Painting a grim picture of the potential environmental and health impacts of Hurricane Katrina, the media described the contaminated flood waters in New Orleans as “toxic gumbo,” “a nasty bouillabaisse of chemicals and petroleum products” and “the second wave of disaster.” Closely following on the heels of Katrina, Hurricane Rita hit the coast of southeastern Texas and Louisiana. Although Rita affected a less populated area, the storm nonetheless exacerbated the environmental impact of Katrina along the Gulf Coast, particularly in New Orleans.
As the water level in New Orleans dropped, concerns about the storms’ environmental consequences rose. It would likely be weeks or months before the extent of the contamination was fully known. Environmental consulting firms began positioning themselves to assist in assessing the storms’ environmental impacts, a necessary step before rebuilding could begin, and started asking questions.
What types of hazardous wastes were handled and stored in the hardest-hit areas? What potential contributing sources existed in the area before the storms hit? What effect will the storms have on the market for Phase I environmental site assessments (ESAs) as the region is cleaned up and rebuilt in the coming years?
Environmental Data Resources, Inc. (EDR), a national provider of environmental risk management information, searched its databases of federal, state and local government agency records, and mapped sites that could have environmental impacts in the regions affected by the storms.
Properties of concern
The geographic region that fell in the crosshairs of both hurricanes is one of the most environmentally hazardous regions in the U.S. Louisiana is responsible for producing one-quarter of the nation’s petrochemicals, and New Orleans is home to oil refining and production hubs, chemical manufacturing complexes and other environmentally risky operations, making the area particularly vulnerable to widespread contamination. The storms impacted thousands of contaminated properties, many of which remained submerged for weeks after the storms were over. This caused considerable concern among government officials, commercial property owners, lenders, insurance companies and environmental experts about the potential for soil and groundwater contamination from hazardous wastes and petroleum products.
EDR identified approximately 700 sites with known or potential contamination along the affected coast of southern Mississippi, and another 1,600 in the New Orleans metropolitan area alone. In a study area defined by the flooded region within the New Orleans metro area, EDR identified 667 sites that are potential sources of contamination, such as generators of large quantities of hazardous waste, industrial facilities that handle toxic chemicals, and facilities with underground tanks, many of which contain gasoline and fuel oil. In addition, EDR identified 89 sites with known contamination that were in the process of being (or had been) cleaned up prior to the two storms. These properties include one Superfund site, numerous abandoned contaminated properties (i.e., brownfields), landfills, and sites with leaking underground storage tanks. The contamination at these properties includes toxic substances such as arsenic, lead, mercury, benzene, chlorinated solvents, petroleum hydrocarbons, insecticides, herbicides and pesticides.
Unfortunately, the environmental profile of the affected region does not stop there. Other sites that have the potential to threaten surrounding areas, particularly if submerged by flood waters, included wastewater treatment plants.
The most immediate need with respect to the nearly 700 sites that are potential sources of contamination is to locate the thousands of drums and containers storing hazardous waste. Some are labeled; some are not; and some likely have labels that are unreadable after being submerged for weeks. The drums are known to contain pesticides, insecticides, lead, arsenic, mercury and even potassium cyanide, a highly toxic substance. Due to damage from the storm, some of these drums may now be leaking their contents, presenting an extremely hazardous situation for human health and the environment.
With respect to the 89 properties in EDR’s New Orleans study area with known contamination, the flood waters could have caused the contamination to spread off-site. At sites where remediation systems had been installed, the integrity of the system will need to be investigated. At the Agriculture Street Superfund site, for example, the reliability of the soil cap over the old landfill is questionable because of storm damage— particularly worrisome given that public housing and an elementary school have been built on the property.
Also of concern is the condition of the thousands of underground storage tanks in the flooded area. Above-ground vent pipes could easily have been damaged by debris in the water, compromising the integrity of the tanks below, and causing the release of contents (mostly gasoline and fuel oil) to local soil and groundwater. Testing of all underground storage tanks in the flooded area for structural integrity is necessary, as is a study of soil and groundwater to investigate whether leaks occurred. Oil spills are also a fundamental problem. A tank farm in the area reportedly released 820,000 gal of crude oil, of which only 320,000 gal were recovered, leaving half a million gallons to be dispersed by the flood waters to the surrounding area.
Finally, mold is a problem in the affected region. The extended influx of water in the flooded areas of Louisiana has made even structurally sound commercial buildings susceptible to mold.
