Weathering the Storm

A critical look at the promising future of the Phase I ESA market in a hurricane-ravaged New Orleans

Aug. 25, 2005: Hurricane Katrina, the 11th named tropical storm, fourth hurricane, and first Category 5 hurricane of the season, makes landfall north of Miami, Fla., killing dozens. Four days later, the slightly weakened system touches down on the Central Gulf Coast of Louisiana. Although now classified as a Category 3 storm, Katrina's size is so massive that devastation occurs far from the storm's eye. A storm surge breeches the levee system that protects New Orleans from Lake Pontchartrain and the Mississippi River. The city floods. Louisiana, Mississippi, and Alabama suffer heavy damages. Total damages from Katrina, the most destructive and costliest natural disaster in the history of the United States, are estimated at $75 billion.1 One thousand, four-hundred, and seventeen people are killed. 2 Federal disaster declarations cover 90,000 square miles.

September 24, 2005: Hurricane Rita, the 17th named tropical storm, ninth hurricane, and second Category 5 hurricane of the season, makes landfall between Sabine Pass, Texas and Johnson's Bayou, La. A storm surge reopens some of the levee breaches caused a month earlier by Katrina, reflooding parts of New Orleans. A day after the storm surge, Rita, the fourth most intense hurricane ever measured in the Atlantic Basin, makes landfall in Florida. The storm ultimately affects the Bahamas, Florida, Cuba, the Yucatan Peninsula, Louisiana, Texas, Mississippi, and Arkansas. Damage is extensive in parts of Louisiana and Texas. Total damages from Hurricane Rita are estimated at $9.4 billion. 3 By any account, 2005 was a devastating hurricane season, in terms of both property damage and loss of life. Countless news stories and television shows recorded the storms' devastation and heartbreak in vivid detail, and much is still being written about the record-breaking damages, the government's response, the rebuilding efforts, and the widespread environmental contamination.

Environmental Concerns
Concerns about the environment in the storms' aftermath are not without merit. The geographic region directly affected by the hurricanes is one of the most environmentally hazardous in the country. Louisiana produces one-fourth of the nation's petrochemicals. Myriad oil refining and production hubs, chemical manufacturing plants, and other environmentally risky operations call New Orleans home. Thousands of contaminated properties were impacted by the storms, and many remained under water for weeks.

In the storms' wake, environmental consultants faced the daunting task of identifying and locating thousands of drums containing toxic chemicals, assessing whether floodwaters could have caused contaminant migration, and determining whether existing remediation systems were still operational. Underground storage tanks in the region had to be checked -- storm activity could have damaged vent pipes. Oil spills were a problem. Due to extensive flooding, mold is a very real concern.

That said, environmental hazards in post-Katrina New Orleans do not seem to be as widespread as initially believed.

"The most significant environmental hazards are fuel releases from equipment and storage tanks," said George Cramer, II PG, an associate vice president and principal hydrogeologist with ARCADIS G&M Inc. in Baton Rouge. "The hazardous materials seem to have been better protected. Fuel releases from equipment and some underground storage tanks, although a much smaller number than was anticipated, not to mention the larger tank farm releases that made the papers, will have an effect on assessments."

Randy Luwe, a principal with Lagniappe Environmental LLC said: "There was no toxic soup in New Orleans. The media overplayed it big time." He said mold, asbestos, and airborne dust are the biggest problems at the moment.

Karen Brignac, a project director with PPM Consultants Inc., remarked: "There are no significant environmental hazards in the Baton Rouge area from the hurricanes. In the New Orleans area, the Louisiana Department of Environmental Quality and the U.S. Environmental Protection Agency (EPA) have conducted numerous assessments of the air, water, and soil. These assessments indicate varying degrees of impact from the storms and associated flooding."

Impacts on Environmental Consultants
As the environmental community, and environmental consultants in particular, help with pollution assessment and rebuilding efforts, many are dealing with their own losses and wondering just what will happen to the Phase I environmental site assessment (ESA) market in the hardest hit areas. Environmental Data Resources Inc., a national environmental information provider, identified approximately 60 Phase I ESA offices in the storm-ravaged areas (FEMA-designated counties and parishes where assistance is being provided). Locating employees and providing housing was the first priority for these companies.

"One of our employee's houses was destroyed, and all the others were damaged to the point that only one employee is going back to her house," Cramer said.

Brignac's experience was similar. "The loss of employee housing has proven to be one of the more challenging issues resulting from the hurricanes," she said. "Many companies are providing temporary housing for employees."

Next up for consultants was assessing damages to company buildings, files, computer systems, and other office equipment. In cases where damage was extensive, employees were relocated to nearby offices, and in others, entirely new offices were set up with whatever equipment and supplies could be recovered.

"Our office was without power due to Katrina for a day and a half," Cramer said. "Our New Orleans office was caught up in all the flooding issues. We weren't able to get back into the office building until just before Christmas."

