Record Construction Spending Continues– No Decrease in Sight

The years 2006 through 2008 will see unprecedented construction levels resulting in the strongest of the six Outlook forecasts released to date, and significantly exceeding record construction activity achieved in 2005. Most notably, residential construction is expected to remain strong throughout the period while the previously flagging office construction sector continues its remarkable turnaround. Much depends on the full funding of public capital plans which represent a significant portion of the forecast.

Construction spending reached a record $18.8 billion in 2005 and is expected to reach $20.8 billion by the end of 2006 and exceed $21 billion in 2007 and 2008. Much depends on the ability of major public agencies to fully fund their capital programs.

After a banner year in 2005, during which $18.8 billion was spent on construction in New York City, spending is expected to reach $20.8 billion in 2006 and exceed $21 billion in 2007 and 2008, if all planned spending occurs. Fueling this growth is the continued demand for 30,000 housing units per year representing annual spending of roughly $5 billion. In addition, significant office construction representing 10 million square feet of new floorspace, is expected to push annual non-residential construction to over $4 billion. Major office buildings under construction, such as the Bank of America tower and Goldman Sachs, account for about 75% of the City’s total office development. Citywide, 11 office buildings will be in construction in 2006 (up from eight in 2005). Looking ahead, seven office buildings are forecast for 2007 and five in 2008. The completion of 7 World Trade Center and progress with other towers proposed for the site is a favorable indication that this forecast will be achieved.

Major office buildings under construction account for about 75% of the City’s total office
development Citywide; 11 buildings will be in construction in 2006, with seven buildings forecast for 2007 and five more expected in 2008.

Based on the latest multiyear capital plans, public construction spending in the City is projected to increase from $9.7 billion in 2005 to $13 billion by 2008. With fluctuations in the construction budgets of the Metropolitan Transportation Authority (MTA) and other public agencies and authorities, the capital budget of the City of New York will account for most of the strong outlook from 2006-2008.

Challenges

Increasing Costs
The World Trade Center Memorial project was the subject of much debate recently about ever-increasing construction costs and burgeoningproject budgets. The particular challenges of that project aside, New York City has experienced larger increases in construction costs than any other U.S. city. From 1979 through 2005, construction costs increased by 300%, significantly more than cities like Boston (175%), Los Angeles (130%) and Dallas (95%), and rose by nearly 6% in 2004 and 9% in 2005. In 2006, the City’s construction costs are increasing at a rate of about 1% per month, adding to uncertainty about the timelines and funding of projects large and small.

The strong residential construction
market, representing annual spending of
roughly $5 billion, is expected to continue
through 2008 with demand for
30,000 housing units per year.

The costs of such essential building materials as concrete and steel have risen significantly. Exacerbating these costs is the price volatility of fuel and other commodities, the limited number of contractors qualified to supply certain materials, escalating land costs, expanding environmental regulations and land use review procedures, and conflicting or overlapping construction schedules for major ongoing and planned projects. In Lower Manhattan, efforts are underway to coordinate deliveries of supplies needed for the myriad projects planned for that area. Officials at the Lower Manhattan Construction Command Center are examining innovative delivery methods in a quest to overcome logistical challenges as well as surging demand for construction materials and equipment.

Renewed development interest in major office buildings represents 10 million squarefeet but the diverse portfolio of non-residential construction in New York City through 2008includes sports and entertainment, education,hospital and other commercial facilities.

These challenges are mirrored in neighborhoods throughout New York City. With major developments and infrastructure improvements planned in all five boroughs, projects like Hudson Yards and East Side Access in Manhattan, Yankee Stadium in the Bronx, Atlantic Yards in Brooklyn, Newtown Creek Wastewater Treatment Plant and Mets Stadium in Queens and the Homeport on Staten Island, in addition to renovations and expansions
of universities, museums, hospitals and transit systems, are creating a kind of construction perfect storm.

It is encouraging that public officials and industry leaders seem to agree that the City’s construction costs and construction commitments require urgent attention and must be adeptly managed. For now, they are committed to moving forward with these grand, City-shaping initiatives and are joining efforts to devise creative solutions before projects are threatened.

Public construction in the City is expected to reach $11.6 billion by year end 2006 and
increase to $13 billion in 2008, if all planned spending occurs. The capital budget of the City of New York accounts for most of the strong outlook.

Skilled Labor and Professionals
Heightened construction activity in 2006-2008 clearly will raise employment levels but, due to the emphasis on public spending, the full impact of the job increase will not be reflected in private payrolls. Still, private construction employment in the City is expected to peak at near record levels of nearly 118,000 in 2006 before falling slightly to 113,400 in 2007 and 109,300 in 2008.

Questions persist about whether the private construction labor force will be able to accomplish all that is planned during the forecast period and what the impact might be of greater numbers of non-union and undocumented workers. Recent calls to change federal immigration standards, eventually, may add to the payrolls of both union and non-union firms. However, many of these workers will need training to safely contribute to the skilled workforce necessary for the complex infrastructure and development projects planned for the next few years and beyond. Apprenticeship programs incorporated into many of the larger projects and supported by organizations such as the Construction Industry Partnership and Non-traditional Employment for Women, will help provide a stream of qualified workers to replace those reaching retirement age. Furthermore, recent project labor agreements indicate that labor unions are more willing to adopt progressive work rules which can increase productivity of existing workers.

Available Funding
The funding of proposed public infrastructure projects by New York City agencies and State authorities remains a critical element of the forecast. The City’s $15 billion 2006 Capital Plan represents the largest portion of public construction spending. The Plan focuses on educational and environmental protection facilities such as new and renovated schools and construction at water and wastewater treatment plants. While most environmental work is City-funded, substantial capital for education improvements must come from other sources where funding is still not assured.

While most environmental work is City-funded, substantial capital for education improvements must come from other sources where funding is still not assured.