The Real Deal New York

State of the unions

The expiration of a long-held agreement deals a blow to the 'closed-shop' model

December 29, 2011
By Katherine Clarke

In a key sign that the relationship between developers and organized labor has changed, the so-called New York Plan — a century-old agreement that required most contractors to use union labor — was allowed to expire Dec. 31.

The New York Plan required any member of the Building Trades Employers’ Association — which represents the majority of the city’s construction managers and contractors — to use completely “closed shops,” with all-union labor. But in the middle of last year, the 1,700-member BTEA called for a halt to the agreement, saying it put their members at a competitive disadvantage when going up against non-union outfits for building contracts.

Unions are undoubtedly still strong in New York City, historically a heavily pro-labor town. But the demise of the New York Plan does indicate a marked shift in the landscape for unions here.

“Union influence is declining rapidly,” said Allen Ross, head of construction litigation at the law firm Duane Morris, who represents several high-profile developers. “The market is beginning to open up, and some people are predicting not the death knell of the union, but certainly the death knell of the closed shop.”

For many years, the use of non-union construction has been confined to small residential projects in the outer boroughs, industry experts told The Real Deal. But an increasing number of developers are now considering non-union alternatives, they said, due to the economic crisis and the unions’ perceived failure to compete on price with non-union labor.

In the past, non-union labor was “mostly in the outer boroughs,” said Louis Coletti, president and CEO of the BTEA.

Now, “it’s creeping into Manhattan,” he said. “Manhattan is not a safe haven.”

Equity Residential, one of the city’s largest real estate investment trusts, went with non-union construction on its 111-unit rental project at 500 West 23rd Street last year. Homebuilder Toll Brothers opted to go non-union on its second tower at Northside Piers in Williamsburg in 2009. And the Chetrit Organization has hired non-union workers for its controversial renovation of the Hotel Chelsea.

Paul Fernandes, chief of staff at the Building and Construction Trades Council of Greater New York, an organization that represents the interests of the unionized construction industry, also attributes the unions’ loss of market share to the financial crisis. But it’s not so much that developers are opting to go non-union, he said; rather, a huge chunk of high-end private-sector construction has simply disappeared since the recession.

“A diminished pool of work and [increased] competition for that work has brought these problems much more to the surface,” Fernandes said. “Class A commercial office space, high-rises, upper-income projects — that market is dramatically smaller.”

Still, he said, large-scale transportation projects and public works are almost entirely union-constructed. “If you look at certain types of the market, we’re still very strong.”

A ‘closed-shop’ town

In the 1970s, non-union construction constituted only about 10 percent of the work going on in New York. Little official data exists on the subject, but industry insiders agreed that the figure now hovers around 40 percent.

“There was a time where if you were operating in a heavily unionized environment, it was almost considered to be anti-American to go non-union,” Ross said. “That’s not really the case anymore.”

Toll Brothers senior vice president David Von Spreckelsen said his company likely would have gone union at Northside Piers if it made financial sense.

“The market had changed, and we had a sense of what we’d be able to sell the condos for,” he said. “It wasn’t a number that would work if we used union construction.”

At the New York University Schack Capital Markets Conference last month, Related Companies chairman Stephen Ross complained about the price of union construction.

“We can build the same building in Chicago at 50 percent of the cost in New York,” he said. “Working with the unions, it’s hard to compete with other parts of the country. The best thing that could happen to New York is it would become an open-shop town.”

Most onerous for developers, one real estate honcho said, is not the wages, but the work rules: prescribed lunch hours, coffee breaks, and safety measures that many developers view as excessive and a waste of time.

The expiration of the New York Plan affects future developments, not projects already under construction. But as the plan takes effect, more developers may opt to use a combination of union and non-union workers, as opposed to the “closed shop” the plan required, said Duane Morris’s Ross.

Coletti noted that many developers have pledged to continue using union labor. “Most of the developers we work with would go union with or without the plan,” he said, though he declined to identify the developers in question.

Another possible consequence of the plan’s expiration, however, is that it “may drive a wedge between the unions themselves,” said Ross, the attorney. Aside from dictating the exclusive use of union contractors, the plan specifically outlines which roles certain workers can carry out. Its expiration will allow certain workers, like carpenters or electricians, to dabble in other kinds of construction, introducing an element of competition that might not otherwise have existed.

Traditionally, one incentive for developers to hire union workers has been that they are viewed as more skilled than their non-union compatriots. Plus, “larger projects, with more mass, require the skill of union labor and a volume of workers that only the union can supply,” said attorney Morris Missry, chair of the real estate department at law firm Wachtel & Maysr.

But the gap between the skill sets of union and non-union workers may be closing. Duane Morris’s Ross said the recession and ensuing layoffs at unionized companies has allowed non-union contractors to hire skilled workers they wouldn’t normally have access to.

Fernandes said that isn’t a significant factor. Since the recession, “there are 25,000 fewer construction jobs in New York City,” he said. “[Laid-off workers] are not going to work for non-union employers. They’re unfortunately not going to work anywhere.”

He added that unions are working to become more financially competitive. At TF Cornerstone’s Queens West Long Island project, Fernandes said, his organization made a special deal with the developer to cut the union’s payroll costs by 20 percent.

TF Cornerstone did not respond to a request for comment.

Lending to survive

Union labor has a few more cards up its sleeve, however. The unions are sure to maintain their grip on the New York market for at least a few more years, sources said, because developers are increasingly turning to labor pension funds for project financing in the continuing credit crunch.

The Housing Investment Trust arm of AFL-CIO, a voluntary federation of 57 national and international labor unions nationwide, has invested over $700 million in the New York metro area through its initiatives since 2002, an AFL-CIO spokesperson told The Real Deal. The most recent investment was $134 million for the rehabilitation of the historic Penn South Cooperative in Manhattan.

And union financing almost always comes with the condition that the developer must use union labor. Sometimes the agreement is constituted by “a wink or a nod,” sources said; other times it’s in writing.

The fact that unions are acting as lenders provides an additional incentive for developers to use union labor.

“If they desire to organize themselves in a manner that can create a lending arm, then that can be a healthy model for them,” Missry said.

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