"Our firm had just moved into a new building we had bought and renovated, so we had no damage from flooding or wind," Luwe said. "However, we also had no power, phones, Internet, mail, or physical access due to the storm. We had to temporarily relocate the business to my colleague's living room in Destrehan, Louisiana, once he got power and Internet back. Destrehan is about five or 10 miles west, but we reopened for business on September 12, just 15 days after the hurricane hit. We were finally able to move back into our building in November -- 60 days after the hurricane hit."

"PPM Consultants has six offices in the southeast," Brignac said. "The office most affected by the two hurricanes was the Baton Rouge location. Our Mobile and Orlando offices have had their own disruptions with the other recent hurricanes along the Central Gulf Coast and in Florida. We did not have to relocate as there was no damage to our office, but were without power for about four days after Katrina."

"Not Unlike Iraq"
Because damages are extensive, the task of identifying and assessing properties is monumental. Doing so under extreme conditions makes the job even harder.

"The biggest problem we have encountered is working in a landscape that has been permanently altered, both physically and socially," Cramer said. "Government agencies have relocated, knowledgeable people are gone, some areas of the state are still at this writing off-limits to non-residents, and the infrastructure is still heavily damaged. Many of our coastal areas are still functioning on generator power. To perform ESAs, we've had to be escorted into two of the areas we were evaluating. It is not unlike Iraq, except that there are no suicide bombers or improvised explosive devices."

PPM reported a similar experience. "With the help of a generator, we were able to access our electronic files and continue working. The most significant impact was on communications. Landline phone service was spotty for several weeks and cell phone service for even longer. It was difficult to reach our clients to see if they needed any assistance. At times, it was even more difficult for them to reach us," Brignac said.

She added, "Immediately after both hurricanes, LDEQ issued emergency orders providing regulatory relief for industries affected by the storms. This was very helpful in getting industry up and running again. Significant problems were encountered in restarting natural gas processing plants as the majority of these are located near the coast."

"Immediately, our biggest problems were cash flow, the lack of dependable and timely mail service, and the fact that some clients haven't come back online," Luwe said. "New expansion is being delayed to catch up on repairs. Also, delays in insurance payments such as flood insurance and business interruption are hurting us."

The Phase I ESA Industry
According to EDR data, Phase I ESA reports ordered for commercial properties in New Orleans during September 2005 were down a dramatic 92 percent compared with September 2004. By the fourth quarter of 2005, however, activity was down a more modest 25 percent from the previous year. Near term, Phase I ESA activity will likely rebound as companies return to the Gulf Coast region. Storm-ravaged properties will need to be carefully assessed for releases and threatened releases of hazardous chemicals and petroleum products and other environmental risks -- if they can be located.

"The near term impacts were not that great for our ESA market," Cramer said. "We primarily do large corporate mergers where multiple properties are reviewed, many of them outside Louisiana. The property market in the hurricane damaged areas is still sorting itself out. Our biggest impact has been in one merger where many of the facilities were along the Gulf Coast and are no longer there. Determining the type of assessment to be performed, and even locating landmarks, is somewhat difficult."

Luwe remarked, "The market has shifted to the undamaged areas, such as Baton Rouge, Lafayette, and St. Tammany Parish, as large numbers of New Orleans evacuees buy up property. Jefferson Parish and Kenner also have projects. Business development in New Orleans was zero near term."

Brignac reported no significant near-term impact on the environmental assessment market in the Baton Rouge area where her company is located.

While Phase I ESA activity took an immediate drop after the storms hit, EDR economists predict that activity will be down just 7 percent by the first quarter, and up 3 percent in the second quarter as rebuilding efforts get underway. Those employed by environmental companies are understandably concerned about the future of their jobs, but, like EDR's analysts, most are optimistic that Phase I ESA activity will bounce back and then remain high for several years during the rebuilding efforts.

"We expect there to be more commercial property transfers in the long term as businesses make the difficult decision to relocate from the New Orleans area," said Brignac.

"Long term impacts will be more significant than short term," Cramer predicted. "There will, apparently, be many foreclosures and property transfers in the next several years. I would expect the number of ESAs to pick up in 2006 and stay at a slightly elevated level for several years."

Luwe isn't sure what will happen: "Long term for the ESA market depends on whether New Orleans comes back. As properties are reopened in the city, the workload should gradually increase. It should peak in two or three years and then level out," he said.

Cramer is optimistic: "Ultimately, I don't believe the hurricanes will have a major impact on the ESA side of the business. Like so many other things, we will have to adjust to address new issues, but that is part of the business."



This article originally appeared in the 05/01/2006 issue of Environmental Protection.

About the Author

Dianne Crocker is senior economist and managing director of EDR's Market Research Group. With 15 years of experience in the environmental industry, Crocker provides strategic data and analysis on environmental due diligence trends to environmental consultants, lenders, corporations, and other parties involved in commercial real estate transactions.

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