New York's Rising Construction Costs: Issues and Solutions
Introduction & Executive Summary
The New York City building industry encompasses all of the men and women who design, construct, maintain and manage the buildings and physical infrastructure that sustain New York – from the top of the Empire State building to the water tunnels deep beneath the City’s streets.
New York City remains in the midst of an historic construction boom that reaches across all sectors of the design, construction and real estate industry. According to New York City Construction Outlook, an annual forecast and analysis prepared by the New York Building Congress, total spending by government, businesses and institutions may top $83 billion over the period 2007-2009.
While this extraordinary level of activity is helping to transform the New York landscape and fuel the local economy, it has also created significant upward pressure on construction costs.
The New York Building Congress and New York Building Foundation commissioned this report on non-residential construction costs in an effort to quantify and better understand New York’s unique construction cost environment and to identify potential ways to contain certain costs Specifically, this report aims to:
- Examine the local, national and international factors driving the costs of construction;
- Analyze construction cost differences between New York City and other U.S. urban centers;
- Recommend steps that City and State government, as well as the industry, can take to contain those construction costs that can be influenced locally; and
- Promote an environment that enables private developers, government and contractors to more accurately project long-term construction costs, which will help ensure that the types of major, multi-year, city-shaping projects critical to New York City’s long-term economic growth come to fruition.
The report comes at a pivotal point for New York City. Though the demand for construction remains intense, signs of a weakening economy abound, which in turn threaten the financial capacity for public and private sector building. All the while, construction costs continue to rise.
As documented in this report, general contractors in New York City reported:
- A five to six percent increase in construction costs in 2004;
- An eight to ten percent increase in 2005;
- A 12 percent increase in 2006; and
- An 11 percent increase in 2007.
Several factors, including some national and global conditions, are acting in concert to produce this seemingly relentless rate of cost escalation.
- Rising global demand, largely fed by booming economies in India and China, is driving up the cost of essential commodities like steel and concrete.
- Nationwide demand for construction materials and services is intense. Non-residential construction spending has surged by 46.5 percent since 2004, and overall U.S. construction spending now exceeds $1.1 trillion annually.
- Price spikes in commodities, such as copper, concrete and fuel, have been exacerbated by the loss of commodity production capacity in the United States.
- Inflationary pressures also account for a portion of the increased cost of contractors, subcontractors and skilled labor, the cost of land, fuel prices and the cost of compliance with environmental regulations.
- Although too early to quantify at this point, the effect of a prolonged credit crunch on the availability and cost of bank loans for construction may be an additional pressure that becomes important to examine.
But these external factors alone are not enough to explain trends in New York City, where costs are significantly greater than in other U.S. cities and where the gap is growing annually. For example:
- Construction in New York City is over 60 percent more expensive than comparable construction in Dallas, nearly 50 percent more than Atlanta, 25 percent more than Seattle and 20 percent more than Los Angeles;
- Total construction costs for high rise office towers can exceed $400 per square foot (psf) in New York City, compared to $180 psf in Chicago;
- In 2007, public elementary school construction costs in New York City were $512 psf, compared to $289 psf in Chicago; and
- At $600 psf, hospital construction costs in New York City significantly outpace Boston and Washington, D.C. ($500-$555 psf) and Los Angeles and San Francisco ($380-$400 psf).
The disparity in construction costs between New York City and other U.S. regions is due to a host of local factors, many of which are self-inflicted. These include:
- Extensive local regulations and government policies that generate waste and added risk;
- Inefficiencies created by poor project planning and management, as well as more extensive union work rules;
- Workforce shortages, including a limited supply of local specialized trades;
- Logistical issues, such as street congestion and the insufficient number and size of staging areas; and
- Stringent environmental mitigation standards, which make it more difficult to add to the City’s shrinking supply of developable land.
Though the appetite for construction remains largely unabated, the question arises as to whether, and at what point, inflationary pressures and increased costs will significantly dampen the enthusiasm of developers and jeopardize funding for public projects. When could building in New York City become cost-prohibitive?
Indeed, warning signs already abound. In the first two months of 2008 alone, New York State infrastructure agencies have announced that they are pulling back on some major, largely funded projects. Two notable examples include the Javits Convention Center expansion in Midtown and the Fulton Street Transit Center in Lower Manhattan. In both cases, government officials cited budgets that had grown far beyond original estimates.
These events are of real concern given the multitude of major transit and development projects currently in planning or in the initial stages of construction, including the Second Avenue Subway, Moynihan Station, Atlantic Yards and the World Trade Center redevelopment.
As this report seeks to demonstrate, some factors contributing to construction cost escalation can be combated on a local level. For example:
- The supply of land could be expanded through continued rezoning initiatives, enhanced brownfield remediation and vacant land surcharges;
- The on-time and on-budget delivery of projects could b e aided by the implementation of effective and fair procurement polices and practices;
- Government, private owners and management could t a k e steps to better share risks and promote quality-based selection and prompt payment for services;
- Workforce productivity and supply could be enhanced by a number of measures, including the increased use of project labor agreements and further development of contractor and project management skills; and
- Government could use its executive, legislative and regulatory authority to better ensure a free flow of construction activity, timely decision-making and improve coordination of supplies delivery and necessary permits.
When taken together, these and other steps would achieve tangible cost savings and help keep construction in New York City competitive.