|
Rethinking
Development
Report
No.
4 June 2008
Raise the Roof, Lower the
Costs:
Construction Costs and Housing Affordability in New
York City
by
Rosemary Scanlon, Consultant in Urban and Regional
Economics
Executive Summary
The challenges that make building in New York City
famously difficult have not reduced the level of construction
the city has experienced over the past few years.
The city’s desirability as a place to live and
do business, the high incomes earned by its large
cohort of accomplished professionals, and the easy
availability of credit have spurred an extraordinary
building boom that has overcome every obstacle thrown
in its way.
There are reasons nevertheless to investigate the
causes of the local construction industry’s out-of-scale
cost structure. First, incomes in the crucial financial
sector, on which so many other sectors depend, though
still strong in 2007, will probably decline in 2008
due to upheavals arising from the subprime mortgage
crisis. Credit of all kinds has become less available.
And housing costs have reached a painfully large fraction
of income—already in 2006, 40 percent of all
New York City households were spending more than 35
percent of household income on rent.
In the face of these potential constraints on demand,
the prices of building materials such as steel, glass,
aluminum, and copper have shot up, climbing 1 percent
per month in 2006, while petroleum-based products
such as asphalt keep surpassing earlier peaks. Significantly,
perhaps, the number of building permits issued in
the first quarter of 2008 was 40 percent lower than
it was four quarters earlier. In short, we have probably
left a period of rising incomes and demand and entered
a period of flattening income growth, some softening
in demand for housing, and costs that continue to
soar.
These warning signs and trends do not necessarily
augur contraction of the construction industry as
a whole. Indeed, a major source of cost inflation
is the continuing intensity of demand for contractors,
subcontractors, and construction supervisors, whose
numbers are effectively limited by the city’s
idiosyncratic rules and procedures. Large public projects
and infrastructure repair will keep demand high for
the foreseeable future. The issue is not the health
of the construction industry but rather whether intense
demand in some areas will deny resources to others.
The population segments already bearing the brunt
of this cost spiral are those of lower and moderate
income. The rejuvenation of neighborhoods such as
Bushwick in Brooklyn and the Lower East Side of Manhattan,
where ten or fifteen years ago only subsidized housing
was being built, has drawn market-rate developers,
who have bid up the price of land. Government subsidies
that are still available have not kept up with land’s
rate of appreciation. In any event, the question arises
as to whether subsidies should continue to flow to
neighborhoods where housing can be built without them.
If the per-unit level of subsidy is no longer sufficient
to keep building costs affordable, how does such housing
get built, so as to assure the continued residence
of population segments vital to the city’s economy
and diversity? The most important way, and the impetus
for this paper, is to identify costs that, first,
are within the city’s power to control and, second,
unduly burden the construction process and thus threaten,
in time, to reduce the amount of new construction
in this growing city. In an inflationary environment,
those costs responsible for project delays are particularly
difficult to excuse. Since the amounts of land, labor,
and materials available, while not fixed, are certainly
finite, savings in some sectors should benefit the
economies of others.
The following recommendations meet both criteria
mentioned above:
-
Reduce
delays in construction time, and thus cost, by streamlining
the city’s regulatory and permitting processes.
-
Continue to increase the amount of buildable space
available for residential development through rezoning,
upzoning, and other techniques.
-
Preserve
the use of nonunion labor in the construction of
affordable housing.
-
Reform
the state’s negligence laws, in particular,
those imposing absolute liability on builders for
accidents on the job site.
-
Monitor
the unfolding impact of the recent curtailment of
the 421-a tax-abatement program, which has been
responsible over the years for spurring building
in neighborhoods where it would not otherwise have
occurred.
With these steps, New York City can help lay the
foundation for a secure future of economic growth.
About Author
Rosemary Scanlon is associate professor of
economics at the Schack Institute of Real Estate,
New York University, and a consultant in urban and
regional economics. From 1997 to 1999, as a visiting
research fellow at the London School of Economics,
she served as project director of the London/New York
Economic Study. From 1993 to 1997, she served as New
York State deputy comptroller, monitoring the budget
and economy of New York City. She is probably best
known in the city for her tenure as chief economist
of the Port Authority of New York and New Jersey (1983-1993),
during which she initiated a wide range of research
programs on the economy and demography and commissioned
economic impact analyses of capital investment projects.
Ms. Scanlon’s recent consulting work includes:
a study of the economic impact of the arts and of
capital investment in the arts in New York City; an
assessment of the economic-development potential of
transportation projects proposed for the New York
area; a proposal to establish an economic research
capability within the government of London; and advisory
reviews of economic and infrastructure strategies
for Seoul and Melbourne.
Ms. Scanlon earned undergraduate and graduate degrees
in economics in her native Canada and is a graduate
of the Program for Management Development at Harvard
Business School. She has been an invited speaker in
Australia, Canada, China, France, Italy, Mexico, Spain,
and the United Kingdom.
