Uncertainty

Uncertainty

By Sean Roth and David Wexler

Staff Writers

When Hurricane Katrina entered the Gulf of Mexico after grazing the southern tip of Florida, it looked like the effect on the state would be minimal. Wishful thinking. Besides the obvious devastation and loss of life for residents in Miami-Dade County and the Gulf States, Katrina has disrupted the national economy as well.

Suddenly, Southwest Florida chief executives are finding themselves trying to guess the outlook for the next six to 12 months. There's upward pressure on costs and prices everywhere - gasoline costs, delivery costs, material costs. There are material shortages and, with unemployment near 3%, there are increasing labor shortages. That will be especially so in Florida's construction industry, one of the state's economic engines.

How will these factors affect your business? The Review interviewed more than a dozen Southwest Florida chief executive officers to gauge their thinking and attitudes toward the future. The results: They've become cautious.

Patrick Neal

President

Neal Communities Inc. Lakewood Ranch

Home builder and developer

"I think the word right now is uncertainty," Neal says. "I got a notice yesterday from our sewer/water supplier that the price for pipes is going way up. Fuel is, of course, higher. The drywall supply has virtually stopped ... and I guess we expect a jump in lumber and sheet rock as well. But I think there are a lot of facts that will unfold over the next few days or weeks that we can't perceive with any certainty."

Neal says his company so far has not raised prices nor has he added an escalator clause in its home contracts.

As for the question of whether the fuel shortage will hurt home purchases, Neal says the results from August seem to suggest it won't. "We had a terrific August; it was just huge," Neal says. "So far sales have not been affected."

Neal doesn't expect the problems from Katrina nationwide to put the economy into a recession based on what happened following Hurricane Andrew. "After Andrew, we had material and labor shortages sporadically," Neal says. "But admittedly Katrina is probably much worse than Andrew. It hit refineries, ports and a big drywall plant. Even so, depending on the damage, the rebuilding effort actually could have a simulative effect on the economy."

Fred Pezeshkan

President, CEO

Kraft Construction Co., Naples

General contractor

Pezeshkan expects a labor shortage once rebuilding efforts in Louisiana and Mississippi are under way.

"Initially, we may see some labor from those areas that may come to Florida to work in the short term. But in the long term, once that area is opened for redevelopment and repairs and construction, we'll probably see a need for laborers and technicians in that area and that may impact Florida, especially in the northern part of the state."

"Our plan is to be very active; watch the situation," he says. "Our strategic plan is to make sure that we can supply and service our clients and make sure there is material and labor and subcontractors available for the work we have in hand."

"There has been discussion that two or three plants that manufacture drywall have been damaged. If that's true and the supply of drywall from those areas is reduced, that might increase the price of drywall. But I think it's going to take a little bit of time before we know how that will impact us."

Steve Knopik

President, CEO

Beall's Inc., Bradenton

Department store, outlet store retail chain

Katrina hit Beall's hard.

"We had 41 stores in that market ... that were closed by either voluntary or mandatory evacuations," Knopik says. "Of those, 24 have now reopened. Of the remaining 17, there are six stores that are not accessible yet. And an additional four will probably be a total loss. A number still have some minor damage."

Knopik says most of the company's storm-related focus right now is on contacting all of its employees. "Unfortunately, there are a number we have not been able to reach," he says. "At the same time, we have had to deal with the disruption in the flow of products to us. New Orleans was not only a port city, it was a railway gateway. We have redirected products that were going to go to the closed stores to some of our other locations."

From an operational perspective, Beall's officials are also reemphasizing traditional energy conservation efforts, including raising thermometers and reminding employees to turn off their computers when they leave for the night.

"The escalation of fuel costs has caused a lot of pressure on our business model for some time now," Knopik says. "We have been paying fuel surcharges on a variable portion of inbound freight for a while. Fuel costs are an element that doesn't seem to be coming down anytime soon."

As for how consumer-spending pasterns are being affected by the extra gas costs, Knopik says it was too soon to say.

"I would be surprised if there weren't some customer groups that found fuel costs caused them to restrict their budgets, including for purchases," Knopik says.

Bill Laplante

President

WFL Properties Inc., Naples

Residential and commercial builder

"The next batch of builders, who have not yet ordered, will be seeing a lot of resources sent to New Orleans, so I think it could further potentially delay our normal projects as products get shifted to rebuild Katrina victims," he says.

Laplante says the residential and commercial building market likely will be affected in the longer term as was the case in Charlotte County after last summer's hurricanes.

