2008 ‘A Year To Remember’ in construction industry;
Economic impact to be felt in 2009-2010

Jane Chmielinski, Robert Mullen, Richard Anderson and Robert Selsam

View more photos from the event

The year 2008 will be “a year to remember” for those in New York’s construction, architecture and engineering industries.

That’s the message that Dick Anderson, president of the New York Building Congress, brought to 150 attendees at Anchin’s annual State of the Construction Industry event held at The Harvard Club on Tuesday, Sept. 9.

Ramifications from the current economic downturn will not manifest themselves until late 2009 or 2010. And until that point, Anderson said that new records continue to be set in the City: an estimated $34 billion spent on construction projects; 130,000 employed in the field; and more than 30,000 residential units constructed in 2008, the strongest year since the mid-1960s.

“The residential market, in contrast to the rest of the country, is still quite strong,” Anderson said. He projected that the construction boom would continue into 2009 but its strength would be determined by a combination of factors, including public funding, the fortitude of financial and public institutions, and the demand for office space.

The challenges that affect the industry in 2009-2010 were described by Anchin partner Phillip M. Ross, co-chair of Anchin’s Construction Services Group, as the “perfect storm” in his introductory comments at the event.

“So many factors have come together to temper the unbridled enthusiasm of years gone by,” Ross said, “including the growth of construction activity worldwide and the stress that this growth places on the availability of raw materials; the decreased value of the dollar; the rising cost of commodities; the increased cost of oil; increased insurance and labor costs; financing challenges for owners; and potential cutbacks in governmental projects. 

“Nor can we ignore the fact that 2008 is an election year. We do not have a crystal ball and cannot predict the election outcome,” Ross said. “But what we can say for certain is that the outcome of the election will impact the economy and that impact will be felt throughout the construction industry.”

Industry experts on this year’s panel included:

• Jane Chmielinski, President and CEO, DMJM Harris;
• Robert Mullen, President, Structure Tone, Inc.; and
• Robert Selsam, Senior Vice President, Boston Properties.

Chmielinski noted that the softening market could be bolstered if the permitting and bidding processes in New York City were streamlined and if there were more cooperation between the public and private sectors. “We can weather this (softening market),” she said, “but we cannot drive our own industry down.”

An expert in transportation construction, she cited Boston’s Big Dig as an example of an infrastructure project that was the single biggest economic driver in Boston during the worst economic times. “It was,” she said, “an infrastructure project that drove the economy. Public-private partnerships work all over the world, but with very little success in the U.S.”

The need for repairing New York’s crumbling infrastructure is no secret, but the city needs the political will to form public-private partnerships to tap into the wealth of resources available, Chmielinski said.  Such partnerships may actually hurt designers by commoditizing their work, but she said they are essential to meet the challenges of funding major infrastructure projects.

Mullen said that those in the industry need to pay attention to national and global factors. “We understand what’s happening, and we know how to run our business,” he said. “We need to continue making good business decisions.” He noted that his firm constantly looks at other markets with fewer restraints on construction, such as Texas: “We will not stay in or go into markets where we cannot be successful.”

Declining construction markets, according to Mullen, include the commercial office sector, retail, multi-unit residential, and mixed-use developments. On the other hand, Structure Tone has experienced an increase in the hospitality, higher education and health care sectors, particularly where health care facilities are tied to major universities.
Other “reactive” market sectors, such as cultural facilities, public buildings, aviation and technology, are relatively flat but play a bigger role in markets outside of New York City.

“Though we expect to see a 10 to 15% decline in the (commercial building) sector,” Mullen said, “that will still leave a record-breaking number of projects in New York City. This is not terrible news, but there will be a downturn in the commercial market.”

The New York market is driven by the office market, he said, noting that there were currently more spaces as well as larger spaces available. Rents have stabilized, he said, and no significant downturn in rent is expected.

Trends in the industry, according to Mullen, include:

• Increased costs, as much as 10% per year, leading to delays and/or cancellations of projects.
• An increased use of “open shop work” (non-union). Greater cooperation is needed, he said, between unions and owners.
• An increase in “green projects.” Mullen said almost 50% of Structure Tone projects involve some aspect of green design.
• Building Information Modeling (BIM). Adoption of BIM technology can save costs, construction time, and support better building performance and control, impacting all parties to a construction project. Both BIM and green projects provide opportunities to improve the industry, the environment, and the economy.
• Increased concerns about safety, in light of the high numbers of construction accidents in the city so far this year. “It is up to the leaders of the industry to provide safe environments for workers and the public who come into contact with our projects,” Mullen said.

From the real estate/ development perspective, New York is a tale of two cities, according to Boston Properties’ Robert Selsam. The current year is both the best of times, with less competition, and the worst of times, with in an increasingly difficult environment in which to operate.

New York’s geography (bound by rivers) and zoning restrictions create a unique office market, according to Selsam.  New construction is more robust in other markets, such as Los Angeles, Miami, and Houston, where land is available, costs are lower, and the process moves faster, in contrast to New York, where building an office building can take five to seven years.

Yet Boston Properties “remains bullish” on New York City, having purchased $3 billion worth of buildings over the summer, including the recent acquisition of the trophy GM Building.

The city’s Building Department is “under siege”, he said, as a result of recent construction accidents, with as many as 6,000 to 8,000 “stop work” orders in effect around the city.

“This makes building even more difficult,” he said, with the resulting street closings, sidewalk closings, and the multiple permitting process for weekend permits, after-hour permits, and more. These conditions will lead to increased rents and a pent-up demand for office space.

He noted that the area had gone through downturns before, in the late 1980s and early 1990s, when there was an oversupply of commercial space on the market, again in the late 1990s with the demise of the dot.com boom, and after September 11, when the public perception was that the city was not safe. Today’s market is different, he said, because there is no abundance of supply available and little room for new construction.

The result? New York will remain a major market in high demand.  “There are only two western capitals for finance,” Selsam said, “New York and London. Others are developing, but New York and London remain ‘go to’ cities. The ability to see a business colleague within 10 minutes or to meet someone on the street is ‘the genius’ of the two cities.”

As a precaution, Selsam said that Boston Properties maintains a “moderate leasing profile,” so that only a small percentage of leases come due at any given time. This measure helps “makes us downturn resistant.”

What danger signs face the industry?
It is important that investments continue to be made in “quality of life” projects, including park land, roadways, and projects that help create a sense of community, Chmielinski said. Sustainability starts with a good public transportation infrastructure but includes adequate power plants, the security of a police presence and public parks.

Chmielinski, Mullen and Selsam agreed that recruiting people to the industry and rising costs remain constant challenges to the industry.

Two factors that were cited for the first time include both the local and global political scene. The panelists agreed that 2009 should remain “fairly strong” for the construction sector in New York City and that their concerns are directed more at 2010.

“We need to pay attention to what’s going on in the world,” Selsam said, “as well as what the next election will bring.”

Anderson noted that the City may have a new mayor, controller, and 41 of 50 new City Council members. “We may have an entirely new city government,” he said, “at a time when expectations are quite high.”

Anchin’s State of the Construction Industry event has become one of the premiere construction events of the year. Details regarding the 2009 event, typically held the third week in September, will be posted at www.anchin.com as soon as a date is finalized.