ULI New York Blog

Wrap-Up: Sky High Costs in a Building Boom: The Future of Construction in NYC

Construction panel

Photo: Andy Feinberg

BY MICHAEL MARTIN

Rising high, into the sky… These words not only capture the increasing price of real estate and the supertall buildings piercing our city’s skyline, but also the cost of building in New York City. The closing panel of ULI New York’s Real Estate Outlook for 2016 addressed this issue head on.

Moderated by Michael Fascitelli, the panel included several of the most influential figures in the construction industry; leaders of two of New York’s preeminent construction managers (Jay Badame of Tishman Construction and Richard Wood of Plaza Construction), the President of Building and Construction Trades Council (Gary LaBarbera) and the Head of Development for Kuafa Properties (Jeffrey Dvorett). Mr. Dvorett set the stage properly, emphasizing the importance of assessing, forecasting and managing construction costs: “After land acquisition, hard (construction) costs are the largest project expense.”

Construction 2Immediately the group identified key drivers of recent construction cost increases: an extremely busy market for both public and private projects (more on this below), a stagnant pool of subcontractors and a dearth of skilled trade workers. Gary LaBarbera noted that 130,000 members of local trade unions have sustained full employment for several years running after rebounding from unemployment of up to 40% for certain trades in 2010. These factors and others led to cost escalation of 12-15% from 2014 to 2015, despite plummeting prices for commodities and raw materials that would normally be expected to temper the feverish rise in construction costs.

Cost escalation has been so rapid that Richard Wood of Plaza warned against any protracted value-engineering exercises to find budget relief, stating “the targeted cost savings of any substantial VE or redesign will be eaten away by escalation in the time required to do the exercise.” To combat this risk, owners need to be decisive and act quickly to execute.

Large scale public projects currently underway, including World Trade Center buildings and transit hub, Moynihan Station and Second Avenue Subway, have kept union trade unemployment at nearly zero for several years. With massive projects commencing at LaGuardia Airport, Port Authority Bus Terminal and Javits Center union trade employment will remain high for several years into the future. Meanwhile, residential construction is also booming and is predominated by non-union labor. The panel agreed that unionized trades have been able to mostly ignore the residential sector while the public project pipeline has supported full employment, and this presented an enormous opportunity for non-union labor to get a foothold in New York’s traditionally union construction market.

Project type, complexity and schedule requirements influence the cost delta between union and non-union construction. A consensus range of the non-union discount was between 15% and 20%, with some instances of as much as 30% on more straightforward, larger residential projects. However, these raw numbers may not hold true when schedule delays and safety are factored into total project costs, the panel said. Nonetheless, the capabilities and sophistication of non-union contractors are improving with the immense opportunities in this busy market, but not quite as fast as the market demands. Many union contractors see an opportunity in this void and have opened non-union divisions and operate a “double breasted” company, as they say inside the industry.

Gary LaBarbera saw this as a hedge move by established union contractors. “The trades recognize adjustments need to be made to work rules… to become more competitive in the residential market,” but aligning the interests of multiple trade unions is difficult and renders the prospect of significant reform happening soon less likely than the market pressures justify. Nonetheless, LaBarbera conveyed optimism of inter-union cooperation based on the success of the Project Labor Agreements (PLA) implemented during the recession. PLA’s relaxed some of the most onerous work rules and allowed crew composition with more apprentices and helpers alongside the more seasoned journeymen, reducing the blended labor rate and bringing construction costs down.

Looking forward and tying back to the real estate thread of the conference, two looming changes in public policy could have significant impact on the construction industry: outer borough rezonings and the expiration of the 421-A tax abatement.

The City Planning Commission rarely establishes new industrial zoning districts and has rezoned industrial areas for commercial or residential uses with increasing frequency. Land owners and developers are transitioning these properties to the highest and best use the rezoning permits, which eliminates areas for fabrication and manufacturing facilities. Most concerning was the prospect of concrete plants closing due to rezoning, further restricting competition among an already narrow set of options. There are logistical dangers as well, as concrete has a 90-minute time limit from the plant to being poured in place at the project site. With increasing traffic congestion, close proximity of concrete plants is an essential component of a robust construction and development market.

The New York State legislature is currently debating the merits of the 421-A program and what reforms might improve the program. Jeffrey Dvorett said unequivocally the expiration of 421-A would impact the pace of development in the City, particularly for affordable housing, which typically requires this and other subsidies to underwrite the projects. Gary LaBarbera, meanwhile, was hoping a renewed version of the program would require prevailing wage labor on any 421-A project, which would rest somewhere between union and non-union costs. If prevailing wage is required, it would increase construction costs for many of the affordable housing developments using non-union labor and make the narrow margins even tighter, or make increased subsidies necessary to offset the construction cost increase.

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