About Construction Outlook

Available indicators of future construction activity show continued near record levels, and there seems to be the political will to press ahead with vital capital projects. The big question regarding proposed public and private sector work, however, is the availability of financing necessary to move projects from planning to construction.

The current level of uncertainty is heightened by reports of a slowing trend in the design sector, the first stage in the construction process, and less than full employment in the construction trades. While the slowdown may simply represent an easing off of what was a breathless pace of activity over the past three to four years, a prolonged or deepened slump in these areas could spell trouble for certain industry sectors in the years ahead.

Despite a weakening economy, growing budget deficits and a high degree of uncertainty stemming from last year’s terrorist attack, construction spending and employment is holding up remarkably well. In fact, with 2002 construction activity remaining at near record levels, the industry has been countering the region’s downturn and helping to buoy the local economy.

The information that follows examines some of the key issues that could affect construction spending and employment in New York City over the next few years.

How might the redevelopment of Lower Manhattan affect this forecast?
Construction Outlook does not include activity related to the rebuilding on the World Trade Center site. While replacing up to 11 million square feet of commercial and retail space will greatly increase construction activity, the bulk of such work is not likely to proceed any earlier than 2005.

However, from 2002 through 2005, the most robust activity may well be in public sector construction in Lower Manhattan, especially if either a proposed major transportation hub or the submergence of West Street is approved, funded and built on an expedited schedule.

What other variables could affect these forecasts?
Insurance Issues – A number of proposed projects reportedly have been held up due to lack of Federal guarantees of insurance coverage for property destruction due to war or terrorism. Without such guarantees, financing of major construction projects is jeopardized. While there are signs of progress, as of this printing, the issue remains unresolved and a source of concern for the industry.

Budget Deficits – New York State and the City face multi-billion dollar budget deficits at least through 2005 and significant budget cuts are expected. This could have a negative effect on long-term capital programs. While it is unlikely that major ongoing projects will be
canceled, many educational, transportation and infrastructure projects contained in various capital budgets may well be delayed. And, while there are a number of proposals for transit system expansions, none are likely to move forward until new sources of revenue are identified.

Is the current glut of office space a concern?
The increased vacancy rate of commercial office space can negatively impact construction activity. Although several proposed office developments are being planned, these projects likely will not move forward until anchor tenants are signed. Given the availability of current space and recent job cuts, many developers may have difficulty doing so.

There are, however, a number of projects that could move forward despite market forces. There is, for example, considerable pressure to move quickly, regardless of market conditions, on at least some portion of the 16-acre World Trade Center site in Lower Manhattan. Similarly, developers may not wait for the market if insurance
proceeds come through. Developer Larry Silverstein is doing just this with the former 7 WTC site.

Finally, Manhattan’s largest upcoming construction projects will provide new headquarter buildings for major firms such as The New York Times Company and the Hearst Corporation.These decisions to build are being made independent of the current office market.

What are the prospects for construction through this decade?
Despite great uncertainty, there are many positive signs for potential construction through 2010. There is little doubt that significant construction will occur in Lower Manhattan. In addition, New York City was recently designated the U.S. candidate to host the 2012 Olympics. Initial estimates call for nearly $6 billion in new construction and infrastructure improvements in all five boroughs if New York is ultimately named the Host City when the final selection is made in 2005.

Is the outlook uniform among all sectors?
While firms in all sectors operated at a fever pitch in the late 1990’s, many industry officials foresee a "bust" to balance the previous "boom" in certain industry sectors over the next few years. Already, there are reports that office interiors work, a discretionary expense for many companies, is in short supply. Conversely, contractors involved in heavy construction are maintaining a brisk pace. It is very possible that such sector-specific strengths and weaknesses could continue and become magnified in the coming years.