Construction costs play a big role in whether a residential development makes money, but contractors say they’re not the ones with huge profit margins.
That benefit is usually reserved for the developer.
Steep increases in the costs of steel last year and shortages in concrete this year have made construction more expensive, but that cost is absorbed by the end user.
“Overall, the costs of construction went up,” said Andy Frankl, chairman and CEO of Ibex Construction. “And the market was able to absorb it, because they’re getting astronomical numbers for these condo units.”
Construction costs are up more than 4 percent in New York from 2004, according to the Engineering News-Record. The price index for steel is up about 9.4 percent over this time last year. Cement is up about 3.8 percent.
The big leap in steel prices brought about a switch from use of metal joists in construction of smaller four- or five-story buildings in the boroughs to use of more concrete, said Eugene Aydin, a principal with the Kiska Group.
“Concrete hasn’t gone up as much as steel. However, concrete is very labor intensive,” he said. “As labor prices go up, concrete goes up as well.”
Kamran Mirfakhraie, a principal at KMM Consultants, a company that consults with developers, said the cost of concrete constructions has soared in the past year.
“There was a shortage of steel at one point, due to large demand overseas, like far east Asia and China,” he said. “However, in New York City, currently you’re witnessing a cost increase in the high-end residential development, typically concrete structures.”
Frankl agreed that a concrete shortage andécorresponding demand is shaping development of residential buildings.
“Right now, you can’t even get a concrete company to do the work,” he said. “If you can get them, they have a hard time getting the concrete, because there’s so much work going on.”
Frankl said the number of developers doing steel structures has increased, but there are still more concrete structures being built, despite the higher labor costs.
“The technology of concrete has improved over the past decade, and now you can build almost any high-rise building out of concrete,” he said.
Richard T. Anderson, president of the New York Building Congress, said the soft costs of construction including the cheap cost of money are driving a residential building boom. Another factor is the availability of sites for development, given the large number of city commercial and manufacturing areas that have been rezoned for residential development, he said.
While many developers complain of a shortage of developable land, Anderson said that’s “nonsense.”
“That’s like saying there’s no more oil available,” he said. “Well, there’s no more oil available under certain cost considerations.”
Labor costs are another preoccupation of general contractors. In the boroughs, there has been widespread use of nonunion labor.
“There is a surge in the number of nonunion contracts in the boroughs,” Mirfakhraie said. “In that market, with the nonunion contracts, I don’t see any significant increase in construction costs.”
Construction firms doing commercial construction often feel more pressure to use union workers than do those developers doing residential construction, since commercial buildings use many different types of union labor.
Since there has been an explosion of residential development, it’s not surprising that union labor has not fared as well in recent years.
“In most office buildings and a lot of the high-end condos and coops, you’ll see labor costs for union labor be a substantial part of the price,” said Barry B. LePatner, construction law attorney and founder of LePatner & Associates LLP. “But as you move away from those two areas, you get nonunion workers, and you get workers who are what I call ‘panel-truck people.'”
These are nonunion, dirt-cheap laborers who are rounded up in various areas of the boroughs and hustled onto trucks that carry them to their day job.
While union labor costs are still significantly more than nonunion costs, the costs of nonunion labor have been creeping upward, Aydin said.
“Even the cost of nonunion labor has been going up when there’s so much business going on,” he said.
The incredible pace of residential development has also made it hard to find a good contractor who’s not previously occupied, Mirfakhraie said.
“For them, it’s a question of pick and choose,” he said. “And pick and choose is good for them.”
Anderson agreed, saying contractors are bidding less aggressively due to the high demand that is allowing them to be selective about their jobs.
That’s also affecting subcontractors, who now demand profit margins of 20 or 25 percent as compared to 10 or 15 percent profits in the past, Aydin said.
“They realize the developers are recouping a lot of profits due to the increase in condo prices, so they try to artificially increase their prices,” he said.
But construction experts don’t anticipate rampant residential development, including conversion of commercial buildings to condo, to go on forever.
All that residential development “probably will create the need for more commercial construction, since we’re losing the availability of commercial space,” Frankl said. “And the increasing number of residential units in New York City is going to create more need for retail as well.”
For the time being, however, huge demand by those seeking a place to live is enabling construction costs to do what they will and, currently, that’s shoot upward.
“There have been substantial increases in construction costs in recent years,” LePatner said. “And this always materializes in higher costs to the end user.”