On April 4, 2006 the Greater New York Construction User Council presented a seminar which provided an economic forecast as to the conditions which may be anticipated to follow the current real estate boom.
The seminar was moderated by Rae Rosen, Senior Economist and Assistant Vice President, Federal Reserve Bank of New York. Ms. Rosen represents the Bank to the business, banking, government and media groups interested in the regional economy and is responsible for analyzing the economic conditions and critical issues that affect the region's economy.
The speakers were:
Angelo Cosentini, Principal of On the Level who is currently overseeing the development of Blue, the 16 story, 32 apartment $17 million luxury condominium, designed by architect Bernard Tschumi, on Manahattan's Lower East Side on the former parking lot of Ratner's Restaurant.
John Barkidjija, Senior Vice President, Corus Bank, N.A. Corus Bank is a leading provider of first mortgage construction, development and bridge loans.
Patrick Crandall, Vice President and Regional Manager, Fremont Investment & Loan, Mr. Crandall is in charge of Fremont's Northeast region.
Allan M. Paull, First Vice President, Civil and Structural Engineering, Tishman Construction Corporation who oversees the overall review of structural design and construction for all Tishman projects in the region, including recently completed buildings such as 7 World Trade Center, the Whitehall Ferry Terminal, the Borgata Hotel, Casino & Spa, and the Westin New York at Times Square.
New York City Economic Forecast 2006
The seminar set out to explore the views of constructors, developers, forecasters and lenders on the state of the 2006 real estate economy in New York City. Although there was not full consensus on every issue, the following views emerged:
The Residential Market: There may be a softening of the New York market but if there is, so far, the impact is only on the sales pace. When the market stays strong for a while, inexperienced developers, undercapitalized and willing to experiment with questionable locations, participate. Lenders are wary of lending to these developers and will require them to put more equity into the deal or to provide other collateral. Unique projects will continue to attract buyers and lenders. Manhattan is clearly a service economy, without the industrial or manufacturing base which provided support in the past. Lower Manhattan has established itself as a viable residential neighborhood and is now a "hip" place to live.
According to John Barkidjija of Corus Bank, "There is drastically increased cost, everything is bid out at a higher cost to the extent that it has pushed the sale price in excess of $1,000 per square foot, net sellable price with some deals going for $1,200 to $1,400 per square foot. These prices are far in excess of other urban markets, with Chicago at $500 to $600 per square foot and Miami at $500 per square foot with only a few exceptions in South Beach."
All in all, land prices have increased drastically, and the consensus is that a ground up residential building in Manhattan, for which the property was purchased at 2006 prices, cannot be a rental as the numbers do not work.
Manhattan Prices: Land costs have increased a great deal and construction costs have increased due to spot shortages in labor and materials.
Long Island City and Brooklyn: Concern was expressed that Long Island City, Williamsburg and Atlantic Yards may suffer if there is a downturn in the economy, and that loans on these projects will be scrutinized carefully before lenders proceed.
As Mr. Crandall of Fremont observes, "I am surprised that Long Island City has not developed further; there are concerns there if the economy dips. At Atlantic Yards, the impact of a downturn is not clear. Williamsburg may have topped out with an average of $600 to $700 or even in a rare instance $950 per square foot on a net sellable basis. Lower Manhattan has become a viable residential market."
Foreign and Regional Indicators: Foreign markets are not seen as an indicator of what may be anticipated in Manhattan. In fact, even when there is a softening of the real estate market in Connecticut and Westchester, there may be absolutely no impact on Manhattan.
Patrick Crandall observes, "I don't see rising interest rates as a major driver in the event of a slowdown. I have been asked whether London, Paris and Tokyo can help us project what will happen in New York City. I do not focus on world markets because there are so many different drivers including different tax schemes and real property laws. "
Foreign Buyers in the Manhattan Real Estate Market: Exchange rates are strong and this brings foreign money to New York City, Miami and Los Angeles. Although there is a perception that Manhattan has become a "World City," there are only 3 percent foreign buyers in the market; this is certainly not driving the market. In fact, foreign buyers are more likely to buy in South Florida than in Manhattan.
