As New York City construction firms get slammed by the downturn, they are turning to more modest projects, in some cases taking on multimillion-dollar renovations rather than the multibillion-dollar skyscrapers.
While it’s clear that the collapse of the New York development market has taken a toll on builders and brokers, there may be nobody in the industry hit as hard as construction firms.
As banks have largely cut off financing for new projects and cranes have been mothballed, thousands of contractors have lost their jobs.
“It’s having a devastating impact on the construction market,” said Lou Coletti, president of the Building Trades Employers’ Association, which represents 1,700 construction management and contractor firms. “There are very few, if any, new projects moving forward.”
To combat that lack of work, major New York construction firms are bidding for much smaller projects and diversifying into public-sector work, while other firms have been forced into bankruptcy protection.
The bankrupt HRH Construction — whose projects include 75 Wall Street and Trump International Hotel & Tower — may be one of the biggest symbols of the pain in the industry.
Kevin Kane, chief financial officer of HRH, said in an affidavit filed in bankruptcy court last month that the economic slide “caused owners to delay moving forward” with some of its projects. (The firm was also hurt by a $6.5 million judgment after billing at inflated rates and for no-show construction labor at 2 Broadway, the MTA offices.)
Kane noted that the firm saw annual revenue fall from $352.6 million in 2007 to $193.3 million in 2008. But the firm is getting closer to emerging from bankruptcy, its attorney said.
Experts warn that HRH is not the only construction firm that could face bankruptcy, noting that in the last major real estate collapse in the early 1990s, New York saw more than 20 percent of contractors disappear because of the inability to collect payment on completed jobs.
“In the early 1990s a number of construction companies went bankrupt because a number of developers couldn’t pay them, even though the jobs were built,” said Coletti. “I’m already hearing there are a number of firms that could be in very serious trouble by the third quarter, or end of this year, for the same reasons.”
Other firms are facing less-serious consequences, but have been forced to make changes in the business they go after.
Andy Frankl, president of Manhattan-based Ibex Construction, said his firm has diversified away from focusing mainly on condo and office buildings.
“A few years ago, we decided to diversify the business because we saw this kind of situation happening,” said Frankl, whose firm has developed the Manhattan Mall, Hotel Pennsylvania and other large projects. Court documents show that Ibex has been impacted directly by the downturn.
In August, it filed a $1 million mechanic’s lien against developers Leon Charney and George Comfort & Sons at 119 West 40th Street, an office tower now facing foreclosure proceedings.
To deal with the loss of business, Ibex has expanded into new sectors, including health care, education and retail outlets. It is currently building out Claremont Prep’s new 200,000-square-foot space at 25 Broadway. Claremont is scheduled to start classes in the new $30 million space this fall.
Ibex has also taken on projects for Columbia University, where it renovated Uris Hall at the School of Business and converted an office facility into a student activity center.
Chuck Taylor, director of operations at Chicago-based Englewood Construction, said that because retail chains have shrunk, many contractors are now remodeling or expanding existing stores, rather than building new ones.
He said Englewood, which has worked in New York for 15 years, mainly in retail and restaurants, recently reduced its staff, and cut the number of architectural drawings it sends out, a move that helped it save hundreds of thousands of dollars.
Englewood isn’t the only firm reducing staff.
Coletti said unemployment among the unionized construction trades is around 30 percent and could rise as high as 50 percent by later this year. New York State Department of Labor figures show that construction jobs fell by 25,000 in December, down from a year ago, one of the biggest declines of any sector.
A labor agreement Coletti’s organization helped hammer out with developers did mitigate some of the damage by saving up to 21 percent in costs. The changes included staggered work schedules, employee contributions to health care, cutbacks to 401ks and frozen salaries.
Meanwhile, construction spending in New York was down 20 percent, to $25.8 billion in 2009 (it would have been down further, but projects were already in the pipeline), compared with a record of $32.4 billion in 2008, according to an October report from the New York Building Congress. The report estimates a slight slippage in 2010, falling to $25 billion.
The figures highlight an industry in free fall from the five-year development boom.
And the slump has led to a serious increase in competition for the jobs that do exist. Sources say some of the city’s biggest construction firms, like Tishman Construction and Turner Construction, are competing for jobs with lowball bids or in other cases for small renovations of less than $5 million, putting the squeeze on smaller rivals.
Tishman spokesman John Gallagher insisted the company, which is the construction manager for One World Trade Center, has always competed for smaller contracts.
“The nature of our industry is fluid — we move people around and hire up and down based on projects, not economic cycles,” he said. “Of course, like every business, we’re watching costs closely.”
Still, there are some bright spots.
As of November, the cost-savings labor agreement was adopted at 36 construction sites citywide, including Forest City Ratner’s 76-story Beekman Tower in Lower Manhattan; Tower 111, the 47-story, Costas Kondylis-designed office building; and 885 Sixth Avenue.
Still, attorney Barry LePatner warns that development in New York will remain weak for many years, even with an influx of federal stimulus money.
“Contractors keep talking about the idea that stimulus money will hopefully come around. [But even if] New York gets its share, it will be woefully inadequate for roads, bridges and tunnels,” he said.
LePatner notes that public projects, including the extension of the No. 7 subway line, the Javits Center and the construction of the Second Avenue subway, are providing some much-needed work for construction firms, but public-sector construction will not make up for the loss of private-sector projects.
Millionaire developer Elie Hirschfeld, whose firm also does construction, said negotiating with contractors has become much easier since the economic downturn, as prices have come down significantly and firms are much stricter about adhering to schedules.
“Work is evidently slowing for them,” said Hirschfeld. “They are being much more considerate in their pricing and also expectation of delivery for completion.”