Hard times for hard hats

With development down, NYC contruction industry sees jobs dry up and competition increase

From left: Barry LePatner, Louis Coletti, Michele Medaglia, Pat Di Filippo, Richard Anderson, Richard Kennedy, Jack Buehrer

While the residential market might be improving for brokers, construction firms are still severely suffering, and the immediate outlook for improvement appears bleak.

Indeed, construction firms in the city are competing for every scrap of work they can find. And large firms that a few years ago would never have considered jobs under $10 million are going head-to-head with smaller companies for jobs as small as $1 million to $2 million.

In this month’s Q & A, The Real Deal talked to construction firm executives and to experts who either work in or follow the industry in New York City. While most said that activity for interior office renovations is up, they don’t expect much business from new residential or commercial development in the next year or two.

At the moment, public projects like the Second Avenue Subway, the No. 7 train extension, and infrastructure projects at the World Trade Center site are boosting the industry. Work for institutional entities like Columbia University and NYU are also helping to put more workers in hard hats.

That’s because many of those entities have private endowments to fund construction. Developers who are dependent on lenders, however, are in a different boat.

Meanwhile, the increased competition for the work that does exist has prompted some firms to float low bids for jobs, which could come back to bite them if there are cost overruns.

But there are some developers, like Extell’s Gary Barnett, who are getting projects off the ground. Extell recently announced plans for Manhattan’s tallest residential tower, to be built on 57th Street. For more on how the construction industry is faring and on whether the Extell project will provide a badly needed shot in the arm, we turn to our panel of experts.

Barry LePatner

founding partner, LaPatner & Associates

What type of construction are you seeing the most of right now in New York City?

A good chunk of the $25 to $28 billion of construction in the New York area is coming from public works , with projects like Ground Zero, the No. 7 subway line extension and the Second Avenue subway. But as funds [for these] run out, it will be very difficult for public works projects to be maintained at the same level.

What type of construction are you seeing the least of right now in New York City?

Residential and office are far below what we’ve seen in earlier years. These are projects where developers require construction funding, [which] is very scarce today.

What other trends are you seeing in the New York construction industry?

In recent years and, in fact, for several decades [developers] have been constructing with [what’s called] Guaranteed Maximum Price contracts, which required owners to get into the ground before the completion of architectural and engineering drawings. That process has become hugely detrimental since it invariably leads to cost overruns of 30 to 40 percent or more and project delays of up to a year or more. In a capital-constrained marketplace … that fast-track process is totally invalid. My firm is espousing a move to true fixed-price contracts based on complete designs, where contractors no longer have to put in bids at or below cost to secure a project. That only drives up the final price 30, 40, 50 percent or more.

Are construction firms in New York taking different jobs than they were a few years ago? Is there more competition for smaller jobs and renovations?

Yes on both. Clearly the largest and the medium-size firms are going after projects that three to five years [ago] they would never have even looked at. … [Also,] many are not competitively bidding. They’re bidding low to secure jobs. That’s a danger because it means they are not thinking about whether there will be enough money to complete the job properly. That puts everybody at risk.

When do you expect construction to pick up in full force again and do you expect it to get back to boom-time levels?

I don’t see a very rapid return to an expanded and solid real estate market in the city for the next two years. It will be a slow, sloggy kind of improvement.

How has the difficulty of getting construction financing impacted the construction industry on the ground?

The lack of construction financing today and the fact that lenders are asking for 40 to 50 percent equity from prospective developers is a real impediment. Until that changes, it’s going to prevent many developers from either buying distressed properties and finishing them, or going into the ground on their own. Keep in mind that even if you have a loan of 50 to 60 percent from the lender, if you face construction cost overruns of 30 percent, there are no mezzanine lenders to give you more money. Therefore the developer has to reach into his or her own pocket, which would probably wipe out most of the profits.

What are wages like in the construction field now compared to the recent past?

Compensation is down because the jobs aren’t there. Some firms try to hold the line [on wages] for the people they are keeping, but others just can’t. They have to get rid of people and use lower-paid people to fill the empty spaces.

Louis Coletti

president/CEO, Building Trades Employers’ Association

We know construction spending plummeted during the downturn. How much construction is taking place in the city?

I think we’re beginning to see a slight increase in bidding activity for interior office renovations. Whether that actually turns out to be real jobs, I don’t know. There seem to be a lot of leases up. So that market is moving a little. There seems to be some slight increase in the residential market, which baffles me because there’s so much inventory, especially in the boroughs outside Manhattan.