Regina Armstrong, principal of the economics
research and consulting firm Urbanomics, undertook
the initial work on this study and participated in
many of the early interviews that made it possible.
A Note on Methodology
The findings and recommendations in this report are
based on published sources of construction cost data
from the Bureau of Labor Statistics and Engineering
News-Record, other published sources such as the
U.S. Bureau of the Census and the New York State Department
of Labor, and on interviews conducted between 2006
and 2008 with more than fifty specialists in housing
construction in New York City. These included developers,
contractors, architects, lawyers, and senior officials
in city government and nonprofit housing-development
organizations. Observations and quotations relied
on throughout this report are attributed to sources
by profession, not by name, at their request, in order
to assure confidentiality.
Unless otherwise specified, all quoted material,
whether indented or set off by quotation marks, comes
from these interviews.
**********************************
Chapter
1. Construction is Now a Booming Industry in New York
City
The years since 2003 have seen a steadily increasing
volume of construction in New York City in all categories—infrastructure,
including transportation and public works; commercial
office, hotel, and retail; and residential.
The New York Building Congress reported in its October
2007 New York City Construction Outlook that
construction spending in all categories would exceed
$26 billion in 2007. Just four years earlier it was
$15 billion, as Chart 1 shows.
Prepared by Urbanomics, and based on the capital
budgets of public agencies as well as data from the
U.S. Bureau of the Census and F.W. Dodge, the report
forecast a continuing increase in construction spending
in 2008 and a level of $29 billion in 2009.
Employment in the industry as well began to increase
in 2005 and showed strong gains by 2007. (See Chart
2.)
Residential construction has also increased strongly
since 2003, as measured in dollar terms in Chart 1,
or in the number of building permits issued throughout
the five boroughs, as shown in Chart 3. While the
number of permits issued in 2000, 2001, and 2002 hovered
around 15,000, the annual volume beginning in 2005
has been double that.
Construction was active throughout the city in this
period. In 2007, permits were issued for almost 11,000
units in Brooklyn, for 9,500 units in Manhattan, and
for more than 7,600 units in Queens.
Some weakness occurred citywide in the first quarter
of 2008, when the total number of permits issued in
the city fell by more than 40 percent compared with
the same quarter in 2007. It is too early to tell
whether the city’s housing market is weakening
along with that of the rest of the United States.
If one uses housing starts as the standard, the nationwide
slowdown began in early 2006. (See Chart 4.) New York’s
decline in early 2008 may well reflect a weakening
toward the end of 2007 that was masked by the rush
to begin construction before changes to the city’s
421-a tax-abatement program were to take effect. (See
Appendix A for details.)
Chapter
2. The Rising Costs of Construction: Materials, Land,
Labor, Logistics, Regulation
This chapter and to some extent those that follow
discuss the full range of costs confronting New York
City’s construction industry. Since the purpose
of this paper is not only to diagnose problems but
to propose solutions to policymakers, it is necessary
to categorize costs according to the availability
of policy remedies for them.
-
Unavoidable costs are very difficult to reduce,
either because they are beyond the reach of both
developers and local government, or because they
are endemic to building locally. An example of the
former would be the prices of essential materials
used in the construction process such as steel,
aluminum, copper, and petroleum-based products such
as asphalt, because their price is determined in
the global market. Examples of endemic costs would
be the logistical difficulty of making deliveries
to a city spread across three islands, or the complexity
of building in areas of very high population density,
where impact on the surroundings must be mitigated
and reviewed because it is likely to be immediate
and severe.
-
Avoidable costs are usually those that result
from actions taken by legislators, public officials,
bureaucrats, and enforcement personnel and therefore
can be reduced. For the purposes of this paper,
however, avoidable costs are not in the strict sense
unnecessary costs. Those that protect the health,
welfare, and safety of New York’s workers,
residents, and visitors may be reversible, but they
are undeniably essential. We instead focus on laws,
policies, and regulations that are arbitrary, redundant,
and in almost all cases needlessly expensive, from
the standpoint of the costs of compliance and the
costs of delay they exact. “Avoidable costs”
thus refers to the present state of many aspects
of the permitting process, zoning and environmental
reviews, and the state’s liability laws, among
other factors.
-
Cyclical costs refers to costs imposed by
the construction boom, which is still with us. These
take account of the shortage of contractors, subcontractors,
and supervisory personnel and the rising cost of
land. They are assumed to be temporary and are the
inevitable by-product of prosperity and demand.
It is possible that relief from some unavoidable
costs can be found, for example, through the use of
substitute materials or by establishing procedures
to buy materials in the futures markets. We also recognize
that federal policy and the vigor of the banking sector
powerfully affect the health and activity level of
the construction industry. However, the policies and
practices we focus on in this paper are those that
can be improved by the governments of New York State
and New York City.
