The construction comeback

Hard hats are seeing the most work since the market peak, but developers are more cost conscious than ever

From left: Louis Coletti, Jay Badame, Richard Anderson and Barry LePatner
From left: Louis Coletti, Jay Badame, Richard Anderson and Barry LePatner

New York may have been one of the last cities in the country to get hit by the recession and one of the first to recover from the real estate downturn, but that doesn’t mean there wasn’t suffering here. And among the hardest hit segments of real estate was the construction sector.

But things have changed. In this month’s Q&A, New York City construction industry executives and observers told The Real Deal that the industry is seeing the most work since the 2007 peak.

“We’re looking at a strong market over the next couple of years,” said Louis Coletti, CEO of the Building Trades Employers’ Association, which represents construction managers and contractors citywide. “My contractors are telling me that they’re booking new business. They’ve got a backlog.”

In addition, sources said the private sector, including residential and mixed-used projects, is driving the industry’s upswing. That’s a major turnaround from shortly after the recession when public infrastructure projects were holding the industry up.

Still, the construction industry has significantly changed since the recession hit. While construction financing has loosened in the last few years, it still is not as free-flowing as it was during the boom. As a result, the developers who are building tend to be more experienced because they are the ones who have more equity to pour into deals. Sources say that developers are, however, selecting construction crews based largely on who charges the lowest rate. In addition, developers are more willing these days to tap non-union labor, which was long taboo, in order to save money.

For more on technological advances (or the lack of them) in the construction industry, on whether the pace of residential construction will soon meet demand, and the new bells and whistles that developers are including in their projects, we turn to our panel of experts.

Louis Coletti
CEO, Buildings Trades Employers’ Association

The number of housing construction permits jumped 71 percent in 2013, but still isn’t back to pre-recession levels. What are you seeing in terms of construction activity in NYC?

Overall, activity is up. I think the construction market is coming out of the recession of the last couple years — not only in residential, but also in institutional, higher education, and commercial development to some degree. We’re right at the beginning stages. We need another six months to really see. In general, we’re looking at a strong market over the next couple of years. My contractors are telling me that they’re booking new business. They’ve got a backlog.

According to the latest stats, Brooklyn had more housing permits than any other borough. We’ve also recently written about developers jumping into the Queens market. Where are you seeing the most new construction today?

It depends on market share or what sector. We’re seeing a lot of residential and retail out in Queens and Brooklyn. Keep your eyes on the Bronx — that’s the next borough. They’re ready for it. They have land available and that’s the primary factor.

One concern that’s been raised is that the residential units being built are largely targeting the wealthiest buyers and renters. Do you see that as an issue for the projects underway in NYC now?

The high-end residential is still a very strong growth market. And maybe contrary to what some people think, I think that’s healthy. That means that New York is still a very attractive city. That doesn’t mean that we shouldn’t build more moderate and affordable housing. But I think that having a strong spurt in the high-end market is a good thing.

What type of construction are you seeing the least of now in NYC and why?

Affordable housing is probably toward the bottom of those growth markets and there are a lot of reasons for that. Land costs are very expensive and are continuing to accelerate at a very high pace. Construction costs remain an issue. The regulatory process and how much time it takes is another [factor.] When you talk about affordable housing and rental housing, or sales that middle-class families can afford, it gets hard for a developer to get within that cost range.

What is competition like for construction jobs in NYC today and what tactics are construction firms using to compete?

[In the past] there were several factors involved in how a developer chose a contractor: cost, quality, safety, and reliability of the contractor. We’re in an age now, unfortunately, where cost is the single most important factor. I think, in general, there are too many developers who don’t have enough respect for the skills that good contractors can provide. They think they can buy them off the shelves like a Walmart.

What other trends are you seeing in the NYC construction industry today?

One trend I have a great deal of concern about is cash flow. Contractors are just not getting paid in a timely enough fashion in order to pay their bills. I’ve been in the business for 30 years and this is the worst I’ve ever seen it in terms of cash flow — it doesn’t make a difference whether it’s public or private. I think it’s been part of the way the real estate construction world has developed over the last few years, especially as a result of the recession. Everyone hangs onto the dollars they have until the last second. By doing that and by passing the risk down, at some point it hits the contractor on the ground. That’s dangerous for the whole market.

