Unease Erodes Ambition in Real Estate

After years of sustained growth marked by grandiose, ambitious plans for the city, the real estate development industry is displaying troubling symptoms.

The number of citywide building permits is expected to drop, public and private funding for projects is drying up, and a stream of multibillion-dollar plans is coming in over budget and behind schedule, with many designs being scaled back or scrapped altogether.

"There are very disquieting signs that have ominous implications for the next few years," the president of the New York Building Congress, Richard Anderson, said.

Last week, the Metropolitan Transportation Authority said the price tag for the completion of the first leg of the Second Avenue subway line had ballooned to $4.35 billion from $3.8 billion. Critics are questioning whether Lower Manhattan transportation projects such as the Fulton Street Transit Center and the Santiago Calatrava-designed PATH Station are worth their soaring price tags, and the projects' elaborate designs are being pared down.

The planned redevelopment of Penn Station has a budget shortfall of at least $1 billion. A public spat erupted between city and state officials over Governor Spitzer's plan to scrap the expansion of the Jacob K. Javits Convention Center after cost estimates more than doubled to $5 billion, and last week one of the five original bidders in the proposed development of the Hudson Rail Yards project on Manhattan's West Side — Brookfield Properties — dropped out. A shortage of federal housing subsidies and ongoing litigation from resident groups is threatening Bruce Ratner's $4 billion Atlantic Yards project near downtown Brooklyn. The list of public and private projects on hold seems to grow on a weekly basis.

The president of the Real Estate Board of New York, Steven Spinola, said widespread concern in the real estate community has — so far — fallen short of "panic."

"I don't know if they are collapsing," Mr. Spinola, a former deputy mayor for economic development, said. "There is clearly concern among our members, which is probably more than I feel. Four months ago people believed that if they had a project, that the financing would be available even if they had to put more equity in, or maybe the costs might be slightly higher. A month ago there was a concern that the financial institutions would not want to finance anything. I think we'll get over that bump."

In many instances, the current development projects are so large that it could be necessary, and even acceptable, that construction schedules last longer than two business cycles, he said.

Many observers say the problems concerning the large development projects are myriad, and the difficulty in isolating the causes speaks to the complexity of a number of these deals. The approvals process can drag on for years, and the increase in annual construction costs of an average of 12% over each of the past few years has been a continual thorn in the side of developers. In addition, the credit crunch has led to more restrictive lending policies and greater caution at the state level, experts say. City and state tax revenues are shrinking, and the mayor and governor are looking for budget cuts.

A professor of urban policy and planning at New York University, Mitchell Moss, said the current situation is the result of a glut of projects that have been pushed through without enough reflection by elected officials. Mr. Moss said he believes the only way out of the current situation is increased commitment and investment by the state, and Governor Spitzer.

"The dilemma is we need to be prudent, and part of the problem is that every politician has their favorite project," Mr. Moss said. "The political system has encouraged a large number of projects to enter the planning and design phase, but not enough to get to the implementation phase. There is a need to recognize that we have to pick the projects that are a high priority rather than let a thousand flowers bloom."

When asked which of the projects he deemed most important, Mr. Moss was unequivocal: the planned redevelopment of Penn Station, which many see as the key development project that could open up the West Side of Manhattan.

Known as the Moynihan Station project, after a late senator of New York who was the original proponent, Daniel Patrick Moynihan, the plan currently has a budget shortfall of at least $1 billion and typifies the complexity of the hybrid public-private public works projects that are becoming more commonplace. The project requires coordination among Amtrak, the Port Authority of New York and New Jersey, New Jersey Transit, the Long Island Rail Road, the city subways, and Madison Square Garden, which owns the air rights above the arena along with two private developers — Vornado Realty Trust and the Related Companies.

The man charged at the state level with keeping the Penn Station project on track is the co-chairman of the Empire State Development Corp., Patrick Foye. In an interview, Mr. Foye called the project "one of the most complicated things" that he has ever worked on. "The challenges are many and large, but the deal was dead a year ago and we are now in the public hearing process that ought to be concluded by the end of the year. There are still some challenges we have crossed off the list and there are lots of challenges left. But we are committed to getting it done."

Mr. Foye's counterpart at the city level is the deputy mayor for economic development, Robert Lieber. In an interview, Mr. Lieber said he is confident that the market would work itself out, and noted how any assessment of the current state of affairs must be kept in perspective.

"I don't have a crystal ball," he said. "I don't know how these financial markets are going to react. I am confident that the fundamentals of our economy and our capital structure will prevail. And these projects are sustainable; they aren't born of a bull market and they won't die in the bear market."

Mr. Lieber said one of his biggest concerns is the consistent rise in construction costs and the mounting delays between when a project is announced and when construction actually begins.

"What you design as feasible today — if you are not in the ground with it today — by definition is going to have some kind of a shortfall in a year. And if it is three years, you are going to be 30% over budget. So that is part of what is happening," he said.

Mr. Anderson of the Building Congress concurs.

"The government has loaded up the development process with burdensome and costly reviews and contractual stipulations, more so than any other city in the U.S.," he said.

As it stands, many in the industry are in wait—and—see mode even while bracing for tough times ahead. There are some large projects that appear to be on schedule for completion. Both the new Yankee Stadium and the new stadium for the Mets, known as Citi Field, are on track to be completed for opening day in 2009. The new Goldman Sachs headquarters in Lower Manhattan and the new Bank of America office tower near Bryant Park in Midtown appear set to open on schedule. After long delays at ground zero, work is under way on the Freedom Tower, and the Port Authority recently handed over development sites to Silverstein Properties for the construction of new office towers along Church Street.

The chairman of the Singer & Bassuk Organization, Andrew Singer, said he thinks a scaling back of the number of projects could alleviate the rising construction costs that have come with the development log jam over the past few years. On the financing front, Mr. Singer has already seen a marked change in financing structures from even just a year ago, when a developer could obtain between 90% and 95% of the costs of a project from available financing. He said today that figure is down to around 70%.

"That is not a bad thing," he said. "It means that those projects that go ahead are with the developers that are the most substantial. It is a de-leveraging of the real estate business in general. The high leveraging has created this bubble. It hasn't burst yet. Whether the air gets let out or it comes crashing down remains to be seen," he said.