NYC’s construction craze

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The skyrocketing price of land has been on the lips of every developer and investment sales broker in New York City for the last few years.

But less talked about is the fact that the cost of actually constructing a building is breaking price records as well.

A few years ago, the highest-end condominium projects in the city cost about $650 per square foot to build. And back in 2005, the developers of 15 Central Park West shelled out only about $400 per foot to construct their gold-standard condo project.

But now some developers are routinely paying nearly $900 per foot to erect their under-construction, amenity-filled condo towers, and one project has broken the $1,000 per foot marker, according to Robert Barone, president of the White Plains–based construction analytics firm IVI International. He declined to identify any individual projects.

Those construction figures put increased pressure on developers to sell residential units for upwards of $2,500 per foot. And that’s just to break even.

“You would have to be damn sure of your ultimate selling price to take that kind of a bet,” said real estate developer Cary Tamarkin, who said his Manhattan developments have not come close to $1,000 per foot, and that most high-end condos cost up to $600 per foot to build.

Either way, overall hard construction costs have been steadily rising in New York City, where total spending for residential and commercial construction is expected to hit a record $18 billion this year, figures from the New York Building Congress show. (That’s not including another $10 billion in government construction spending.)

New York City “will have about $30 billion in construction this year,” said Midtown-based construction attorney Barry LePatner. “That is the largest construction value that we have had since 2007. We are really back in terms of new construction.”

That activity is pushing up construction prices.

Many of the high-priced line items for buildings have risen by more than 20 percent over the past several years, according to a comparison of several New York City projects by IVI International.

For example, the price for concrete work, which includes the cost of labor, is projected to hit $92 per foot this year, up from $75 in 2011. Other cost jumps are even more dramatic, such as electrical, which rose by 45 percent, to $45 per foot, according to a comparison of two condo projects IVI analyzed, one from 2011, and one from 2014.

Yet the biggest thorn in the side of builders when it comes to hard costs is the sharp rise in insurance premiums, which have roughly doubled over the past five years to as much as 10 percent or more of the average project’s budget. Labor costs also jumped, but that rise has been mitigated by the surprising growth of non-union contractors in the city.

And a host of materials like steel remain below peak pricing, in part because of the decline in demand from China, where the economy, and therefore development, is slowing down.

Below is a rundown of some of the construction costs in today’s booming building business.

Insurance issues

Insurance is one of the largest line items in the construction field. And in New York, it’s even pricier than it is elsewhere because of a state law that creates strict liability for property owners and contractors, said Louis Coletti, CEO of the Building Trades Employers’ Association, which represents 1,700 unionized contractors throughout the city.

As a result of that legislation — which dates back to 1885 and is commonly known as the scaffold law — when a worker is injured on the job, the owner and contractor are fully liable, regardless of whether the worker is at fault.

Despite the fact that the law has been around for over a century, it has recently led to skyrocketing claims and insurers fleeing the state, Coletti said.

Insiders offered differing reasons for why insurance rates have only shot up recently. Some say juries have been granting huge awards during the current building boom for on-the-job injuries, while others say underwriters have been pulling out of the market, reducing competition.

Coletti cited the city’s School Construction Authority’s predicament as a prime example of the impact of increased insurance costs. The SCA was paying about $95 million per year for construction insurance from 2011 to 2013. But that figure jumped to $234 million for 2014 alone. A spokesperson for the agency confirmed the figures, but declined further comment.

“On the private side, increases are similar,” said Coletti, noting that construction insurance premiums have risen from about 4 percent of the hard costs to 10 percent or more, in some cases.

For example, at Tishman Speyer’s planned $3.2 billion tower at 509 West 34th Street in the Hudson Yards area, insurance costs are $155 million, or about 9 percent of the $1.8 billion in hard costs, according to the company’s filing for a city tax exemption.

Meanwhile, at one recent outer-borough residential apartment project with a budget of roughly $400 million, the insurance costs are about $28 million, or 7 percent of the total, according to the developer, who did not want to be named.

Labor losses

Labor costs have also been on the rise recently.

“The reason building costs more is contractors are finally at the saturation point, where they are so busy that they can charge [developers] more,” LePatner said.

Yet as noted above, in a sea change for the industry, non-union contractors have made inroads — even among established developers.

In addition, major construction firms that historically worked exclusively with unions are beginning to branch out because they’re seeing competition from a growing bench of non-union contractors such as Flintlock Construction Services and Triton Construction.