"There will be a limited supply, as we saw here in Punta Gorda with the re-roofing situation," Laplante says. "As little as a few weeks ago, portions of Charlotte County still looked like Blue Tarp Nation. With that backlog of roofing work to be done and a product shortage on supply, it's going to further negatively impact our efforts as we produce new construction.

"I don't see the demand slowing down, but potentially the ability of builders to produce the housing in a timely fashion may be impacted. I think it's going to extend the time horizon on building a home, from six to 18 months and beyond that."

"We're trying to shore up our lines of supply with product," Laplante says. "Our suppliers are becoming more valuable. Our longstanding relationships are critically important as we attempt to secure product and supplies."

Mike Yeomans

Director, residential development

Benderson Development Co. Inc., University Park

Developer

"We've seen some fuel shortages to this point - not unsimilar to Charley," Yeomans says. "We are thinking that even that could be short-lived."

"We do anticipate some materials and possibly labor shortages. Having lived through Charley in Charlotte County, I know the damage is going to require a lot of cleanup."

But Yeomans doesn't expect as dramatic a labor shortage as last year's storms caused because of the distance from the Gulf Coast to the hardest hit areas.

"We will certainly see some shortage in the critical trades ... demolition, roofers (and) electrical linemen," Yeomans says. "But it's still too early to tell what the impacts of Katrina will be. Everybody is concerned about insurers as they continue to reposition. But we are very optimistic that long-term Katrina won't affect anything we have planned for Florida."

Whiting Preston

Owner, operator

Manatee Fruit Co., Palmetto

Agriculture, distribution and developer

Preston says that fuel pricing has forced his company to make distribution adjustments.

"This really means cutting back service to local customers here in an effort to conserve fuel," Preston says. "We are only distributing four days a week rather than five. In some places it's two to three times a week. We made a conscious effort to schedule trucking within the farm to minimize farm traffic. We are trying to reach around a 15% reduction (in fuel costs)."

Even a 15% reduction, Preston says, pales in comparison to the huge distribution cost increases the company has experienced.

"This reduction could lead to thousands of dollars in savings," Preston says. "It is just going to require us to manage our efforts a little bit better. We are also looking at new equipment with an eye toward greater fuel efficiency."

Preston says so far the company has no plans to increase consumer prices, but if pricing concerns remain longer-term, he says he will consider it.

"It has not yet affected us on the development side," Preston says. "It looks like a lot people have lost their homes forever ... so with the demand for housing it is going to be an interesting few months ahead for us as Americans."

Lee Wetherington

Founder, chairman

Lee Wetherington Cos., Sarasota

Home builder

"We are already seeing that plywood futures have gone up a $1," he says. "We are expecting increases in concrete, lumber and probably shingles. And with gas prices the way they are, that affects anything that is a petroleum product, such as asphalt and plastic pipes. We have seen a bump in drywall prices. Most of this won't really filter down for three months though."

Even with the delay in application, Wetherington expects the pricing impact of Katrina to be significant to the cost of a new home.

"I would expect it to equate it to a 10% to 12% increase," he says. "Unfortunately there isn't a lot of buffer in buying. On an average $700,000 home that should increase costs by about $50,000. With the usual builder mark-up, the price will probably rise by $60,000 to $65,000. But I don't expect this to discourage most of our buyers as long as interest rates stay low. If things get bad enough, buyers may just buy 2,500 square feet instead of 2,800 square feet."

Wetherington doesn't expect much of a labor loss to the Gulf states, similar to what happened following Charley because of the distance to the devastation.

"I am getting calls from (subcontractors)," Wetherington says. "They're increasing new contracts. That's just going to happen."

The home builder is following suit and raising prices, but that, he says, is more a function of the market rather than an effect caused by Katrina. Yet, Wetherington says he has chosen so far not to include an escalator clause in his contractors although he has considered it.

"We still don't think people are going to be running out and signing contracts, especially with all the play on TV," Wetherington says. "We need a mood adjustment. But people are resilient; we will adjust over time."

Michael D. Welly

General manager

Longboat Key Club & Resort, Longboat Key

Hotel, club operator

Despite the possibility of a decrease in visitors traveling to Southwest Florida, Welly expects the hospitality industry to be one of the few industries that will benefit from Katrina.

"I would expect a positive residual from it," Welly says. "Since Katrina hit the coast of New Orleans and Mississippi, we've had some people who are looking for temporary housing and relocating their businesses and things of that nature, and I'm thinking that probably that is the tip of the iceberg. I think in the next several weeks we'll probably find lots of people looking to relocate."

