Consequences of a Construction Boom

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The New York Sun

Soaring construction costs are putting the squeeze on the city’s private developers, real estate experts say, threatening New York’s housing boom, and lessening the impact of billions of government dollars invested in public infrastructure projects around the region.

The Bloomberg administration is authorizing a study, conducted by an external consultant, to identify ways to ease the problem of rising construction costs. This summer, Deputy Mayor Daniel Doctoroff convened a meeting of industry leaders to diagnose the causes of the increases and look for answers.

The interim president of the city’s Economic Development Corp., Joshua Sirefman, said the city is “taking a comprehensive look at what we can do to stem that tide and ensure New York City’s continued growth.”

At a conference on economic development last month, the president of Newmark Knight Frank Capital Group, James Kuhn, called construction costs “the single biggest problem in New York right now.”

“It makes me nervous and I don’t see a solution,”Mr. Kuhn, a powerful figure in the New York real estate industry, said.

He said developers faced with increased costs have to earn about a third more on a per square foot basis than just a few years ago. He added that the costs will put pressure on the bigger, more ambitious, and long-term projects, including Forest City Ratner’s Atlantic Yards.

“When it was started, we were in a very, very bullish condo market,” Mr. Kuhn said.”When it gets approved, will we be in a market that justifies construction at a number where you will be able to sell units?”

The construction industry is on pace to set records again this year, on top of a robust residential market and record levels of government spending on new infrastructure projects.The total number of building permits issued by the city, an indicator of the strength of the construction business, is on pace this year to surpass last year’s record numbers by about 3%. The number of units of housing built this year in the five boroughs is on pace to increase by about 4% over last year, according to the latest data from the U.S. Census Bureau.

But experts say the forecast for 2007 will be dampened by rising costs. The price of land in New York, never inexpensive, is rapidly increasing. The rising cost of materials like steel and concrete, based on increased demand worldwide, including from China and the rebuilding effort in New Orleans, will make it more expensive to build. In addition, there are a number of large construction projects planned in the New York area, including two baseball stadiums and rebuilding ground zero, that are creating shortages of certain types of contractors. The rising costs come at a time of rising interest rates and when demand for segments of the residential market, particularly the luxury sector, is leveling off.

A residential developer, Jane Gladstein, said that increasing cost and softening demand means developers have to evaluate opportunities more conservatively.

“The buoyancy of the last several years gave a false perspective on reality,” Ms. Gladstein said. “We’ve had a sobering six months.”

Some real estate experts welcome the city’s attention, but wonder it can accomplish.

Because material costs are driven by the global marketplace, they say that the city government is mostly powerless. Among some of the solutions being discussed by industry leaders are loosening some code and work rules, increasing accessibility to work sites, decreasing traffic congestion, opening up some city contracts to joint bidding, and siting another concrete plant in the city.

The president of the New York Building Congress, Richard Andersen, called City Hall’s initiative “a good start” but said further action is needed. He said that New York is the most expensive place to build in the country.

“The complexity and the regulatory environment in the city is as much to blame as anything,” Mr. Andersen said. “They can clean up their act, streamline procedures, and work with other levels of government to make things happen more quickly.”

The president for the Partnership for New York City, Kathryn Wylde, said that construction costs are a problem born from the city’s recent success, and that eventually the market would correct itself as construction drops off and prices fall.

“At some point there will be a collapse and a lot of suffering, and contractors and labor will be available at relatively low cost,” Ms. Wylde said. “But I’m less worried about the long term than our short term momentum.”

The president of the Building Trades Employers’ Association, Louis Coletti, said that increase in the cost of materials has begun to level off in the last two months. He said that planned residential projects are the most vulnerable to escalating costs, and developers may choose to delay or not build at all. Public projects, where there is less flexibility to delay, are particular vulnerable to the increases.

“You may lose the opportunity to build that school or that hospital,” Mr. Coletti said.

The chief of staff of New York City’s Building and Construction Trades Council, Paul Fernandes, said the cost increases based on materials and land costs have made developers look increasing towards labor for savings. As construction has boomed, construction wages have dipped, a sign, he said, that developers are looking more at nonunion labor.

“There is a worry that developers will turn to more non-union labor, where they can cut wages,” Mr. Fernandez said.

The New York Sun

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