What are wages like for contractors and construction workers now compared to the recent past?

Everybody thinks contractors make a lot of money but it’s clearly not the case. There was a study done by [financial analysis firm] Sageworks that measured net profit margins, and in 2011–2013, construction ranked next to last. Contractors are not making a lot of money, especially when you compare that to the amount of risk they assume. Most people would think they’re crazy for taking an incredible amount of risk for those profit margins.

Jay Badame
president/COO of NY, NJ and Pa., Tishman Construction

How much is overall construction spending up by compared to the last few years?

We have seen positive and stable growth in New York City construction activity since the downturn, and we are cautiously optimistic this trend will continue. Following 2012’s $27.6 billion in construction spending, reports estimate an increase to $31.5 billion for 2013 [once final tallies are in] and $37 billion in 2015. With ongoing work in Lower Manhattan, including the World Trade Center site, and new starts with the redevelopment of the West Side, the industry is positioned very well.

We’ve written a lot about the massive shortage of residential inventory on the market. Do you think there’s enough residential construction taking place to ease that problem?

Yes, current residential construction activity is on pace to meet inventory needs. In fact, we are currently building more residential projects now than ever before. The value of 2013 housing starts has increased tremendously since 2009. It’s just shy of the 2007 boom.

What type of construction are you seeing the most of in NYC?

The private sector is currently driving construction activity in New York City. Most of these projects are residential, hospitality or mixed-use and they are responsible for the industry’s upswing. We would see a substantial increase in the commercial market as well if the Midtown East rezoning were to proceed.

Richard Wood
CEO, Plaza Construction

Some have expressed concern that the residential units being built are targeting the wealthiest buyers and renters. Do you see that as an issue for the projects underway now?

Yes. As land costs escalate, the only projects that can support those high land costs are condominiums. … Land costs are driving the absence of middle class and affordable housing. Rental housing on property purchased recently would be difficult to justify — even if construction costs were very low, which is not the case.

Construction financing has definitely eased since the downturn but is still not as loose as it was during the boom. How is that impacting the NYC construction industry?

There are less inexperienced developers due to the need for much higher levels of equity required in a project.

During the downturn we wrote a lot about how construction firms were forced to take jobs they weren’t doing in the past. What is the latest on that front industry-wide?

It’s true with the rise in private construction spending, the interest in public work becomes less attractive. As a result, we become more selective and try to focus on public projects that are larger. An interesting current discussion that occurs on each and every project … is the need for flood protection because of the newly adjusted flood plain instituted after Hurricane Sandy.

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What amenities are you seeing developers incorporate into construction projects in NYC today?

Every bell and whistle you can imagine.

What are the most surprising trends you’re seeing in the construction industry today?

The growth of non-union construction. The willingness of the unionized construction industry to be more flexible, the advent of public-private partnerships, the advent of the international architects and their work now dotting the skyline — something we haven’t seen in New York in a very long time.

Charlie Avolio
vice president/operations manager, Turner Construction

How much money is being spent on construction by developers in NYC today and how does that compare to the last few years?

We are seeing construction activity pick up across many building types in New York City, including healthcare, commercial, education, residential and airports. The New York construction market is expected to reach $30 billion in 2014, significantly higher than 2009–2012 levels, though still below the highs of 2006–2007, when many large projects were underway at the same time.

How much is your business up or down by compared to the years before and after the downturn?

Our level of activity has picked up to approximately $2 billion per year, and the number of people in our group has grown to almost 1,000 from fewer than 700 in 2009. On the commercial side, we’re working on the Manhattan West platform with Brookfield Properties, 7 Bryant Park with Hines and doing work at the World Trade Center. In the residential market, we are working with Rudin on their West Village condominiums. On the institutional side, the higher education and healthcare markets are also strong. We’re working at Columbia University, New York University, New York–Presbyterian Hospital, and Memorial Sloan-Kettering. On the cultural side, we’re working with the Whitney Museum, Coney Island Aquarium, the Strand Theater and just finished up on the transformation of Madison Square Garden.

Tom Webb
executive vice president/general manager, Skanska USA Metro New York

What type of construction are you seeing the most of right now in NYC?

