As president of the Gotham Organization and manager for new project development there since the early 1990s, David Picket has had a hand in development both Uptown and upscale in Manhattan.
Between 2000 and 2004, Gotham developed four luxury high-rise residential towers, including the Atlas, a 48-story luxury rental residence on Sixth Avenue and 38th Street. Gotham is building the Langston in Harlem, which will include 180 units of affordable and market-rate for-sale housing. Commercially, Gotham developed Harlem USA on 125th Street, an entertainment and retail center that helped spur further developer interest in Upper Manhattan. Gotham is now developing Uptown NY, a proposed 1-million-square-foot retail hub in East Harlem.
In a recent interview with The Real Deal, Picket shared his views on rising construction costs and other challenges facing New York developers. The interview is part of The Real Deal’s regular podcast series.
THE REAL DEAL: Can you give us your feeling about construction costs right now for residential and retail development in New York? Where are they headed?
DAVID PICKET: Construction costs are high right now in New York. There’s been a variety of reasons. Over the last six to nine months, we’ve seen an increase in hard costs of probably 15 to 20 percent alone. And that’s attributable to several factors.
One is that the construction market in New York is extremely tight right now. There are only so many subs out there that can perform excavation, superstructure, and some of the trades, and they have a tremendous amount of pricing power. That’s the labor side of it.
The materials side of it is that we’ve had some catastrophic events in the United States that have decreased the supply and the ability to transport materials, and that’s driving prices up as well. You see that reflected in steel and sheetrock and just about every building material out there.
TRD: Are construction costs going to get to a point where new condo construction is not worth it for a developer?
DP: We may be at a spot where that’s correct right now. Although, I’ve been wrong for a couple of years. I think what you’re seeing now is a flattening of demand, certainly on the high-end side, for condos.
TRD: Do you think there’s too much condo development in New York?
DP: When you say too much, no, I don’t. I think this city is spoiled by extremely fast absorption periods for product. I think what we’re seeing now is a slowdown and I think maybe a return to a more normal supply-side situation.
With condos, I think the stuff coming to the market right now was done in an efficient fashion [and] is probably OK. I think it’s people who perhaps wanted a contract for land in the last several months, where they’ve seen really an unanticipated increase in construction prices against a flattening demand curve. So, it’s that you’ve got a flattening of prices against a cost structure that’s increasing.
TRD: How does Gotham pick a new location for development? For instance, the Langston in Harlem — what was the thinking behind that?
DP: We try not to pay top dollar for the top sites in the top areas. We look at the areas that we think are close to being there — near neighborhoods, near opportunities. We try not to buy something in a neighborhood that we feel is years away. We like to buy property in a neighborhood that’s on its way up. So, that by the time we’ve developed plans and financed it and put it in the ground and it’s ready to be rented or sold, that it’s a neighborhood that’s arrived.
TRD: Does the same hold true for retail development?
DP: The retail is really a different play for us. We have retail in almost all of the bottoms of our residential buildings. But we’re in a partnership with Grid Properties to develop large, urban retail centers. Harlem USA is the first one we did. We have another site on the east side of 125th Street that we’re calling Uptown NY, and we’re looking to develop that.
TRD: What sort of retail asking rents do you see?
DP: Harlem USA is upwards of $100 a square foot now, so it’s doing quite well.