in the 12 months ended August 2005.
The rise in the price of oil has affected a number of key building products, such as asphalt shingles, the most commonly required material for hurricane repair, and plastic resins. For the 12 months ended December 2005, asphalt prices increased by 19 percent, according to BLS. Carliner said that these prices may “recede later in 2006 when oil supplies are restored.” The PPI for plastic resin increased 12 percent for the 12 months ended December 2005.
“Once refineries and pipelines are fully repaired and restarted, in a couple of months, the supply outlook for oil- and gas-based inputs to building materials, as well as fuel costs, should be more favorable, and there may be some downward adjustment in prices,” said Carliner. “But the prices of petrochemicals and for gasoline and deisel fuel will likely remain elevated.”
The availability of chlorine, necessary for the production of vinyl products, is less of a problem, though production at some chloride plants has been disrupted, the economist noted. Chlorine “is taken from salt water, and we have more than enough of that, especially in the areas affected by the hurricanes,” he said.
“Most of the real rebuilding activity hasn’t started yet in multifamily, and when it does watch out for the cost increases,” Carliner said. The hurricanes’ effect on materials price increases is likely to extend over several years because replacement of housing lost will be a very gradual process and will only really get started in a year or two, he added.
The hurricanes also inflicted an unusual amount of damage to multifamily dwellings, Carliner noted. “Twenty percent of the units that were destroyed were multifamily, which is a very high number by historical standards,” he said.
Carliner said that prices for all building materials are likely to rise at a steeper pace this year than in 2005, though he declined to give percentages. In addition to Katrina, one of the most significant factors driving price increases will be foreign demand, particularly from the Chinese.
Evaluating Materials Costs
But Carliner said that developers should also keep in mind several other issues in anticipating increases in construction costs in 2006. He noted different types of building products are affected in different ways by disruptions in supply, or spikes in demand. For example, because commodity wood products are sold in auction, supply is available to those willing to pay up for these products.
This is not the case with other products such as steel and concrete. “Outright shortages, allocations, and delays may affect builders’ costs to a much greater extent than changes in prices,” he noted.
Carliner also advised developers, particularly those in or near the states affected by the hurricanes, to expect continuing high labor costs, with growing competition for a limited pool of workers.
He said it will be extremely difficult to isolate the cost increases attributable to the hurricanes, because Katrina, Wilma, and Rita will spur construction far afield from the Gulf region. “One of the things complicating the situation is that the hurricanes will lead to increased building activity in those areas where people have relocated,” he said. “It’s tough to get a handle on this.”
A Longer-Term Assessment
Kurt Stout, senior vice president at Grubb & Ellis, a real estate services firm based in Northbrook, Ill., also sounded a warning on upcoming price increases in building materials. In a report on construction expenses at the end of 2005, Stout wrote: “Expect construction prices to rise well above the underlying rate of inflation, particularly as Gulf reconstruction accelerates through 2006.”
“About the only catalyst to bring on lower prices would be slower growth in the U.S. and globally, which could happen gradually as rising interest rates and a slower housing market cause the economy to decelerate but probably not for another year,” he added.
Outside the Gulf
Stout noted that outside the Gulf region construction prices increases have been especially pronounced in South Florida.
He said that contractors there have seen increases in the price of concrete, steel, and drywall. Florida contractors are also worried that labor costs, which have risen sharply since Katrina, could rise even more dramatically in 2006, Stout added. This is because Florida competes directly with federal disaster areas, where the Federal Emergency Management Agency is paying contractors premium rates to quickly rebuilt hurricane-damaged areas.
Stout also noted sharp recent price increases in Southern California after relatively subdued construction cost increases for almost a decade. Philadelphia, he added, “is seeing major increases in construction cost due primarily to the intense high-rise and mid-rise residential condo development.”
