Staying Alive

The region holds its ground while NYC surges ahead

A sector that typically needs good economic times to gather funds for long-awaited renovations is in a busier cycle.

Despite drops in homebuilding, this year’s regional construction market should remain near the peak levels achieved in 2006 and outperform the national market.

Sharp declines in residential construction starts pulled down the total value of U.S. starts by an estimated 8% in 2007 and will be followed by a further retreat of 2% in 2008, according to the latest forecast by McGraw-Hill Construction.

The tristate region is projected to fare better than the nation, sustaining a mild 2% downturn in starts in 2007, from $52.4 billion in 2006 to $51.3 billion. Continued weakening is expected for 2008, with starts forecast to slip by 1% to $50.9 billion.

But the region’s dip doesn’t extend to the New York metropolitan area, where the white-hot construction market is on a roll. “All sectors are thriving and all boroughs are doing well, says Richard Anderson, president of the New York Building Congress.

“I think there is going to be strong and consistent growth across all sectors including the residential market,” adds James McKenna, CEO of New York-based Hunter Roberts Construction.

Remarkable Growth in New York City

In October, the NYBC released its “most positive report yet” on the outlook for the New York City construction market. Estimates for total spending were up 6.5% to $26.2 billion in 2007 and are forecasted to reach to $27.5 billion in 2008 and $29.5 billion in 2009, an increase of 18% over three years.

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Nonresidential construction continues to climb steadily from its low point in 2003. “The surge in 2006 to almost 17 million sq ft was truly remarkable,” Anderson says. “With further recovery in the office market in 2007, we could top that number, with spending as high as $11.2 billion by 2009.”

Lower Manhattan is fueling the growth with ongoing construction of the Freedom Tower and the Goldman Sachs headquarters and projected starts of three World Trade Center Towers in 2008. Increased activity is also slated for Manhattan’s Upper West Side and the area around Penn Station. 

Institutional sector activity includes the expansion of Columbia University and the NYU Medical Center. New stadiums are also under construction for the Yankees and the Mets.

Even more impressive is the forecast for residential construction, which is bucking the national trend. “To our surprise we may hit as many as 35,000 housing units authorized in 2007,” Anderson says. Projections for 2008 and 2009 see continued strength with units numbering 30,000 or above per year. 

Factors sited for fueling residential growth include strong demand, a healthy economy, and successful efforts by the city to keep crime in check and improve the quality of life.

Public construction is also projected to continue at a strong pace, growing from $11.9 billion in 2006 to $12.3 billion in 2007 and $12.6 billion in 2008 and 2009. 

The city is helping to drive construction activity through rezoning and redevelopment of major areas, including Jamaica; Willets Point and Long Island City in Queens; downtown and Coney Island in Brooklyn; and Lower Manhattan, Hudson Yards and the expansion of the Javits Center in Manhattan, says Robert Lieber, president of the New York City Economic Development Corporation.

But there are some warning signs on the horizon. Ronald Berger, executive director of the Subcontractors Trade Association in New York City, worries about financial difficulties derailing infrastructure projects. “I just can’t understand where the city and state are going to get all the money for all the work that they are proposing,” he says.

Lieber cautions that the intense demand for materials and labor, along with logistical issues delivering materials and minimizing disruptions, calls for close coordination. “Without the proper preparation and planning, the growth we are experiencing could absolutely choke the city and we’ll become victims of our own success,” Lieber adds.

Mixed Regional Outlook

Across New York State, New Jersey and Connecticut, the outlook for the value of construction starts is best described as mixed based on forecasts by McGraw-Hill.

New York State was projected to grow at a moderate 2% pace for 2007 with the 22% drop in the residential sector offset by growth in nonresidential and infrastructure sectors. 

The value of starts in New Jersey was projected to decline by 6% for 2007, dragged down by a 21% drop in residential starts and a 5% slide in the nonresidential sector. 

Connecticut’s pullback was more serious, projected at 12% overall with nonresidential construction slipping 31% and residential 13%.

For 2008, construction starts in New York are expected to retreat 3%% to $31.2 billion. Both New Jersey and Connecticut see mild recoveries in ’08, with starts in the Garden State growing 3%% to $13.2 billion and Connecticut starts elevated 1%% to $6.5 billion.

