Rebuilding After Katrina: An Owner's Perspective Two Years Later

Real Estate Issues, Spring 2008 by Meltzer, John A, Shlaes, Noah

WE ARE TAUGHT TO THINK OF REAL ESTATE AS A STABLE INVESTMENT, with predictable behavior. Two years after Katrina struck, the rebuilding of our seven New Orleans properties is finally complete, and I have learned just how much I had taken for granted. I once thought that the portfolio was a convergence of location, bricks and mortar, and cash flow. After two years of hard work, I am now convinced that real estate requires more; it is a result largely of people, contracts, relationships and trust.

THE STORM

My own Katrina survival is another story, and to be sure, 360,000-square-feet of local real estate was not at the front of mind at the time of the storm. But once family members were safe and accounted for, company personnel and their families safe, I turned to the portfolio.

Roads were closed and access impossible. So starting with satellite photos, I learned what was still standing. When we finally got to the properties, we had gone from 100 percent occupied to completely vacant. Every roof was damaged by water, wind or tornado. The water and wind damage was obvious and clearly visible, but the separation of layers in the roofs lifted by tornadoes had destroyed the structural integrity of most of our roofs. One lightweight concrete decked roof required total replacement. Of a seven-property local portfolio, only parts of one small strip center and parts of one larger center were in good enough shape to reopen.

Even so, it was clear that we should rebuild. Our properties were recoverable, and they were located in areas that were not completely devastated. We decided to move forward as fast as we could. Would first completed and open win?

CONTRACTORS AND SUBCONTRACTORS

In the confusion that followed the storm, we were concerned that contractors would take shortcuts and take advantage of the situation, and that backlogs would build quickly. We needed someone we could trust-and fast. Even more, to get to the front of the backlog, we needed someone who trusted us.

My first call was to a former partner. A few years ago, we had sold our general construction business, Dana Corp., to Danny Chartier, now Chartier Construction. I called him a week after the storm and asked him if he was ready to go back to work. We prevailed on our 15-year history as partners.

Competition for contractors and subcontractors was intense. At this time, many owners had not yet settled on rebuilding, and they were waiting for word from insurers, government and other users. Decisiveness and a commitment to rebuild put us ahead of other builders when dealing with our general contractor, and our subcontractors as well. Past business relationships played heavily in our success. Most of our subcontractors knew us to be fast payers who understood construction. We had a history of success and the resources to back it up.

As a result, they committed to our projects. It took two weeks to arrange demolition crews to clear out wet sheetrock, doors, light fixtures, glass, etc. Demolition, normally the cheapest labor, had gone from $8 an hour to as much as $18 an hour in just two or three months after the storm.

Materials were at a premium. Our largest need would be gypsum board, and we concluded that due to the magnitude of the devastation, a shortage was coming. My brother Jeff ended up being our connection. Through his neighbor in Chicago, we were able to obtain two tractor trailers of gypsum board out of a Houston supply house. The move not only saved us substantial reconstruction time, but gypsum board prices skyrocketed shortly thereafter.

THE TENANTS

But what good is a finished product without tenants? Retenanting empty properties after devastation is scary. There are paragraphs in leases that most of us skim- paragraphs concerning disasters and business interruption and occupiable property.

In the month that followed the storm, some 40 percent of our tenants contacted us by telephone, email and written notice to cancel their leases pursuant to these clauses. Constant communication was the key to holding on to the rest.

Rebuilding was going to take longer than the leases allowed, so we had to brief tenants on a regular basis about the progress of reconstruction. While some tenants' spaces were not badly damaged, the businesses had no personnel. In spaces that were not completely damaged, some tenants asked us to move or store their furniture, to protect property, and much later to move it back in when work was complete. Their former employees were scattered across the country, and we did our part to keep the tenants' headquarters offices in Texas, Minnesota, or wherever, confident and contented. They worked on restaffing, and we made sure they had a place to restaff.

MORTGAGE HOLDERS

During this period of devastation and uncertainty, I needed to preserve cash and credit so that recovery could move as fast as possible. At the time, almost all rental income had stopped, with no clear indication of who, what, when, where and how businesses would start again. So I contacted each lender to request two to three months of loan payment deferral.