Sharply rising costs of construction since 2003—for
materials, land, labor, and logistics—have added
to the existing high costs of complying with the multiplicity
of regulations that apply to all forms of development
in New York City. This combination is threatening
the capacity of developers to produce rental or ownership
housing that a wide range of lower-income to middle-income
households in the city can afford.
Every aspect of building in New York City has long
been expensive: hard costs and land costs, along with
soft costs such as insurance and professional fees
for lawyers, architects, and consultants of every
kind, who are needed for navigating the regulatory
maze. New York’s geography, density, and traffic
congestion add to the high costs of construction.
They are responsible for the scarcity of space for
storing construction materials and for the logistical
challenges involved in delivering materials from distant
warehouses so that they arrive at construction sites
at precisely the time they are needed.
 Table
1 data, provided by a nationwide construction-management
firm, highlight the cost differential in building
a high-rise office building in the central business
districts of New York, Chicago, and Atlanta in the
early months of 2008.
In this comparison, no single cost in New York City
accounted for all or most of the total differential.
Costs for each element in the process were significantly
higher in New York than in Chicago, where the Loop
is also a dense urban environment. Some New York costs
were double those in Chicago. For structural frame
costs per square foot (psf), New York costs were triple
those in Atlanta.
Similar cost differentials between New York and Chicago
are found in the construction of residential buildings.
A condominium tower in Manhattan due for completion
in 2008 is expected to amount to $425-$430 psf, while
costs run $275 psf for a high-rise condominium in
downtown Chicago.
Labor costs, which constitute the major share of
hard costs, are significantly higher in New York than
in other major U.S. cities, as shown in Table 2,
which compares hourly union rates for key trades in
construction.
Construction Costs Have Increased Rapidly Since
2004
Construction costs began rising in 2003, as construction
activity picked up in New York City, while strong
demand resulting from domestic and international economic
growth strained supply inventories and pushed up prices
of basic construction materials.
Increases in costs have affected all construction
across the country, not only in New York, although
the rate of increase has often been much greater here
due to the number and size of both public and private
projects, as well as the limited availability of high-quality
firms to perform this work. The Building Cost Index
for the United States, prepared by Turner Construction
Company, shows sharp increases beginning in 2004.
(See Table 3.)
Engineering News-Record compiles an index of
building costs in twenty major cities across the United
States. Chart 5 shows that New York City’s booming
construction industry has experienced increases that
surpassed the twenty-city index in several years since
2000, particularly in 2006 and 2007.
The Engineering News-Record Building Cost
Index for major U.S. cities shows overall cost increases
that have occurred in New York and other comparable
cities since 2000. Chart 6 demonstrates that building
costs have risen strongly across all of the selected
cities, and notably in New York, Chicago, Boston,
and Los Angeles.
As an example of these rising costs, a twenty-five-story
condominium project in Manhattan was budgeted in 2006
at $360 psf, while a similar thirty-five-story condo
project due for completion in 2008 was budgeted at
$428 psf.
Major cost elements for construction of an office
or residential building are:
-
Land
-
Hard Costs, which encompass labor and materials
for site preparation, foundation, superstructure
and walls, electrical, plumbing, interior finishes,
and HVAC, together with “general conditions.”[ 1]
Contingency allocations and other fees may account
for one-third of total hard costs. Material costs
usually account for 40 percent of hard costs in
a market-rate residential building, assuming it
is using union labor. These prices escalated sharply
between 2004 and 2006.
-
Soft Costs consist of financing, insurance,
professional fees for architects, lawyers, and consultants,
who must deal with the multiple permits required,
as well as compliance with building codes and environmental
regulations. These costs typically add 20 to 25
percent to hard costs and can be particularly onerous
for developers of affordable housing.
-
Developers’ Fees/Profits vary according
to whether the developer is commercial or nonprofit
but are reported to be in the vicinity of 25 percent.
Materials Costs Soar in 2004 and 2005
According to the Producer Price Index (PPI) series
of the U.S. Bureau of Labor Statistics (BLS), the
cost of basic materials used in building construction
soared between 2003 and 2006, and particularly in
the years 2004 and 2005:
-
Copper-mill
prices shot up 185 percent.
-
Steel-mill
prices were 65 percent higher in the summer of 2006
than they were in 2003.
-
Drywall
prices were up 63 percent.
-
Structural/architectural
metal gained 35 percent.
-
Aluminum-mill
prices went up almost 30 percent.
These price increases are reflected in the BLS producer-price
series for construction materials and equipment. (See
Charts 7-10.) Similarly, the ENR charts that together
comprise Chart 11 show increases for six key building
materials.
Prices of steel, concrete, and most metals (including
copper and aluminum) stabilized somewhat during 2007.
The only outright decline in prices has been in lumber
and lumber products, a result of the sharp decline
in housing construction in most other areas of the
United States.
