The Real Deal New York

In 421a prevailing wage dispute, the real numbers are murky

An independent report tying union pay to higher construction costs faces criticism

February 11, 2016 04:20PM
By Konrad Putzier

Will developments using the 421a tax abatement be required to use prevailing-wage contractors?

Will developments using the 421a tax abatement (like One57) be required to use prevailing-wage contractors in the future?

UPDATED, Feb. 12, 12:30 p.m.: The 421a tax abatement program remains in limbo, and its future hinges on one crucial question: should City Hall mandate prevailing construction wages at affordable housing developments that receive tax breaks?

This week, opponents of the mandate received a major boost from the Independent Budget Office, which found that prevailing wages cause construction costs to soar by 23 percent (it had previously put the figure at 13 percent.) But critics counter that the report is flawed and could well be exaggerating the effect of prevailing wages on construction costs. 

The publicly-funded agency’s revised calculation reckons the city would need to dish out an additional $4.2 billion in subsidies to meet its goal of creating 80,000 new affordable housing units citywide.

The corrected report seemed to vindicate the hardline stance taken by the Real Estate Board of New York in the 421a negotiations, and the industry’s and the de Blasio administration’s argument that higher labor costs would make affordable development unfeasible.

“The IBO’s updated report goes further in validating what we have been saying for years — more prevailing wage mandates mean less affordable housing for low- and middle-income New Yorkers,” Jolie Milstein, head of the New York State Association for Affordable Housing (NYSAFAH), which represents affordable housing developers, said in a statement.

IBO’s limited scope

No one on either side of the debate denies that a prevailing wage requirement will increase construction labor costs for developers. But unions claim that prevailing-wage contractors tend to do better work than their low-wage counterparts, reducing cost overruns, expensive delays and fines. These savings, the argument goes, could offset some of the added costs of higher wages.

The IBO report doesn’t account for any of these factors. Its data comes from construction budgets, as opposed to final construction costs tabulated upon completion. In other words, it doesn’t take into account any impact higher wages and union labor may have on speed and quality of construction. This impact may be a crucial factor in the overall cost calculation, or it may be negligible. The IBO report doesn’t offer an answer.

“There’s no question that the quality and skill of prevailing-wage and union contractors brings the project in much more quickly than non-union contractors,” argued Gary LaBarbera, head of the labor group Building and Construction Trades Council of Greater New York and the key proponent of the prevailing-wage mandate in the 421-a negotiations.

IBO’s communications director Doug Turetsky countered that “if there are efficiencies from using prevailing wage contractors, then those efficiencies should be reflected in project budgets.”

“Logical leaps”

James Parrott, chief economist at the Fiscal Policy Institute, a think tank, argues that the report’s methodology is ultimately flawed. The IBO arrived at a cost effect of prevailing wages by crunching numbers on projects sponsored by the Department of Housing Preservation and Development (HPD). But Parrott claims the report fails to account for the effect city guidelines for these projects unrelated to wages could have on construction costs.

“At best, the IBO report finds that HUD requirements raise the construction cost of certain subsidized housing units,” he wrote in a statement back in January. “It is a logical leap to attribute all of that to prevailing wage requirements.”

“Given the limitations of the IBO analysis, it should be not be used to inform a discussion in the public policy sphere,” Parrott told The Real Deal.

The land factor

And finally, the report ignores the elasticity of land prices, which are part of the construction cost equation. TRD recently reported on how if other construction costs rise, land prices tend to adjust downward in the medium term.

Here’s how it works: Land prices are set by the free market – meaning they are set at a level where buyers think they can meet their return expectations. Return expectations are usually constant. If construction costs rise, developers will not buy land at current prices because they can’t make the desired return. Initially, this drop in demand means fewer sites are sold and less housing is built. But in the medium run, urban planners argue, landowners adjust their expectations downward, land prices fall and development resumes.

A rise in construction costs could be partially counterbalanced by a fall in land prices – at least after a transition period. This dynamic is murky and extremely difficult to quantify, making it hard to fault the IBO for not including it in the report. But it should still play a role when thinking about the ultimate effect of prevailing wages on construction costs.

The IBO report offers a window — albeit one with a partial view — into how higher wages could impact construction costs, and the nonprofit claims it did its best given the limitations of construction cost data. “Our report,” Turetsky said, “takes into account what it could with the available data in order to examine the effect of prevailing wages.”

CORRECTION: an earlier version of this post incorrectly stated that the IBO report found construction costs rise 28 percent with prevailing wages. That figure referred to only hard costs.

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