What type of construction are you seeing the most of right now in New York City?

There does seem to be a steady flow of public work. But all of that combined is still not anywhere near the employment levels we’ve had in the last several years. The most construction is taking place in interior renovation.

What type of construction are you seeing the least of right now in New York City?

New commercial space. Candidly, I don’t know of any.

What other trends are you seeing in the New York construction industry?

The cost structure for development in the city has permanently changed. In the past, the developer came in with maybe a 5 to 10 percent equity down payment and was able to borrow the rest and begin a project. Today banks are requiring owners to come in with 40 percent equity before they’ll even look at their proposals. [They’ve] really shut off the spigot for small and midsize companies. I’m also hearing from contractors that banks with whom they have had relationships for 20 or 30 years are saying they are not extending their credit line or they are reducing their credit line, telling them basically that they’re out of the business of loaning to construction businesses.

Which geographic areas are still hurting the most when it comes to restarting stalled construction sites?

There were over 500 stalled sites on the Buildings Department list. Brooklyn had the most, and right now that seems to be where I’m getting calls from developers asking for some help in reducing construction [labor] costs. Queens is second.

How many people are employed in construction in the city today and how does that compare to the height of the boom?

Unemployment in the construction industry in New York is around 25 to 35 percent. At the height of the boom I think there were 125,000 to 130,000 [construction jobs]. I think that number is down to 105,000, according to the last number I saw from the state.

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Are construction firms in New York taking different sorts of jobs than they were a few years ago? And has competition for getting jobs increased?

Firms are competing for every scrap and morsel of a job. Large construction companies who in the past wouldn’t look at a job for less than $10 or $20 million are now competing for $1 or $2 million jobs. In terms of pricing [construction jobs], it’s cutthroat. There are many companies that are taking jobs at prices that they cannot sustain, and it is going to be a disaster for the company and the industry. We’ll have a repeat of the last downturn. [In the 1990s,] the industry lost 20 to 25 percent of its capacity because companies went bankrupt. I think we will start to see that happening now.

Gary Barnett of Extell recently announced plans to Build A Tower On 57th Street that’s slated to be the tallest residential project in Manhattan. Do you think developers are getting more confident again in the city?

That project is going to be a great shot in the arm in terms of confidence. A lot of the problem is a lack of confidence. This project shows New York is coming back. But Gary is in a very unique position. He’s been able to get his financing, he’s worked with the unions to reduce cost, and he is very successful. I’m sure there will be a lot of competition for that job.

When do you expect construction to pick up in full force again, and do you expect it to get back to the level it was at during the boom?

We have to keep in mind that in 2007 and 2008 we had a $25 to $30 billion market in the city. Those were the highest levels I think we have ever had. I don’t know that we are ever going to get back there. But I think it’s reasonable to expect that we can be in a $20 billion market, which is still substantial and probably the largest construction market in the country. I don’t think we will begin to come close to that until 2012. I think the remainder of this year and 2011 are going to be very difficult.

What has been the impact of the labor saving agreement between the construction industry and developers?

It was a lifesaver. Without the Economic Recovery Project Labor Agreement, we would be in a depression.

What are wages like for contractors and construction workers now?

On the trade workers side, many of them have taken wage freezes, and with respect to the residential market in the boroughs they’ve even agreed to a 20 percent cut. For contractors, their employees have not gotten raises in two to three years. Both sides are suffering. Profit margins don’t exist.

Michele Medaglia

president/CEO, ACC Construction Corporation

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

Many firms have switched gears because there is a significant amount of work in the public sector, but we’ve remained focused on private-sector corporate, health care and retail. We have a strong base of clients that have interior renovations. And we are definitely bidding on more projects than we were during the course of 2009.

What other trends are you seeing in the New York construction industry?

Landlords reinvesting in their properties to attract more quality tenants. We’ve renovated several lobbies, corridors and common-area spaces, as well as done infrastructure upgrades because it’s an immediate way to improve the appearance of a building.

Pat Di Filippo

executive vice president, NY region, Turner Construction Company

How much construction is taking place in the city now compared to a few months ago, a year ago and during the boom?

In New York, any contractors out there, whether it’s the subcontractor performing plumbing, electrical or drywall, the small general contractor or the large-scale firms like Turner or Bovis or Tishman, we’ve all experienced reductions in volume of 20 to 35 percent [since the fall of 2008]. Some would even say 40 percent.