In recent months, prices of some construction products
have once again begun to increase. For example, steel-
mill products in May 2008 were 20.8 percent higher
than they were in May 2007, following an increase
of only 1 percent in the preceding twelve months,
according to the May 2008 PPI. The overall PPI for
materials and construction components gained 5.5 percent
in the year ending in May 2008, after a gain of only
1.8 percent in the preceding twelve months. In line
with the rapid increase in the per-barrel price of
oil in recent months, the price of No. 2 diesel fuel
rose 75.8 percent in the year ending in May of this
year, after gaining 8.6 percent between May 2006 and
May 2007.
Considering the scale of these price increases at
the producer level, New York developers estimate that
the rising costs of building materials in the city—steel,
glass, aluminum, copper—were contributing to
an increase in hard costs at the rate of 1 percent
per month during 2006. Industry executives describe
these increases as unprecedented.
During this decade, the market for building materials
has become global, a reflection of the massive increase
in demand from the rapidly growing economies of China,
India, and parts of the Middle East and Latin America.
The Supply of Skilled Contractors Has Not Kept
Up with the Boom
During the course of this study, industry leaders
repeatedly cited the shortage in skilled contractors,
sub-contractors, specialty trades, and first-line
supervisory managers as a major concern. The huge
volume of construction under way has created a demand
for which there is no adequate supply. Moreover, the
special requirements and knowledge required for building
in New York serve as a barrier to entry for national
or international developers and contractors who might
otherwise be available. As one developer explained:
We have a limited number of participants:
there are only five or six contractors who can do
poured-in-place concrete and who can build up to forty
to fifty stories. This requires great expertise and
needs to be done in two or three days. The same is
true of plumbing or electrical contractors, HVAC or
superstructure contractors. There are few competent
contractors in these fields that major lenders or
bond insurers would take on.
So if there are twenty big jobs going on in New York
City, a contractor can do two jobs by putting his
best team on the work, but in the third or fourth
job, he could only offer the “B team” and
then the “C team.” The lenders aren’t
happy, charge more, and so the price of the job gets
bumped up.
One large contractor working on both commercial and
housing projects in the city noted that “there
are only two or three contractors or concrete subcontractors
to do a curtain wall.… [W]e are negotiating rather
than bidding, and booking these subcontractors months
in advance. Costs are now what the market will bear.”
Rising Labor Costs Have Become a Major Burden
Until 2006, labor costs were not a major force in
driving up building costs in New York City. Union
wage increases have been predictable—although
the hidden costs of featherbedding and other inefficient
work rules have not. But the limited capacity among
contractors and builders is now widely seen as the
driving force behind the recent large cost increases.
Average annual wages, as reported by the New York
State Department of Labor, increased from $52,212
in 2000 to $61,707 in 2006, a gain of 18.2 percent,
or 2.6 percent per year, as shown in Chart 12.
Average wages for specialty-trade contractors increased
by 15 percent between 2000 and 2006, reaching a level
of $59,000 in 2006, for an average annual gain of
just over 2 percent. Since the inflation rate in the
metropolitan area increased by 20.6 percent during
the same years, on average labor rates did not increase
in real terms.
The state labor department reported that prevailing
wage rates for key skilled trades, effective July
1, 2007, increased in the range of 1 to 6 percent,
with the higher gains posted by brick masons, carpenters,
and crane operators. In early 2008, a developer of
both market-rate and affordable housing reported that
union labor rates were increasing by 6 to 8 percent
due to shortages in the labor pool, and that “some
trades even show 50 percent increases,” particularly
in mid-rise and high-rise construction. As another
developer noted:
You can bring in workers—they’re
called “travelers”—from other jurisdictions
when necessary, but we can’t seem to import contractors,
so there will be a shortage of supervisory or organizational
strength. Also, contractors live and die with the
economic cycles, so they don’t like to overstaff
during boom times. In a crunch, overtime goes up and
labor costs go up.
Land Is Now the Major Cost Factor
Given current development pressures, land costs have
risen sharply in all five boroughs of the city.
Changes in land costs over a particular period of
time are difficult to measure unless the same property
has changed hands in that same period. As an example,
a property in Harlem was sold in early 2006 for $112
psf and was resold ten months later for $133 psf,
a gain of almost 19 percent. In other instances in
Harlem, land prices increased from $125 psf for residential
buildings in late 2005 to as much as $285 psf in early
2007 for buildings with mixed residential and retail
uses.
Other neighborhoods have also experienced dramatic
increases:
-
An
appraiser reports that land in Manhattan on blocks
outside the prime core, which had been selling for
$100 psf in 2001, is now going for $400-$500 psf.
Within the core, land can go for as much as $1,100
psf.
-
Similar
price increases for land have been reported in downtown
Brooklyn, where land that sold in the range of $70
psf in early 2005 had risen to around $250 psf by
mid-2007.
Land prices can vary within neighborhoods, and even
from block to block. But in general, land costs are
being driven by the boom in construction throughout
the city—of commercial projects, residential
projects, and infrastructure. When major properties,
particularly in Manhattan, change hands simply as
the result of purchases by investors, the effect is
the same.
