Boom collides with rising building costs

By TRD | November 30, 2007 09:54AM

The building boom still going strong in the city could be jeopardized by rising construction costs.

On Oct. 8, the Associated General Contractors of America released a national construction costs study that predicted costs would go up dramatically over the next two years. The following week, a report issued by the New York Building Congress said that city housing construction activity is expected to level off next year — after increasing 14 percent in 2007 to $5.6 billion.

To take a look at the future of building in the city, The Real Deal spoke to NYBC president Richard Anderson in a recent Webcast interview. He discussed his group’s report and his own predictions for how construction costs will affect the city’s projects over the next few years.

Anderson, recognized nationally as an expert on public policy and construction issues, spoke about what sets the city’s construction outlook apart from that of the rest of the country’s — particularly when it comes to residential development.

THE REAL DEAL: Do you see construction costs actually going down because of a falloff in building activity? Is that on the horizon at all?

RICHARD ANDERSON: No. Costs would only go down — and they probably wouldn’t go down, they would moderate — if there was a real slackening of demand. We had that in the mid-’90s.

TRD: There’s been a decrease in home building activity in 2007, but according to the Associated General Contractors’ new report, 2007 non-residential construction was a banner year.

RA: The AGC report is a national report, and the New York Building Congress deals with the city of New York. And we have found that the market here has been strong both residentially and non-residentially, whereas nationally, the residential market has slowed down tremendously. Non-residentially, though, we’re about the same if not a little bit ahead in New York City.

TRD: Despite the fact that New York City is bucking the national trend, Ken Simonson, the AGC’s chief economist, said the end of the calm is coming soon. He’s referring to the worsening slide in home building and turmoil in the credit markets that will affect non-residential construction. Do you agree with his assessment?

RA: Two points: Residentially, we think there will be a decline in New York City eventually. It is not happening yet. Actually, New York City will have its strongest year in 40 years residentially. We should build 35,000 units in 2007 in New York City. Non-residentially, we’re not seeing any end in sight. In fact, it’s speeding up.

TRD: We’re going to go back to the report again. It showed construction costs rising at more than double the rate of increases in the consumer price index since the end of 2003. Would that explain why some projects are being cancelled, delayed or redesigned? Or are we just absorbing those costs?

RA: The highest cost factor in a project in New York City is the cost of land. And what AGC measured was the cost of labor and materials, which is significant. In the city, we’re finding [increases of] about 12 percent a year overall, and that, I think, mirrors the national picture. So far, the construction cost increase has not slowed things down. But when you factor in the cost of land and everything else — the soft costs that go into a project — these are really significant. And any project that is marginal, such as some of the residential projects on the drawing boards, will certainly be candidates for cancellation.