Impact on environmental due diligence market
The potentially far-reaching environmental impacts of hurricanes Katrina and Rita are also likely to have a series of near- and long-term impacts on the environmental due diligence market. The most immediate impact was felt by Phase I ESA consultants with offices in the hurricanes’ area of impact. Isolating the area most significantly affected by the storms (i.e., FEMA-designated counties
and parishes where individual and public assistance is being provided to businesses, individuals and local governments), EDR identified approximately 60 Phase I ESA offices, which account for 0.4% of the U.S. Phase I market annually. The concentration of consultants in the hardest-hit areas is fairly dense, particularly considering that approximately 280 Phase I offices operate in Louisiana, Mississippi and Alabama combined. Displaced staff in the affected region were quickly moved to nearby offices in other metro areas, such as Houston, Dallas and Baton Rouge.
As companies slowly return to the Gulf Coast region, damaged properties will need to be carefully assessed for actual and potential releases of hazardous chemicals and petroleum products. Particularly in New Orleans, reclamation of properties may be severely impacted by the presence of hazardous materials either from flood water or from storage tanks and drums whose viability may have been compromised.
The two most important aspects of the cleanup include environmental sampling and accounting for the hazardous waste and toxic chemicals in the area. More testing of sediment, soil and groundwater is necessary throughout the flooded area.
Every facility that handled toxic substances and hazardous wastes must be inspected and an inventory taken. All drums and containers must be located, even if they are no longer on the property that once stored them. Over the near term, Phase I ESA firms expect to see more demand for assessments related to storm damage. Via swiftly posted web pages, environmental consulting firms are offering expertise in the areas of insurance claim support, mold assessments, hazardous waste management, and redevelopment of contaminated properties. Some are conducting Phase I ESAs to assist local officials with the urgent task of identifying properties that are environmentally suitable for housing displaced residents. Given the potential for hazardous materials to be mixed with non-hazardous waste, insurance brokers are advising their commercial clients to complete inventories of hazardous products and waste, and provide notifications of chemical releases to the federal, state and local environmental agencies. Commercial lenders and rating agencies are in the midst of classifying which properties in the region may have been compromised. They are also researching the ability of borrowers to pay back loans on properties in FEMA-designated counties by determining whether additional environmental assessments and testing are necessary to evaluate if properties have been significantly devalued. A slight uptick in demand for Phase I and Phase II ESAs to evaluate the risk of hazardous waste and petroleum contamination in the affected region is already evident as insurance companies, commercial lenders and others with a financial stake in value degradation caused by the storms look for answers.
The impact of the storms’ activity on the environmental due diligence market will likely closely correlate to how commercial real estate markets react. PPR, an independent provider of real estate research and a sister company of EDR, predicted that economic growth will be slower than expected in the near term but will bounce back as reconstruction occurs. The company expects the overall implications for real estate to be quite mild. After the initial slowdown in the affected region passes and the rebuilding efforts get underway, cleanup and redevelopment is likely to exert upward pressure on Phase I growth higher than 2006 projections—possibly as much as 20 to 30% in some areas.
In the hardest-hit regions, the risk of higher commercial mortgage defaults, particularly by borrowers who lacked flood or mold insurance, could drive properties back onto the selling block. Clearly, there will be a large concentration of insurance claims because of the hurricanes. It will be interesting to monitor whether the spike in claims will result in tighter environmental insurance underwriting standards over the long term. Carriers are likely to be more cautious about issuing policies in the region, particularly given the contamination unleashed by the storm.
Moreover, the contamination left in Katrina’s wake could also generate a more acute awareness of the need for environmental insurance as a way for clients to manage business risk. This could lead to Phase I opportunities with insurance providers serving this area. Rating agencies, lenders, insurance firms and investors are also likely to scrutinize loans in FEMA-affected zones much more closely in the coming months and even years. Loans originated for commercial mortgage-backed securities (CMBS) pools will be subject to the most stringent levels of environmental due diligence. In fact, inspections for mold could become standard operating procedure for Phase I ESAs at any commercial properties in the flooded region. Fitch Ratings, a leading global rating agency, already announced plans to restate its expectations regarding mold to include a specific mold inspection requirement for loans being originated for CMBS securitization.
Although not many commercial lenders are doing business in New Orleans now, there is clearly interest in rebuilding the city. Developers and other investors will eventually move back into the area. As a result, Phase I ESA consultants, particularly the large full-service consulting firms, are expecting a flurry of activity throughout the entire Gulf Coast region on a three- to five-year timeframe. These firms are forming joint ventures with local firms, establishing relationships with subcontractors, and mobilizing staff in offices near the affected area to take advantage of the new opportunities.
Until an accurate assessment of the full extent of the damage to the area’s soil and groundwater has been made, the impact on the commercial real estate market and demand for Phase I ESAs will remain largely uncertain. There is no question that the assessment and cleanup of the affected region, particularly the New Orleans flooded area, is unprecedented, and will represent one of the environmental industry’s greatest challenges.