The large-scale and widespread development of condominiums
in Manhattan has driven up land prices there and pushed
housing development into the other boroughs, where
land costs are now rising rapidly as well. In Greenpoint,
Brooklyn, land costs have reportedly risen from $80
psf to $200 psf in just the past two years.
New York City’s Vast Array of Building Codes,
Regulations, and Required Permits Adds a Significant
Premium to Construction Costs
Almost without exception,[2]
developers and contractors interviewed for this study
cited the morass of regulations and requirements for
permits as causing expensive and unnecessary costs
and delays. Highly specialized legal and architectural
professionals are required to penetrate this regulatory
maze. Overlapping jurisdictions between city agencies
can cause extensive delays. Applications for special
permits or for zoning variances can take months or
years, as can environmental studies and other reviews.
And delays in obtaining one set of permits can cause
others to lapse and force the application process
to be repeated.
For major commercial, luxury, or mixed-use projects,
these costs can be more than offset by high rentals
or sales prices. But the added costs of compliance
and the attendant delays can seriously threaten the
economic viability of lower- or middle-income housing.
For example, one developer who is experienced in
developing housing projects in New York as well as
in other U.S. cities observed that “New York
City agencies take so long on everything—for
example, the time it takes to get a Certificate of
Occupancy or a Fire Protection Plan. And it is so
complicated to deal with the Department of Buildings
and the Fire Department. It is just not an efficient
process. Nothing is predictable. These delays cost
money.” An executive of a major national construction
company provided further detail on obtaining a Certificate
of Occupancy: “Chicago has the same various inspection
groups as New York City (plumbing, electrical, fire,
general construction, etc.), and it takes about one
month of time basically due to a close coordination
process through agencies. In New York City, you cannot
start early enough to secure a C of O. The process
here can take months (four to six at a minimum) and
requires a significant effort and cost by all parties
to accomplish this task.”
A contractor explained the onerous nature of permit
renewal from the city’s Department of Buildings
(DOB) and the Department of Transportation (DOT) for
fencing, sidewalk sheds, highway use, cranes, etc.
“They expire too quickly, generally in thirty
days, and never more than ninety days or when the
insurance expires, whichever is sooner. This requires
repeated refilings, with significant costs in time
and expediter charges.” He recommends making
the period in which the permit is in effect coterminous
with the duration of the project or effective until
the insurance expires.
An architect remarked that recently more and more
sites in the city require some kind of zoning change
or variance from the Board of Standards and Appeals
(BSA), which adds time and cost to the process. Moreover,
anything built with New York City housing funds must
bear the additional burden of reviews by the Division
of Architecture, Construction, and Engineering (DACE)
in the city’s Department of Housing Preservation
and Development (HPD)—as well as environmental
reviews that similar market-rate projects do not face.
“The amount of time to acquire the necessary
permits and regulatory clearances is significant—a
BSA application takes six to nine months, approvals
from DACE from HPD take about four months, and a ULURP
[Uniform Land Use Review Procedure, required for disposition
of city-owned land], if necessary, takes at least
six months. And these need to happen in a serial fashion
rather than in parallel, adding still more delay and
cost to the development process.”
A contractor marveled that “for a builder doing
affordable [subsidized] projects, it seems as if the
city is giving him funds to pay its own fees.”
And another spoke of problems with DOT, saying that
it “issues endless permits. There can be as many
as one dozen on a basic job. The fines and violations
are time-consuming and costly. And I have to file
a site plan with DOT on logistics, but DOT won’t
sign off, and then I have to go to the community planning
board for approval.”
According to one contractor, “The city’s
regulatory burdens basically add an aggravation factor
that discourages outside companies from coming to
New York and increases the prices that contractors
will charge.”
Another offered: “Affordable housing is a rule-encrusted
world, whether it is the range of federal rulings,
state regulations, or navigating the whole range of
codes and permits in the city. It is a boon to consultants
and a bane to soft costs in New York.”
The Current Boom Is Also a Cause of Rising Costs
In summary, there have been significant cost increases
in the price of building materials, in land prices,
in the fees collected by contractors and subcontractors
whose capacity has been stretched thin, and in overtime
wages paid, especially since 2006. Indeed, the regulatory
agencies are overtaxed as well, causing further delays
and thus a longer period for which financing is required
and exposure to escalating prices lasts. In addition,
the sheer availability of credit has spurred building
during this period, intensifying already costly demands
on capacity. A well-known construction attorney stated
that in the past few years, real estate investment
trusts (REITs) became a staple of people’s investment
portfolios and thus made yet more capital available
for building. And insatiable demand and big profit
margins drew into the industry relative amateurs,
who were inattentive to monitoring costs.
“As long as condos could sell for $1,000 per
square foot, and then $1,500 and up to $2,000 per
square foot, the costs of construction just kept going
up,” this attorney observed. “And this drove
up prices for all housing construction, and mopped
up all the best construction resources in the process.”