In addition to the thousands of employees in the hotel and restaurant industry relocating to Florida as a result of Hurricane Katrina, Welly also expects an increase in business meetings moving to Southwest Florida in the coming weeks.

"New Orleans was a huge convention city, and all of those have to be relocated," Welly says. "We spoke to our Convention & Visitors Bureau, as I'm sure many of the others hotels did. The Conventions & Visitors Bureau was doing the right thing in contacting the national association to let them know that we can be of assistance if somebody needed to relocate a meeting. Other than that, I'm not sure there is a communications vehicle, and I'm not sure what the right time would be to use that vehicle.

"I think what we're looking for, at this point, is to be reactive to people's requests, and if there's a point that we can be proactive and do it the right way, we'll know that when it happens," Welly says.

Joseph Thompson

Director, sales and marketing

Hyatt Regency Coconut Point, Bonita Springs

Hotel operator

So far, Katrina has had positive effects on Thompson's business. "We have been getting calls from a number of groups that were going to hold events in New Orleans about hosting their event here," he says. "At least seven or eight different groups called. No one has booked anything yet."

Thompson also reported that despite rising gasoline prices, the hotel was 90% occupied and it only had five cancellations as of Aug. 2, which is well within its expected cancellation rate.

Says Thompson: "Unless the national situation changes drastically, we could very well end up actually gaining from (the impact of Katrina)."

Dave Olmstead

Public affairs officer

PGT Industries, Venice

Window, door and patio room manufacturer

"Everybody is in such a state of chaos right now," Olmstead says. "But people who have been through a number of hurricanes know that you don't see the real effects of a storm until about six months later. You just have to make sure you don't overreact. Right now things are still focused on the rescue efforts. When things shift over to recovery ... we will adjust our business plan accordingly. I am hearing from some builders that they are noticing some labor is moving to Alabama, Mississippi and Louisiana because of the demand and the cost of living here."

Olmstead says a building materials shortages is practically a certainty, and the materials most likely to be hardest hit will be drywall and roofing. However, high demand for construction materials is not a bad thing for PGT Industries.

"We are running at nearly 100% right now," Olmstead says, "but we can ramp up as needed. The Florida building market is probably going to experience a slowdown because of labor and material shortages, but that capacity should be offset by demand from (the hurricane damaged areas.) We are just going to wait and see what happens."

Bob Spencer

Vice president, marketing

West Coast Tomato, Palmetto

Land sales, grower, packer of tomatoes

"Everywhere we look, we're dealing with this," Spencer says. "We're having to closely monitor and cut back where we can our consumption of diesel fuel. Fuel is involved in the plastic that we use as mulch. It's involved in our fertilizers. We have tractors going on a regular basis everyday; we have employees driving to the fields and farms. There's a tremendous amount of fuel involved in our operation."

Spencer said the company is trying to recoup from the increased fuel prices through surcharges added to the customer.

"We're advising all our employees to look for ways to combine trips, and also as an industry, we're looking to adding in a surcharge to help take care of that," Spencer says. "We have, in our industry, what we call a handling charge. It's an add-on to the price of the product, and we're looking to increase that handling charge."

Spencer expects to see some long-term effects when harvesting begins next month. "When we start harvesting in late October, we will have trucks that will be going west. Well, the loss of highways - those distribution points - will have huge effects on us. We've sold a lot of tomatoes over the years into the New Orleans area.

"Whenever you see something like this occur, you reassess your game plans in dealing with natural disasters, whether it be making sure you have the ability to get your plant back online and reassessing your backup plans. All our farms have dikes around them, so we are making sure that our people are staying on top of monitoring the dikes and updating to see if there's any of them that need to be strengthened."

Stephen Heese

President, CEO

Chris-Craft Corp., Sarasota

Boat builder

"As long as the economy stays growing, it won't really affect us," Heese says. "Our buyers don't care about the price of fuel. If it sends the economy in recession, it will affect it, because our buyer doesn't want to be seen to be rewarding himself in a down market."

In the short term, Heese expects the boating industry will be hit hard by the increase in fuel costs.

"Gas lines will kill the boat business," Heese says. "If there's a shortage of fuel and people lining up at the pumps, nobody is going to think about buying a boat or even going boating. Burning fuel in your boat would be seen as being irresponsible if there's a line at the pumps. How that plays out will determine the impact on us."

Further, Heese says boat sales and rising interest rates are correlated.

"We're watching the economy and watching dealer inventories very carefully," he says. "Dealers buy boats when they're selling boats."