Focus on Developers

Competitive Market

Building Developers Adjust to Shifting Economics, Intense Competition

The marketplace for developing new projects is shifting gears in New York, New Jersey, and Connecticut as competition and costs climb and available sites become scarcer.

by Tom Stabile

The New York region's dynamic real estate market - and a confluence of favorable economic conditions - has created a competitive setting for building developers.

Much of the activity has been in the red-hot multifamily residential sector, where developers have found it profitable to pursue new construction over railyards, redevelop brownfields and blighted urban districts, and convert office and factory buildings.

Developers may be entering a tightening phase, however, as they contend with rising materials and resource costs as well as fierce competition for sites.

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Development sites - whether for commercial or residential uses - are harder to come by across New York, New Jersey, and Connecticut, because the recent building surge has scooped up many attractive locations.

"The availability of sites in desirable areas is quite limited," said Jim Kilbride, assistant chief estimator for the DeMatteis Organizations, a developer and builder based in Elmont, N.Y. "The development guys are always looking for sites. There are more cranes in New York City right now than I've seen in my career."

The competition keeps larger development firms in close quarters, said Sam Gershwin, president of Westminster Communities, a residential and retail developer active in New Jersey and Long Island.

"You've got the same [development] companies bumping up against each other," he said. "The parcels of land are becoming scarcer."

Developers are also finding contractors and architects commanding higher fees - after years of dampened rates - and rising costs for building materials, said Robert Freedman, president and CEO of GVA Williams, a New York-based broker.

"I think what's happened is you've used up a lot of the capacity in the construction marketplace," he said. "Construction costs have gone up in the last year by about 20 percent."

Freedman said materials availability has been a major concern for developers, who faced steel shortages in 2004 and had trouble securing concrete last year because of the region's spate of residential development and competition for supply from the post-hurricane reconstruction of the Gulf Coast region.

"With the velocity of construction right now, it's a very tight market," he added. >>

In the office sector, most recent development has been build-to-suit space for particular owners, such as Manhattan's 856,000-sq.-ft. Hearst Tower for Hearst Corp., or has been concentrated in large projects, such as the 1.7-million sq. ft. of office space in the 7 World Trade Center tower in Manhattan or a handful of speculative office complexes on Long Island, in northern New Jersey, and in the Bronx.

"I haven't seen much typical high-rise speculative office space going up - nowhere near the amount of activity on the residential end," Kilbride said.

Market Trends Signal Tighter Times

Developers are starting to reassess the market. Some expect a slowdown in activity but others plan to target strategic pockets.

Development activity in 2006 is likely to focus on mixed-use projects in "infill" areas - spaces near central business districts and suburban nodes - as well as in sectors such as hotels and housing for seniors or students, according to "Emerging Trends in Real Estate," an annual survey conducted by the Urban Land Institute, a New York-based developers association.

"Transit-oriented development near subway or light-rail lines almost can't miss," stated the report's national development outlook. In a discussion of New York trends, meanwhile, it predicted that "the lodging sector booms - occupancies zoom north of 80 percent. New hotel construction will heat up to fill the void."

On a scale rating regional prospects for commercial and multifamily development, the survey respondents gave New York City 6.58 out of 10 points, with "5" as fair and "10" as outstanding. On that scale, the respondents gave a 5.85 to prospects in Newark and northern New Jersey, with a 5.79 to Long Island and a 5.98 for New York's Westchester County and Connecticut's neighboring Fairfield County.

That somewhat restrained outlook may owe partly to tighter financing, especially for new residential development.

"Most lending institutions want to see a fair amount of presales before they lend to any great extent," Westminster's Gershwin said.

Some lenders are already pulling back on residential projects, Freedman added.

"There have been a few lenders who have redlined that asset class," he said.

On the office side, developers are eyeing the prospects for projects currently under construction to determine whether new development is warranted. Freedman said developers will closely track Lower Manhattan, where New York-based Silverstein Properties is slated to build 10 million sq. ft. of office space on the World Trade Center site.

"It has sufficient subsidies that it should be able to attract tenants," Freedman said. "The key with downtown is whether they're going to parcel out the redevelopment of the World Trade Center to other developers. Some people are concerned the pace could slow down."