“Declines in the tristate region are not as bad as what we are seeing in the rest of the country,” says Jennifer Coskren, senior economist with McGraw-Hill Construction’s research and analytics group.

The slide is expected to abate in 2008, with starts down just 2% to $7.1 billion, but Coskren warns that the projections may prove to be too positive. “We are assuming the worst is behind us,” she adds.

In New Jersey, the residential sector is struggling, with multifamily construction starts down 26% in 2007. “Certainly through 2008 the outlook is best described as bleak and I do not think that 2009 will see much of an improvement,” says Patrick O'Keefe, president of the NJ Builders Association.

The market is still holding up well in a few areas, such as the New Jersey side of the Hudson across from New York City and the immediate area around Atlantic City, due to the expansion of the gaming industry, O’Keefe adds.

But problems in the financial markets are taking a toll. Funding is harder to get and projects are looked at more closely, effectively slowing the pace of construction,” says Ted Domuracki, president of Little Falls, N.J.-based MAST Construction Services.

Interestingly, multifamily starts were projected to gain ground in Connecticut in 2007, but a closer look at the numbers reveals that one large project, the Trump High Rise Condo Tower in Bridgeport, valued at $153.5, is dominating the category. The numbers are expected to pull back in 2008, Coskren says.

Regional estimates for commercial and industrial starts were off 16% to $9.8 billion in 2007 from a high of $11.7 billion in 2006, but are expected to recover to $11.8 billion in 2008, a 20% increase.  Offices and hotels led the drop in 2007 and aid the recovery in 2008.

The dropoff for office starts in 2007 was not unexpected because McGraw-Hill projections place the entire value of a project in the year it starts, so $3.37 billion of the $5.74 billion in the 2006 office number was due to the start of the Freedom and Goldman Sachs towers, Coskren says. Without office projects of that scope in 2007, office starts fell to $4.2 billion, still well ahead of 2005 levels.

Strong growth is expected in 2008, with office starts jumping to $5.7 billion with the anticipated start of three towers at Ground Zero. There is some doubt that all three projects will commence in 2008, so the forecast doesn’t reflect the full value of the three starts.

“Office might come in higher if all three start,” Coskren says.

Likewise in the hotel sector, three large Atlantic City projects accounted for $1.1 billion of the $1.8 billion in starts recorded in 2006. Lacking comparable projects in 2007, the numbers fell. But several large projects, including Ravel Entertainment’s 1,900-room facility and the 1,000-room Mohegan Sun in Atlantic City, are slated to start in 2008, returning the sector close to 2006 levels. 

Pinnacle Entertainment is also slated to build a new 3,000-room hotel, but Coskren says she thinks the project will get pushed into 2009.

Starts in the institutional sector were projected to grow to $12.4 billion in 2007 and then to fall back to $11.7 billion in 2008. Health care was off sharply for 2007, down to 1.6 billion.  A 10% recovery is expected for 2008.

Education in New York State had a huge year in 2007, with starts buoyed by two large projects: the John Jay College of Criminal Justice and the Collaborative Research Center, collectively valued at $695 million. Declines are projected for 2008 but still represent a fairly high level of construction, Coskren says.

Infrastructure starts were up across all sectors in 2007, rising to $14.2 billion, and are expected to fall to $12.8 billion in 2008, still well above 2006 levels. 

Electric utilities registered triple digit growth in Connecticut in 2007, thanks to several large transmission projects in Middletown, valued at $2.6 billion. 

In New York, bridges, water supply systems and electric power and gas also had a big year. Water supply systems are up over 200% in 2007 due to the start of the Croton Water Filtration Treatment Plant in the Bronx, valued at $1.3 billion. Two wind energy projects in New York accounted for $400 million in starts.

While 2006 was definitely the peak, strong levels of construction are still expected for 2007 and 2008, Coskren says. This translates into a busy time for the construction industry in the tristate region.

“We have much to be grateful for,” Anderson says. “Now the challenge is to get the work done and get it done safely, efficiently and at high level of quality.