Chapter
3. The Demographic and Economic Context, 2000-2008
No discussion of construction costs in New York in
2008 can ignore broad trends in the city’s economy
and demography or their effect on the economics of
the construction industry—particularly on the
quantity of certain kinds of housing. Unless an extraordinary
range of new government subsidies suddenly appears,
the distribution of wealth and income within New York’s
population will strongly influence what kind of housing
gets built.
Population Growth Has Continued Since 2000
Despite much concern after the terrorist attack of
September 11, 2001, about whether New York would remain
a secure place to call home, the city’s population
has continued to increase. Chart 13 shows that in
the present decade, almost 270,000 residents joined
the eight million recorded in the 2000 Census, making
this the third consecutive decade of strong growth,
after the loss of more than 800,000 residents during
the 1970s’ long years of recession.
The growth in the city’s population has been
driven by an influx of immigrants and younger Americans
drawn by the city’s robust economy and appealing
lifestyle, as well as by an influx of formerly suburban
empty-nesters. New York is also experiencing a baby
boom, foretelling a surge in construction of educational
and other facilities over the next few years.
Economic Trends, 2000-2007
By 2007, New York’s economy was in full recovery
from the recession that began with the dot-com bust
of 2000-2001, which was aggravated by the September
11 attacks and the disruption of commercial activity
in Lower Manhattan that they caused. Today, the rebuilding
of the World Trade Center site is under way, and access
to the transportation network is restored. Reflecting
confidence in the city’s revived economic health,
private developers as well as city and regional agencies
have launched major construction and renovation projects
throughout the five boroughs.
The city also more than recovered from the declines
in employment levels that occurred in 2001, 2002,
and 2003. As Chart 14 demonstrates, by 2007, total
wage and salary employment of 3.745 million had surpassed
employment levels reached in the previous peak year
of 2000.
While the 2000-2003 recession was particularly severe
locally, since 2005 the city’s employment growth
has kept pace with the national rate, even surpassing
it in 2007. Chart 15 tracks the growth levels in the
city and the nation.
Growth in Wages at Place of Work Is Strong
 Table
4 shows that wages and bonuses from jobs in the city
also increased strongly over the decade’s middle
years, rising from $206.7 billion in 2003, the last
year of the recession, to an estimated $300 billion
in 2007.
Wages surged among the higher-income employees of
firms in the city’s leading industries, primarily
finance and insurance, professional and business services,
and media and communications. For example, average
wages of workers in finance and insurance soared 68
percent between 2003 and 2007, reflecting disproportionate
gains at upper income levels, while average wages
in all other industries in the city grew 15.5 percent,
only slightly ahead of the 14.7 percent increase in
local inflation rates. (See Table 5.)
In addition, bonuses at Wall Street firms have increased
sharply since 2003, reaching $34 billion in 2006 and
$33 billion in 2007 despite the $10-billion plunge
in profits at Wall Street firms that year. Housing
prices at the top end of the market are considered
to be driven at least in part by the size of these
annual bonuses. (See Chart 16 for bonus trends.)
Median Household Incomes Fail to Show Measurable
Gains
By contrast, the household incomes of lower- and
middle-income workers in New York City have by and
large not kept pace with inflation in this decade:
-
The
median household income in New York was $46,480
in 2006, the most recent measurement by the U.S.
Bureau of the Census.[ 3] This
figure was 21.4 percent higher than the median income
in 1999, which was $38,293, according to the 2000
Census.
-
However,
the Consumer Price Index in the New York metropolitan
area increased by 24.7 percent during these years,
which means that the inflation-adjusted median income
of city households was actually lower in 2006 than
it was in 1999.[ 4]
-
The
metropolitan area’s housing costs went up more
steeply than overall inflation, rising 33 percent
between 1999 and 2006 and further reducing the ability
of a median-income household to buy, rent, or pay
the asking prices for shelter during this decade.
-
Poverty
levels in the city have not eased during the decade.
Some 16.3 percent of all families and 23 percent
of all families with children lived below the poverty
line in 2006.
The American Community Survey (ACS) of 2006 compares
average household income in New York City by quintile.
It found that the average income of the top quintile
of households is 23.95 times the average income of
the lowest quintile. While substantial, the gap here
is not the largest anywhere: in a comparison of major
cities, New York ranks sixth, behind Washington and
Boston but ahead of Los Angeles and San Francisco.[5]
A Steep Rise in Housing Prices, 2003-2008
In 2006, the median value of owner-occupied homes
in New York City was $496,400, more than 160 percent
higher than the median value in the nation, according
to the 2006 ACS. This disparity had widened considerably
since the city-nation comparison made by the 2000
Census for 1999, when the median value of a single-family,
owner-occupied home in New York was $211,900, or 77
percent greater than the national average.
Strong demand for housing throughout this decade
has left vacancy rates in the city at very low levels.
The ACS reports that in 2006, the vacancy rate was
2 percent for owner-occupancy homes and 3.7 percent
for rental properties.