There’s no question that there’s a ton of residential. But the commercial sector is doing quite well, too. Healthcare and education are very strong as well. In the public sector, there’s been an enormous amount of money invested in public parks [and] the work along the waterfront. We’ve been heavily involved in that. It’s work that often goes unnoticed, but if you look at an aerial of Manhattan, it’s amazing what’s been changed.

What type of construction are you seeing the least of right now in NYC and why?

From a hospitality standpoint, there’s not a lot of new work going up — just renovations. The sports market is pretty tapped out, in terms of stadiums.

During the downturn, construction firms were forced to take smaller jobs and shift to work they weren’t doing in the past. What is the latest on that front today?

No doubt, more firms were forced to diversify, and now with the markets on the upswing, they’re able to re-concentrate.

Richard Anderson
president, New York Building Congress

How much money is being spent on construction by developers in NYC today and how does that compare to the last few years?

There is $32 billion today in all construction — public, private, commercial, residential. The peak was $32 billion in 2007, but if you factor in inflation, [today’s activity is] closer to $37 billion.

Do you think there’s enough residential construction taking place now to ease the inventory crunch?

There’s never enough residential construction in New York because demand is so high. We estimate that at least 20,000 units are needed each year. But even if you average 20,000, that’s not enough to deal with the strong demand for affordable housing. It’s not just the number of units; it’s also the price. I don’t see it easing for some time.

Construction financing has definitely eased since the downturn, but is still not as loose as it was during the boom. How is that impacting the NYC construction industry?

It’s helping, but not helping enough. Financing is always an issue. On the one hand, you don’t want loose money, because loose money got us into trouble in the first place. On the other hand, you’d like it to be more available so that worthy projects can move forward. We’re somewhere between loose money and projects being able to go forward. …We still have more than 600 stalled projects — projects for which there are approvals, but they’ve been stopped because financing has been withdrawn or there are other kinds of procedural difficulties.

What impact, if any, do you see Mayor Bill de Blasio having on construction in the city?

Well, if he’s successful in his affordable-housing initiatives, it can lead to significant work and I think we will benefit. He’s indicated he’s going to support a strong capital budget, which means continued strength in public construction. Plus, as long as the city is well managed and is attractive to investment from around the world, [there will be a lot] of private sector construction.

Barry LePatner
founder, LePatner & Associates

How much is construction activity up by compared to the last few years?

What we’re seeing is an increase in the numbers of projects across the city. But where those projects are being developed, how they’re being developed and how they’re being financed is evidence of a city in transition from 10 to 15 years ago. There are a tremendous amount of properties being bought in the Bronx and in parts of Brooklyn and Queens that have been purchased quietly, off the radar.

Where are you seeing the most new construction today?

We have such a wide range of developers today who have a very wide range of financing, so it doesn’t surprise me that we’re beginning to see heavy investment in places like the area near the Gowanus Canal, which is an environmental cesspool. But with the government focusing on cleaning that up, you know that developers are also looking for areas that have been [more] overlooked. I believe we’re going to see a tremendous amount of development in places like Coney Island despite concerns about future hurricanes. We’re 530-some-odd miles of waterfront in New York. What we’re seeing in Long Island City is significant. We’re seeing new pockets of growth that are going to transform the city for the next 40 to 50 years.

Are you concerned that a lot of the residential being built is targeting wealthy buyers and renters?

At some point, we will run out of individuals who can afford to pay $1.5 million to $2 million a bedroom. There are some who say that will be a long time coming because of [international investors.] We have to balance our city to make sure it does not become an exclusively high-end enclave. We’re seeing that places that were historically comfortable areas of rental apartments are now disappearing, from Alphabet City to the Bowery.

How is construction financing impacting the NYC construction industry?

Compared to 10 to 15 years ago, there are many other sources of financing. Corporations can get money outside of traditional lenders. There is a tremendous amount of money offshore that has enabled developers to find funding. If they want to find funding, they can find it.

What are the most surprising trends you’re seeing in the construction industry?

That contractors have been so slow to move into the digital age to use technology and robots. It is only a matter of time before robotic skills will supplement skilled workers in many of the routine procedures. You will see robots put in steel studs in the commercial buildings and doing all the sheet rock. I think that’s a trend that we’re going to see in the near-term future. The construction industry is the industry that time has forgotten. We build today essentially the same way we have built for hundreds or thousands of years. We need to bring in technology so that the cost of construction goes down, and productivity goes up.