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How Much Building Activity Will the Superstorm Bring?

NOV 13, 2012 10:49am ET

Among the key questions for investors in regional real estate finance and economies in the wake of Hurricane Sandy is whether the property damage will be offset to any extent by the ensuing construction work it creates.

“I don’t see it as being much of a net positive,” said Ken Simonson, who is president of the National Association for Business Economics and also the chief economist of the Associated General Contractors of America.

“A lot of activity will take a long time to get going,” he said in a webcast discussion of the hurricane’s regional economic impacts last week. “Insurance proceeds will take awhile to turn into construction,” especially when it comes to projects where tear-down, clearing, designing and engineering are needed.

Simonson said that in residential areas the number of homes destroyed “doesn’t necessarily translate into one-for-one replacement.”

Also, he said, a number of businesses will not re-open and some businesses that had been ready to expand or occupy new space could postpone or cancel their plans to do so.

The rebuilding may not do much when it comes to creating new construction jobs as “there is plenty of spare capacity” in the region’s existing workforce, Simonson added.

In addition, the total structural damages from the hurricane may be twice as high as the amount insurance covers, and insurance rates will likely increase, noted Greg Daco, senior principal/U.S. economist at IHS Global Insight, during the NABE event.

Daco said in the fourth quarter there will likely be some offsets to initial disruptions to normal activity in terms of rebuilding and repair. But the total recovery will take time “and time means money,” he said. Winter weather is likely to hinder the pace of reconstruction and rebuilding may not be complete until “well into next year,” said Daco.

At least one estimate has pegged total damages as high as $50 billion, he said.Earlier damage estimates before full strength of the storm had been as high as $87 billion.

Economists during the discussion suggested that the impact of the hurricane could be particularly tough on certain areas like Atlantic City, N.J., which already were struggling to some degree; and on small business owners and workers who report income on 1099 tax forms, as they rely on small business loans and second mortgages that can be relatively hard to come by.

Also damage to communities along the New Jersey Shore could affect tourism as many of the houses in that area are now uninhabitable, said Charlie Steindel, chief economist, New Jersey Department of the Treasury.

Steindel said experience with past U.S. storms such as Hurricanes Katrina and Andrew sugest it will be difficult to see what the storm’s impact on the national economy is or will be.

Ken McGill, managing director, Rockport Analytics, said he believes the tourism impact will be a little different on the Jersey Shore than in other tourist regions because the area is dominated by rental homes rather than hotels, and rental homes take longer to repair.