Construction Cost:The Impacts of Hurricanes Harvey and Irma

Rachel Personius
Recent hurricanes Harvey and Irma have caused billions of dollars’ worth of damage in the Southern coastal region of the United States, with the cities of Houston and Miami hit the hardest. With Texas and Florida now facing a major rebuilding effort, a commonly heard question is ‘what will this rebuilding cost?’

For those in the construction industry, this question expands to ‘how will these hurricanes impact construction costs?’ Moody’s Analytics estimates that the two storms combined may end up costing $150-$200 billion due to damages and lost productivity. This estimate puts the two storms in competition with Hurricane Katrina for the costliest natural disaster in United States history.

While the definitive answer to the question of cost will not be known until after the fact, the consensus is that construction costs in the Southern coastal region of the United States will increase over the next 12-24 months. The largest drivers of this increase will be higher costs for labor and materials.

Labor Costs

Pre-Hurricane Harvey, Houston was already facing a shortage in construction labor. According to Fox Business, it is now estimated that Houston will need an additional 10,000 to 20,000 construction workers to rebuild the approximately 30,000 damaged and destroyed houses. Based on this demand, contractors will need to offer higher wages than are typical in the region, passing on those higher costs to the project owners. This will produce a ripple effect: the flow of labor into Texas to aide with the Houston rebuilding will deplete neighboring markets and drive up labor costs in those surrounding areas as well.

Based on this demand, contractors will need to offer higher wages than are typical in the region...

Looking at construction wages in Louisiana and Mississippi before and after Hurricane Katrina shows a temporary increase of 8-12% in labor costs. The impacts on construction wages from Hurricanes Harvey and Irma are expected to fall toward the lower end of that range. Due to the size of the markets impacted, it is unlikely this will extend nationally; construction wages across the nation should not change because of these two hurricanes, according to Bloomberg News. However, locally this is bound to make a significant impact. This localized labor shortage will also likely result in delayed construction starts and longer project durations.

Material Prices

Similar to labor costs, construction material prices were already rising before Harvey and Irma made landfall in the United States. For example, lumber, drywall and fiber board were in short supply and experiencing price increases. The demand for these items will only grow as rebuilding begins, driving prices for these materials to 20% higher than pre-hurricane prices across Texas. Part of the pre-hurricane increase can be attributed to a new tax on Canadian lumber imposed at the beginning of 2017, on its own increasing lumber costs 10-20%, according to NBC.com.

Overall, lumber is the only material expected to show significant cost increases post-Harvey and Irma.

Exacerbated shortages due to the hurricanes could drive lumber costs up an additional 20% during the rebuilding process, while supply of other materials is expected to meet demand and not experience any major price increases. Overall, lumber is the only material expected to show significant cost increases post-Harvey and Irma.

Looking Ahead

While there are clearly challenges ahead in the construction markets of the Southern coastal region in the wake of these storms, history shows that the construction market seems to find its equilibrium quickly post-natural disaster. Planned projects will likely be put on hold as the market focuses on rebuilding houses and damaged infrastructure. Rebuilding is also stretched over time as clean-up is completed, insurance claims are processed, etc. Major natural disasters have also led to migration out of the impacted area, lessening the amount of rebuilding needed.

Looking at historic data and considering all the aforementioned factors, Faithful+Gould anticipates short-term construction costs will be 5-10% higher than pre-hurricane costs. That premium is expected to decrease with time.

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