The More Things Change …
Roland Li Feb. 16, 2010, 8:31 a.m.
Just a couple of years ago, the New York Building Congress anticipated that what it called the city’s “white-hot” construction market would continue to flame, after it reached a record $32.4 billion in spending in 2008. Yet, 2009 was brutal. In the churn of the Great Recession, construction spending plummeted 20 percent to an estimated $25.8 billion, and private-sector construction spending virtually disappeared relative to the work coming from the public side.
But whether boom or bust, the long-term issues of cost, efficiency and city regulations remain. Record levels of spending don’t merely indicate a robust industry-they may also be symptoms of inefficiency. And while rising construction costs could be ignored when commercial and residential rents and prices surged ever higher, the downturn exposes and further exposits these fundamental problems.
As any contractor will tell you, if the foundation is flawed, everything can tumble down.
The scarcity of projects has led to increased competition, with huge firms like Tishman Construction, Turner Construction Company, Bovis Lend Lease, Plaza Construction and Structure Tone bidding against even the smallest contractors.
With such an imbalance in supply and demand, the winning bid from contractors is often the lowest one-but developers beware. Over the course of a project, contractors may cite additional costs in labor and materials, leading to cost overruns that eventually turn into the contractor’s profit margin.
“The construction industry is the only industry in America that enters into contracts at or below cost, and puts in claims to put in additional costs to make a profit,” said Barry LePatner, an attorney who has represented major developers and who has become an advocate for construction industry reform. “Owners are tremendously at risk when they allow that to happen.”
As an insurance policy, the city government has a “No Damages for Delay” clause, which forbids contractors from charging for additional costs due to any delays. But contractors will simply bid higher to compensate, even if such delays never happen.
“You have to bid at a pretty high level in order to protect yourself, or else you go out of business,” said Richard Anderson, president of the New York Building Congress.
An Imperfect Union
A substantial part of the cost of New York City construction is the salaries of the builders. Developers have an option between union labor, which is generally more experienced and almost mandatory on larger projects, and non-union, which is generally cheaper.
“Union labor is more skilled. I think our job sites are safer,” said James Coletti, vice president of the Building Trades Employers’ Association, which represents 28 trade union contractor associations.
But, he says, “in this economic environment, those things are secondary. There’s one thing in a developer’s mind right now: cost.”
The overwhelming number of regulations is the main reason union labor is usually more expensive-Mr. Coletti said his members have a total of 72 collective bargaining agreements, which leads to perplexing situations. Different agreements designate different holidays during the year, leading to discrepancies in overtime pay. A regulation dictating that all workers have to begin at the same time on a project can lead to a clogged line for a single elevator at a construction site. A solution would be to simply stagger the schedule, but some current agreements don’t allow it.
Contractors, developers and the city have attempted to lower costs by about 20 percent through project labor agreements, with a major one enacted a year ago. Savings came from eliminating some union regulations, but also included using less expensive materials and cutting wages. Mr. Coletti credits it with saving 42 projects and about 25,000 jobs, but it is a mere “band aid” in the current crisis. Unemployment in the construction industry is around 30 percent now, he said.
The Building Trades Employers’ Association gathered for its annual Construction Industry Partnership conference in Florida on Feb. 14 to address these ongoing issues, but solutions continue to be elusive.
If You Can Build It Here …
New York’s bureaucracy, desirability and high cost of living all contribute to higher construction costs, too.
According to data from the New York Building Congress, construction in New York is over 60 percent more expensive than in Dallas, nearly 50 percent more than Atlanta, 25 percent more than Seattle and 20 percent more than in Los Angeles. It rivals the likes of Tokyo and London for the most expensive cities in the world in which to build.
As an island, Manhattan lacks the horizontal sprawl of cities in the Midwest and the West Coast, so space has always come at a premium. New development must navigate the lengthy approvals of the city’s departments of Buildings and City Planning.
The tension between preservation and new development is also a continual issue. Much of Manhattan lies within historic districts, so all demolition and additions must be approved by the Landmarks Preservation Commission.
These factors are exacerbated by the national and global market. Weak demand for new buildings, particularly commercial, and the lack of lending by banks has severely hurt the chances of new development.
“Until lenders are willing, or instructed, to open their coffers, we’ll have a moribund construction industry,” said Mr. LePatner, the attorney specializing in construction.
Public Works: A Bright Spot
The one silver lining in the industry is the segment that doesn’t need to rely on fickle lenders. Government-funded projects, such M.T.A. and Port Authority projects, continue to grow, with the New York area’s institutional construction increasing an estimated 18 percent in 2009 to $7.9 billion and a 24 percent increase to $9.8 billion projected in 2010, according to a new study by McGraw-Hill.
“The public work doesn’t slow down as quickly,” said Mr. Anderson of the Building Congress. “It has considerable momentum and funding from state and federal sources.”
The federal government’s American Recovery and Reinvestment Act (a.k.a. the federal stimulus) will infuse New York with an estimated $900 million for construction, according to McGraw-Hill. Heavily subsidized mega-projects, such as the World Trade Center and Atlantic Yards, have also been some of the major projects that moved forward in the past few years thanks to public help.
The Building Congress expects overall stability in 2010 and 2011, with no major declines or improvements for the construction industry. The McGraw-Hill study is rosier (see charts), with construction starts in 2010 predicted to grow 22 percent to $28.8 billion, and public works and utility construction growing 30 percent to $9.6 billion. Meanwhile, New York’s office starts are expected to decline 49 percent to $2.8 billion.
The only clear consensus is that which agrees that the disparity between government projects and privately funded construction will hold. “This will be an uneven market for some time,” Mr. Anderson said.