Prices of apartments and townhouses in New York began
rising sharply in the last half of 2003 in tandem
with the city’s improving economy and population
growth.
According to leading appraisal firm Miller Samuel
Inc., the inflation-adjusted median price of a cooperative
apartment in Manhattan increased from $400,000 in
the third quarter of 2003 to $750,000 in the first
quarter of 2008, a gain of 50 percent in real terms.[6]
The median sales price of a condominium in Manhattan
in the first quarter of 2008 was $1.61 million, 45
percent higher in real terms than it was in mid-2003.
Chart 17 tracks these sales trends. In both cases,
average prices were much higher than the median, a
reflection of the escalating prices of prime Manhattan
properties, which doubled between mid-2003 and the
first quarter of 2008.
Housing prices also have risen significantly in the
other boroughs. The Corcoran Report for Brooklyn cites
a median price for co-ops of $450,000 and of $655,000
for condominiums at year-end 2007.[7]
The report notes that price increases in Brooklyn
for the year were a “moderate 8 percent,”
in contrast to the strong price gains “in the
exuberant early part of the decade,” due primarily
to a spurt in new condominium development.
For the city’s two million rental units, the
ACS measured median rents at $945 per month in 2006
and reported that more than 40 percent of all rental
households were paying 35 percent or more of their
household incomes in rent that year.
Rents have continued to increase strongly through
2007 and into early 2008. Marcus & Millichap report
that the actual rents paid in Manhattan’s large,
market-rate properties went up 7.5 percent in the
twelve-month period extending through the first quarter
of 2008, following an 8.6 percent gain in 2007.[8]
Rental strength is believed to be driven by low vacancy
rates, which in Manhattan were reported to be as low
as 2.3 percent.
In Brooklyn, effective rents increased 6.7 percent
over the twelve months preceding the end of the first
quarter of 2008, following a gain of 8.1 percent the
previous year. Vacancy rates are reported to have
edged up over the past two years, mostly due to the
large number of new completions. Permits were issued
for almost 9,000 multifamily units in 2007, a gain
of 36 percent over the previous year.
In these strong markets, the average rents for market-
rate housing are high—$3,731 per month in Manhattan
and $1,374 in Brooklyn in the first quarter of 2008,
according to the Marcus & Millichap reports.
In summary, the combined effects of continued population
growth and the city’s remarkable economic recovery
from the difficult years of 2001 to 2003, along with
the surge in wages earned by the top echelons of the
city’s high-margin finance and business-services
industries, have led to continued strong demand and
sharp increases in the price levels of rental and
for-sale housing throughout the city. At the same
time, income growth has been weak for most city households,
with gains in median household incomes being eroded
by rising inflation.
In New York City, continued demand for scarce supply
exerts continued upward pressure on housing prices,
which are already high by national standards, while
affordability continues to elude a vast portion of
city residents, whose household incomes have not increased
in real terms during this decade.
The Economic Outlook for the Second Half of 2008
and Early 2009
While New York City’s economy continued to post
strong gains through most of 2007, without doubt the
major economic concern since August of last year has
been the straitened circumstances of the city’s
key financial firms as a result of their exposure
to vast amounts of collateralized debt obligations
(CDOs), whose value has significantly diminished as
a result of the subprime mortgage collapse. Total
profits of Wall Street firms fell sharply in 2007
and have continued to be a concern through the first
months of 2008. Although bonus payments remained strong
in 2007, the large number of announced layoffs and
the downdraft from these lost jobs in a high-paying
industry will have a chilling effect on other aspects
of the city’s economy—on restaurants and
other retail as well as on travel and entertainment.
In addition, there will be a ricochet effect in dependent
sectors such as advertising, management consulting,
and law.
These effects can be expected to prove similar to
those that challenged the city’s economy following
the 2000 dot-com bust and the 1987 stock-market crash.
Over the next few months, there will likely be a
decline in leasing and a rise in vacancy rates in
the city’s office market, and possibly a pullback
in purchase and rental activity in the still-strong
housing market. The abrupt decline in building permits
in the first months of 2008 may signal coming problems
in the city’s housing construction industry.
The lingering effects of the credit crunch have begun
to cast shadows over the planned start dates of the
city’s most ambitious development projects—including
Hudson Yards, Atlantic Yards, and the relocation and
transformation of Pennsylvania Station into a renovated
transit-and-retail complex across the street.
The fact remains that measurable impacts of the nation’s
housing woes have been slow to emerge in New York,
and most of the city’s economic indicators have
continued to reveal resilience, at least through the
first months of 2008.
In particular, New York’s housing situation
as of early 2008 is quite distinct from the downturn
under way elsewhere in the United States, where housing
prices have fallen sharply, foreclosures have surged,
and new-housing construction has experienced its worst
decline in at least five decades.
