Contractors in short supply seize chances to fatten margins.
An excerpt from a post that originally appeared on www.crainsnewyork.com on Dec 7, 2014
With great fanfare, a team of investors unveiled plans last spring to build the world’s largest ice-rink complex for $275 million. Barely 18 months later, the cost of redeveloping the historic Kingsbridge Armory in the Bronx has ballooned by nearly 30%, to $350 million.
Experts blame one factor in particular. It’s the same one that has doubled the cost of the transit hub at the World Trade Center to $4 billion.
“The total has risen substantially at Kingsbridge,” said Kyle Kimball, head of the city’s Economic Development Corp., which is overseeing the private development there. “And quite a bit of that is from construction costs.”
At projects large and small across the city, the picture is much the same. The building boom has pushed the value of construction to $32.9 billion this year, up from $28.2 billion a year earlier as a finite pool of construction firms have suddenly found themselves in high demand—and have hiked their prices in response.
Estimates vary, but a number of developers report that their construction costs have risen by at least 15% to 20% in the past two years. Most of them attribute the run-up to the fatter profit margins now enjoyed by the contractors hired to do the building, as opposed to materials they use—steel, concrete, glass—some of which have actually fallen in price.
The biggest increases in pricing have come from the contractors whose skills are scarcest. After enduring several brutally hard years and laying off workers during the recession, the handful of firms that pour structural concrete or install building façades have rebounded. Many have hiked their prices by as much as 30% in the past two years, according to developers and general contractors.
Down the road, those increases will almost certainly be felt by tenants in the form of higher rents developers will demand in order to recoup their elevated costs.
For developers, it is all part of the calculus of building in a hot market.
“Construction is no different than any other industry: When there is more demand, people tend to charge more,” said Ziel Feldman, head of HFZ Capital Partners, who recently paid more than $700 million for a site in Chelsea, where he plans to erect a large residential building. “I just have to make sure that my cost of land and cost of construction are less than I have to sell [my condominiums] for.”
But the swings can be dramatic. In the last real estate cycle, which ended after the financial crash of 2008, the value of construction in the city fell by several billion dollars and the industry shed 20,000 high-paying jobs, according to statistics from the New York Building Congress.
“When things were really bad a few years ago, you had people taking jobs just to keep the doors open and waiting until things got better,” said Joseph Wallwork, managing director at construction consulting firm Nautilus.
And while developers are the ones shelling out the extra cash for more expensive construction costs—not to mention soaring land prices—it will be the end user who ultimately ends up paying. On the residential side, new construction in Manhattan averaged $1,800 per square foot during the third quarter—up from $1,422 two years ago, according to statistics from appraisal firm Miller Samuel.
Similarly, commercial rents for Class A office space are also projected to grow beyond the $75.76 per-square-foot average reported last quarter, according to a report from commercial brokerage Cassidy Turley.
For one of the biggest funders of construction projects—the public sector—rising costs pose far more of a burden because they cannot so easily be passed on to end users. Higher costs for major projects from bridges and airports to schools and public housing could strain city and state coffers.
“Officials who work for the Port Authority or the [Metropolitan Transportation Authority] will tell you that even though they are government-funded agencies, they must compete for labor with the private sector,” said Julia Vitullo-Martin, senior fellow at the Regional Plan Association.
Construction managers contend that prices have not spiked as dramatically as developers say. And in contrast to the bills submitted by some contractors who are in short supply, other costs have held remarkably stable or even ebbed a bit.
“The cost increases have not been on the [union] labor side,” said Louis Coletti, chief executive of the Building Trades Employers’ Association. Current collective-bargaining agreements, he noted, raise worker pay by only a few percentage points each year.
Steel holds steady
What’s more, the cost of key building materials, including structural steel and copper tubing, has barely budged. In New York City, those prices stood a mere 1.8% higher last month than they did a year earlier, according to an index published by the Engineering News-Record. Many of those costs have been depressed in recent months by the sharp decline in demand in the world’s biggest construction market, China.
In contrast, developers of super-tall towers are adding expensive, rare construction materials and designing structures that are time-consuming and difficult to construct.
“Buildings have gotten much more elegant, and there is a cost associated with that level of architecture and detail,” said Ralph Esposito, general manager of construction firm Lend Lease.
About the Editor:
RJ Diaz is a renovation and remodeling construction management executive in New York City. RJ is
passionate about high quality, well-crafted construction and started RenovatingNYC in 2010 to
share news and information specific to the industry as well as profile the best resources
essential for a project’s success. For advice about your own renovation or remodeling plans,
preliminary cost estimates and project opportunities, please contact RJ using the form below.