What type of work is Turner doing the most of right now?

[We] continue to be busy with education work. At Rockefeller University we’re building labs and research facilities. At Columbia University we’ve been building a laboratory and a chemistry building. We’ve also been working on a project for the East River Science Project. We’re in a joint venture with Tishman … on the construction of the hub [at the Trade Center], and we are doing a project called a connector between the Trade Center site and Battery Park City — an underground tunnel that links them together.

What other trends are you seeing in the New York construction industry?

There have been a lot of property transactions, and these transactions normally yield retrofits. … That creates opportunities for us. There is always the interior business.

Are construction firms taking different jobs than they were a few years ago?

Turner, along with our partner Flatiron, a construction company out of Denver [a wholly owned subsidiary of the Hochtief Company, which owns Turner] formed a venture and acquired a civil construction company because there is more work in the civil business building infrastructure, roads, bridges and tunnels. We are not physically building ourselves, but we’ve invested in a company that is doing it so we can realize the benefits, so we have diversified.

Richard Anderson

president, New York Building Congress

How much construction is taking place in the city now compared to the recent past?

Two years ago we hit $33 billion in the five boroughs. It dropped to $26 billion for 2009 and we are hoping that it will still reach as much as $25 billion this year.

What type of construction are you seeing the least of right now in New York?

Residential. And, just to put that in perspective, the city was authorizing in excess of 30,000 new units a year over the past four years and that dropped to 6,000 for 2009.

What other trends are you seeing in the New York construction industry?

We’re beginning to see a rebound in interior office construction based on growing office employment. [That’s happening] as companies begin to lease new space and fill up the vacant space that they already have.

What’s the most surprising thing in the New York construction industry right now?

The strength of the institutional market, like higher education and health care.

How many people are employed in construction in the city today compared to at the height of the boom?

At the height, we were at about 130,000 [employed]. Today I think we’re close to 115,000. Historically anything over 100,000 is pretty significant for the city. So we’re still at fairly high levels. Some of the unions are experiencing significant unemployment and I am not sure exactly why — whether it’s the growth of nonunion [labor] or just certain trades happened to be the ones that did a lot of residential or office work. Quite a few electricians are out of work. They specialized in high-rise office construction and there’s almost none of that going on.

Is Extell’s plan to Build A Tower On 57th Street a sign that developers are getting more confident? Do you expect there to be a lot of competition for that job?

There is no question that there will be competition for the job. I think that project is one-of-a-kind, not something I would use as an illustration of new trends. Where we look for trends are in those 600 stalled sites. When they start to get going you can talk about a trend.

When do you expect construction to pick up in full force again?

It may be a long time before we see a boom like the one five years ago because it almost never happens that all sectors of the construction market are booming at the same time. I can’t remember a time when it happened previously; maybe the 1920s? Most markets for construction have certain sectors operating more strongly. I expect that to be the case for some years to come.

Richard Kennedy

chief operating officer, Skanska USA, New York metro region

How much construction is Skanska doing these days?

[We’ve] been fortunate that our revenues haven’t declined in line with the rest of the market. That’s mostly because of the projects we pursued during the boom. We focused on institutional clients and were careful to avoid highly speculative projects. It turned out to be the right move — 2009 was one of our strongest ever in this region.

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

We’re currently [working on] the World Trade Center transportation hub for commuter rail traffic in the Ground Zero area. Education continues to remain relatively strong. We’re active in the higher education sector, working with clients such as NYU and others. The health-care sector has also been steady.

When do you expect construction to pick up in full force again?

We’re seeing signs of recovery. I’d say by 2012, maybe longer. I do expect construction will return to the levels that existed before the boom. It’ll just take time.

Jack Buehrer

editor-in-chief, New York Construction (a McGraw-Hill publication)

Which sectors of the construction industry are seeing the least amount of work?

I think by any metric, commercial office and hospitality projects have been the biggest losers of the downturn. I wouldn’t want to be a contractor who specializes in multifamily housing either, but there are at least a handful of residential projects moving forward.

Which construction jobs are most important right now for what they say about the market?

NYU and CUNY both have pretty sizeable programs right now, and Columbia just won a major victory, allowing them to use eminent domain to move ahead with their $6 billion-plus expansion. So in the midst of all of the doom and gloom, there’s been a flicker of light. Any good news is music to the industry’s ears right now.