Developers are also keeping an eye on regulatory changes, especially New >> York City's plans to replace its complicated homegrown code with the International Building Code - a move proponents say will trim project costs.

Seeking Development Opportunities

The taut market conditions have led developers to seek opportunities in new places.

For instance, Kilbride said DeMatteis has begun pursuing projects through the Educational Construction Fund, a public benefit corporation under the New York City Department of Education that offers development rights to a city-owned site as long as the eventual project includes a new public school built to municipal specifications. The developer commits to paying the bonds that finance the school construction on the premise that the high-rise development on site would generate the necessary revenue.

The corporation has been around for nearly 40 years but was relatively inactive in recent years until the administration of Mayor Michael Bloomberg put new focus on it. DeMatteis is negotiating with the city to build 30- to 50-story residential condominium towers on two new school sites in Manhattan.

The competitive market for sites makes the program attractive because a developer doesn't face the hassle of acquiring a parcel, Kilbride said. But the program makes more sense in a high-dollar market like Manhattan because it is less likely that condominium sales in other boroughs would generate enough revenue to pay for the school construction bonds.

"It's pretty hard to sell a $1 million condo in the Bronx or Staten Island," Kilbride added.

Another avenue some developers are pursuing is participation in municipal programs that allow upgrade of a project's size in exchange for public benefits, such as adding affordable housing or parkland.

"There's a West Chelsea overlay that is allowing people to upzone their parcels in consideration for the establishment of green spaces along the High Line," Freedman said, describing a program in Manhattan to encourage new development next to an abandoned elevated rail line that is being redeveloped into parkland.

Instead of competing for individual building sites, some developers focus on the larger properties that offer major redevelopment opportunities. Forest City Ratner took that approach with Downtown Brooklyn in the 1980s and 1990s, resulting in its sprawling $1.5 billion, 7.6-million-sq.-ft. MetroTech office complex.

Now, it is deep into plans to redevelop Brooklyn's Atlantic Yards complex into a $3.5 billion mixed-use community with a basketball arena and a dozen high-rises for residential and commercial uses.

"We've been lucky enough to be involved in projects to transform the city," said James Stuckey, executive vice president and director for commercial and residential development at Forest City. "They consist of a number of different elements - working on a larger scale with more complicated financing, approvals, design, and construction."

Developments of that scale - Atlantic Yards has involved close to $1 billion in site acquisition costs alone - also tend to evolve over long periods of time, insulating them from market trends.

"Our projects, because they are large, tend to live through cycles," Stuckey said.

Managing Work in a Shifting Market

In the midst of a more competitive development market, developers face other shifting factors, such as the higher demands of buyers, tenants, and users in terms of interior finishes, equipment, and features.

"There is so much more information available to the consumer," said Westminster's Gershwin. "They have become more intelligent about the ingredients that go into a building. It's made our life a little bit more difficult."

Developers also increasingly must weave new projects into a community's existing fabric. Gershwin said Westminster made integrating new projects into their environment a core part of the company's development philosophy.

"We do not attempt to force an architectural style or floor plan where it might not be accepted," he said. "We tend to hire people with more local knowledge about styles, layouts, types of construction, materials, and features."

Working closely with a community is particularly a challenge on major redevelopments, said Forest City's Stuckey. The company developed a wide public outreach effort in preparation for its draft Environmental Impact Statement for Atlantic Yards.

"We have been out meeting with people for over two years," he said. "Our plan has evolved and changed based on what we've heard."

Assembling the right project team is often another hurdle, with most developers keeping a regular slate of contributors but still needing to bring in new faces to keep projects on track.

"We have a stable of architects that we're comfortable with," Gershwin said. "But in certain locations, there are architects that are politically more beneficial to utilize. We play the game. It's our business to get from the drawing board into the ground as fast as possible to build something that's well designed and acceptable to the marketplace."

MaryAnne Gilmartin, executive vice president for commercial development and leasing at Forest City, said the company tends to stay with longstanding contractor and engineer teams. On rare occasions, it will extend a broader Request for Proposals to see what the design or contracting market has to offer. At other times, Forest City will ask a few specific firms to submit proposals.

"We love our consultants to death," she said. "We tend to overload them. We're very demanding. We drive ourselves hard and we drive our consultants hard."