Inside Job

Interiors Sector Enjoys Bubble, Finds Ways To Stay Afloat After Burst

Experts see an end in sight to the recent construction boom that has kept interiors firms busy, but most say plenty of work still exists even once the market slows down.

Jobs like Structure Tone’s lobby for the Bank of America building at One Bryant Park, which is seeking LEED Gold Interior rating is one example of the growing amount of green work being undertaken by interiors contractors (Photo by Keith Williams.)

A construction boom in New York City is rippling into a continued slew of projects for interiors contractors, and although predictions abound that the bubble will burst given the tightening of credit and the economic slowdown, contractors remain optimistic.

Part of that rosy outlook stems from lessons learned after Sept. 11 and the last major slowdown in downtown New York City. Big and small interiors contractors began to increasingly diversify into a broader spectrum of markets, which are not so tied to the cyclical nature of Wall Street’s or New York’s economy.

At the same time, even as office tenants begin tightening their belts and cut back—for example, on the amount of office space they might lease—interiors contractors continue to reap the benefits with new renovation projects.

“We have not yet seen a slowdown,” says John Thomann, vice president and general manager of Turner Interiors New York, a unit of New York-based Turner Construction Co. One indicator: Thomann says Turner has virtually hit its sales goal for the year while it wins new work for 2009. Although talk circulates that some proposed building projects will be delayed or canceled, interiors contractors say their diversification plans begun earlier this decade are ensuring new jobs, particularly in higher education, technology and data center markets.

“There always seems to be work in higher [education],” says Larry Petretti, president of New York-based Hunter Roberts Interiors Group, part of Hunter Roberts Construction Group, which like Turner is a full-service contractor.

Meanwhile, the continued climb in rental prices in Manhattan has created a two-edge sword. On one hand, says Michael Gallin, a partner in charge of production at New York-based John Gallin & Son, although those “through-the-roof” prices can mean “less money to spend on interior work,” he’s also seeing “tenants becoming more aggressive in the use of space,” either by moving when their leases expire or by squeezing into less space. That translates into more jobs for interiors contractors as well.

“If they were in 20,000 sq ft, they’re trying to squeeze into 15,000 sq ft or less,” Gallin says. “So it’s a job, but it’s a less dollar-value job.”

Gallin says another trend he and other contractors are seeing is an increased amount of subletting, and that also translates into new interior jobs as contractors install petitions and take on more cosmetic or modification jobs. “It’s work, but again, it’s less dollars,” Gallin says. “Instead of four or five months, it’s a lot of six- to eight-week jobs.”

Skyrocketing New York rents also have another effect. Owners of older buildings in Manhattan, the other boroughs and across the Hudson in New Jersey are signing contracts to renovate and make infrastructure upgrades to better compete for tenants who can’t afford the high rents but feel that to compete they need to upgrade.

Buildout projects like John Gallin & Son’s 12,000-sq-ft job for UK-based Fidessa Group PLC on the 35th floor of 17 State Street in Lower Manhattan are among the types of jobs that tend to dry up during lean economic times.

Also, with a shortage of hotel rooms in Manhattan, interiors contractors see strong sales for some time to come in the hospitality market in both new fit-outs and renovations.

Adding to the market picture is the color green. Interiors contractors continue to respond to growing customer demand for more environmentally sensitive materials and technology, which provides more work as well as more challenges.

To meet the challenge, contractors are investing more time and money to train their crews so they are LEED certified. Contractors say building owners are increasingly willing to spend the extra money because their employees or tenants want sustainable spaces and they can justify the cost over the life of a lease.

Turner’s Thomann says up to 20% of the unit’s work is now LEED-rated fit-outs, and that growth has come just within the past two years. Its most recent project was AOL’s corporate headquarters at 770 Broadway, a silver LEED project completed in June.

Similarly, Michael Neary, chief operating officer of New York City-based Structure Tone, says the amount of revenue generated by LEED-certified or otherwise green projects has expanded tenfold since 2006. “In 2008-09, nationally, we’re projecting between $750 million and $1 billion in green work either under way or in the pipeline,” Neary says.

Going green is also becoming easier, which is helping smaller interiors firms stay competitive. “The paperwork has evolved so that the onus is not completely on us,” says Doug Parrish, president of Hauppauge, N.Y. -based Donaldson Interiors, which has two LEED-certified staffers. “We can share the burden with our suppliers and manufacturers.”

For some larger projects, incentives through no-cost energy credit programs are available. And some customers who are less willing to go through the certification process are still putting in green orders, asking for such items as recycled carpet or other green design elements that don’t add to cost, Gallin says.

Looking ahead, contractors continue to express optimism about the state of the interiors sector. On the horizon, WPP Group is planning two 500,000-sq-ft projects, and Goldman Sachs has its 1.6-million-sq-ft building out to bid for a complete interior fit-out this year.

Other major renovations also are scheduled, including the headquarters of JP Morgan Chase at 270 Park Ave., with improvements to half the building still out to bid.

“We expect a little flattening of growth, but we see it as temporary,” Thomann says. Parrish agrees, noting the tremendous amount of school construction work for interiors contractors being supervised by the New York City School Construction Authority, as well as renovation work in buildings “anywhere within a stone’s throw of downtown.”

However, Neary cautions that with the tightening of credit, there is concern that new projects that have not broken ground yet could be delayed or postponed. But he adds that “from an interiors point of view we’re not immediately affected.”

For now, firms big and small say they will continue to pursue new leads, partly by servicing existing clients and working closely with others in the industry such as architects and full-service contractors. Turner’s 45 business units has interiors groups with most business units, and when its core-and-shell unit completed the Hearst Tower, its interiors group did the fit-out in about 13 months.

But Thomann says Turner’s interiors units also solicit leads from architects, owners’ representatives and its existing client base. And while Parrish says Donaldson Interiors works with bigger full-service contractors, Neary says Structure Tone pursues a full range of project sizes, including smaller jobs. “That insulates you in good and bad times,” Neary adds.