"Hot Architects": In a hot market, unique projects with distinguishing features sell first. Developers have shown a penchant for hiring the "hot architect" to set their project apart and to maximize the sales price. Cautionary advice has been offered that putting a prominent architect at the helm inordinately drives up construction costs.
As Patrick Crandall puts it, "Branding helps; a few examples are Witkoff and Cipriani at 55 Wall St. and Boymelgreen's project at 20 Pine Street with Armani, but there is a debate as to how much it will impact the overall construction cost when you choose to go with a 'hot architect.' The question is whether you will be able to 'reel him in' and be able to control these costs."
Allan Paull of Tishman believes that the "hot architect" can be an asset. "It is clear that turns, twists, fancy curtain walls and elaborate systems inside the building can cost you a lot more. But the key is for the owner to 'control the process.' The design architect can develop the concept which brings uniqueness to the project, but it is not necessary or even desirable for the design architect to design the actual pieces of the building."
As an example, Paull cites the Westin Times Square, built by Tishman and designed by a "hot architect" as a building which did not suffer a significant price premium due to the design architect's whims.
Angelo Cosentini cites his relationship with a "hot architect" on his Lower East Side Blue building, which is currently in the construction phase. "In our instance, the architect did not drive up the cost and was not inflexible. I am sure that there are examples of this being the case; perhaps watching Richard Meier as he takes control of the third tower will provide a perspective."
Increasing Construction Costs In An Overheated Market
Although the focus of the seminar centered on New York's residential market, the overheated market for construction and development in New York assures that the demand will remain high; there are major projects slated in each sector: transportation and transit projects, an expansion of the Javits Center, new stadiums in Flushing and the Bronx, Atlantic Terminal, lower Manhattan development, ambitious university expansions, and further hotel development. Overwhelming demand for labor and materials will create shortages of labor and an insufficiency of capable companies to carry out the work, resulting in an increased cost of construction.
According to Allan Paull, "Underlying the consistent increase in construction costs in New York City is that there are spot shortages of concrete, cement and steel and spot shortages in some categories of labor. When we built 7 World Trade Center, for the first time, 20 years ago, the price of steel was almost the same as current prices and then all of a sudden there was a 40% increase."
Paull observed, "It is generally believed that union construction is higher in quality than non-union, but you can see that some developers would like to save the 20-30% premium which they feel they save by going non-union."
As to the high cost of constructing in Manhattan, Paull also notes, "Labor costs in New Jersey are 20-30% less."
The Greater New York Construction User Council's Essential Role
"Our client base is owners: hotels, developers, universities, hospitals and school districts. I am the GNYCUC's General Counsel and have been a member since 1988. The GNYCUC is a valuable resource and advocate for the owner community - in providing both a voice and a forum for owners," stated Osborn.
The "Economic Impacts of New York City's Development Boom" is one of a series of programs presented by the Greater New York Construction User Council, providing insights into methods of understanding rising construction costs in the New York City area. Other recent programs have focused on hotel development, university development and the development of large infrastructure projects throughout the region.
The GNYCUC's mission is to promote cost effective and safe construction, to encourage a higher level of professionalism in project management, to provide a key forum to discuss issues, policies and laws affecting the construction industry and to better understand and facilitate technology and new initiatives in sustainable construction.
The GNYCUC's focus in 2006 closely follows the rationale under which it was founded in 1971 as the real estate industry faced drastically rising construction costs. In its founding, the GNYCUC urged top executives to take a more active interest in construction practices and the effect of construction on overall corporate real estate operations. An outgrowth of this advocacy and involvement was the formation of the Business Roundtable, a national organization based in Washington, DC whose mission was "to gain a better understanding of the causes of inflation in construction." In 1971, executives from 12 major New York-based industries formed the Greater New York Construction User Council.
John E. Osborn is a Partner of the New York City and Westchester construction litigation and environmental law firm of John E. Osborn PC. Mr. Osborn is the General Counsel of the Greater New York Construction User Council and on the Board of Directors of the Building Owners' and Managers' Association of New York.