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That newfound competition for stalwart construction unions has helped keep costs down for developers.

“The non-union market has made significant inroads in new construction in 10- to 30- [story buildings], primarily in residential and hotel, and in interior renovation. That has been a problem for us,” said Coletti.

He said unions have seen a net loss of work despite the overall growth in the industry. (Residential construction spending alone has jumped 50 percent this year compared to 2013.)

Yet developers see risks with the smaller, non-union companies popping up to take advantage of the building boom, said Craig Nassi, principal with the Manhattan-based BCN Development.

“There is some risk with the small guys because they can just put their hands up and walk away,” if they run into problems or get a more lucrative job, Nassi said. But non-union firms are competing for ever-larger projects, said Gary Rosenberg, a partner with the real estate law firm Rosenberg & Estis. He pointed to the 37-story Hilton Garden Inn at 136 West 42nd Street that opened last month and which was built by Flintlock.

“They really established that non-union can build substantial buildings,” Rosenberg said.

Coletti said non-union shops are still able to underbid union shops by 15 to 25 percent. Some of that discount stems from paying workers lower wages. But Rosenberg said the main savings comes from not having to adhere to “archaic or onerous requirements” such as stationing a mechanic next to the construction elevator, or hoist, at all times.

In addition, because they are saving developers money, non-union labor costs can also make it easier to secure a loan, said David Pfeffer, a partner and chair of the construction practice group at the Midtown-based law firm Tarter Krinsky & Drogin.

In a response to the decline in business, construction unions have inked several agreements to cut costs for developers.

For example, in August a group of unions backed a plan to cut wages for junior workers by 40 percent on affordable housing projects in select neighborhoods.

In addition, not all boroughs are created equally.

Manhattan is, not surprisingly, the most expensive borough in which to build, with average hard construction costs for buildings over 10 stories logging in between $400 and $600 per square foot, according to IVI International’s Barone. By comparison, construction costs in Brooklyn and Queens are about half that, because finishes and labor are typically less expensive.

Materials matters

New York, of course, doesn’t operate in a vacuum. It’s part of the global economy. So the economic tumult in China, and the development slowdown that’s gone along with it, has had an impact on construction costs here.

At the moment, the drop in demand from developers in China is good news for New York developers when it comes to pricing on some key materials. For example, U.S. structural steel prices are down 7 percent from a 2008 high, an index from the trade publication BNi Building News shows. On the commodities exchanges, some steel products are down more sharply, from a high of more than 56 cents per pound in 2008 to just over 33 cents last month.

Aluminum, too, is down from the 2008 peak of nearly $1.40 per pound to just over 90 cents last month, data from the information and data company InvestmentMine shows.

Other costs are near historic highs. The price of gypsum board, or Sheetrock, has surged 50 percent in the last year after remaining level since 2008, BNi reported.

Typically the most expensive line items are concrete superstructure, windows, electric systems, drywall, carpentry and plumbing.

Prices for cement and concrete, which surged about 40 percent over the past decade, however, are nearly flat over the last year. Still, concrete remains a huge line item for developers at about 10 percent to 15 percent of a construction budget for a concrete shell building.

At that aforementioned residential building, where hard costs reached about $400 million, nearly $55 million of that, or roughly 13 percent, is going to pay for concrete alone.

Yet, the rising or falling prices of materials have not individually had a major effect on development costs, LePatner said.

“The cost of the product, however marked up, is only a small part of what the bids are,” he said.

What’s ahead

Developers and contractors know cyclical spikes in demand for construction don’t come without spikes in costs, said Plaza Construction CEO Richard Wood.

“There has been a tremendous escalation of demand,” which is driving the higher costs, Wood said.

At the same time, the strong demand is helping to rebuild New York’s construction industry, which thinned out after the collapse of Lehman Brothers in 2008.

In addition, the astronomical price of land is partly responsible for higher construction costs, as developers need to distinguish their projects and recoup their investments, Barone said.

“The problem is that as the costs go up, there are fewer options for what can be done with the parcel. If you are paying [a huge amount] for land, it does not pencil out as a rental. It has to be luxury. But it can’t be luxury, it has to be super-luxury,” Barone said.

Correction: An earlier version of this article that appeared online and in the print edition mischaracterized Tishman Construction’s union policy. The firm does not manage any non-union projects.