Chapter
4. The Challenge of Building Housing that is Affordable
As the preceding sections have demonstrated, most
types of building are occurring in great volume within
the city’s borders, due largely to the continuing
prosperity of the people, businesses, and government
bodies that will be using, occupying, and paying for
them, even in a climate of spiraling rents and prices.
The intended constituency for one category of building,
however, lacks the means to handle its full cost.
That category is known as affordable housing.
Almost all housing commonly designated as “affordable”
in New York City, throughout the range of low- to
moderate-income projects, is built with some form
of public subsidy. Most of it can be found outside
Manhattan, primarily in Brooklyn and the Bronx; the
relatively little being built in Manhattan can be
found mainly north of 96th Street. Within central
Manhattan, affordability can be achieved through the
use of a variety of federal and city programs, such
as the tax-exempt and taxable bond programs administered
by the New York City Housing Development Corporation
(HDC); by using a range of low- and mixed-income programs
carried out by the city’s HPD; and under the
umbrella of various state programs that offer subsidized
mortgages or other forms of assistance to particular
constituencies, such as the elderly and working families.
The 421-a program, which abates property taxes for
some period of years to encourage building in most
parts of the city, has been considered by developers
to be especially effective, but starting in July 2008,
its eligibility requirements will be significantly
altered—with unfortunate results, some predict.
(See Appendix A.)
The “block-and-plank” (concrete block and
flooring) form of structure, which generally rises
to ten-to-twelve stories, and the “stick-and-brick”
(wood and brick) building type, which is reserved
for lower-rise buildings, are favored forms of construction
because they are less complex and costly to build
than structures above those heights. Stick-and-brick
technology is cost-effective enough to have built
thousands of units of outer-borough housing, affordable
even without subsidy. Programs such as those pioneered
in the Bronx by The Community Preservation Corporation,
or by the Nehemiah projects in Brooklyn, have played
a significant role in turning around once-devastated
neighborhoods.
Construction costs go up significantly for high-rise
buildings that require structural steel reinforcement,
additional fire-safety measures, and elevators, among
other features. In many cases, the cost of these elements
makes a larger structure economically infeasible,
even allowing for the additional number of units such
a structure could accommodate.
Nearly all affordable housing outside of Manhattan
is now built with nonunion labor, which is estimated
to cost from 20 to 25 percent less than its unionized
counterpart. There are exceptions: one contractor
who builds primarily for-sale housing in the affordable
range uses only union labor because he believes that
the savings realized from more efficient and professional
execution justify union labor’s higher wages.
Several of our interview subjects stated that New
York’s union labor force is appreciably more
efficient than union labor elsewhere. They say it
is also more efficient than local nonunion labor,
although, as one contractor related, nonunion contractors
who have built projects in Harlem and upper Manhattan
“have honed” their high-rise construction
skills in the process.
The rising costs of materials over the past four
years have been a major concern of developers of affordable
housing. Hard costs for affordable housing projects
outside of Manhattan, using nonunion labor, have risen
from estimates of $130 psf in 2004 to $170-$185 psf
in 2006 to levels lately that range upward of $200
psf. A low-rise, stick-and-brick building is now estimated
to cost $125-$150 psf if built with nonunion labor.
Recently, an eleven-story block-and-plank building
in Brooklyn, built with union labor, had hard costs
of $220 psf, while another in the Bronx “with
fewer bells and whistles” came in at $193 psf
in hard costs. Other recent estimates for projects
using union labor quote hard costs at $275 psf, depending
on the size and type of construction.
One developer has provided a comparison of recent
hard costs for market-rate and affordable housing
projects in Manhattan and the other boroughs:
-
For
a high-rise condominium or rental building in Manhattan,
hard costs range up to $450 psf if union labor is
used. The same type of construction in the other
boroughs would be less—about $375 psf.
-
For
a high-rise (fifteen-twenty story) building outside
Manhattan, hard costs would be about $300 psf if
nonunion labor is used.
-
For
a mid-rise (twelve-fifteen story) block-and-plank
building in Manhattan north of 96th Street, hard
costs would be $250-$275 psf for union construction.
If built nonunion, hard costs would be $200 psf.
While building materials were the most rapidly appreciating
cost factor during 2004-2006, pushing up hard costs
of construction for all types of building in New York
City, the most rapidly appreciating cost factor since
2006 has been land. Land costs have reached the point
where they now seriously threaten the capacity to
build housing that is affordable, even on the Lower
East Side, in Harlem, in upper Manhattan, and throughout
the other four boroughs, because for the first time
in a long time, market-rate developers think they
can make money building there.
Several developers have suggested that to moderate
increases in hard costs, it may be possible to find
substitutes for some construction materials, or to
lock in prices for critical inputs such as steel and
aluminum by purchasing futures contracts. Using nonunion
contractors and workers, a practice well established
outside Manhattan, also significantly lowers hard
costs.
The supply of land within the city’s borders,
however, is finite, and its effective expansion depends
on contentious and time-consuming revisions to the
zoning resolution. Most of the land the city accumulated
through tax foreclosure during the fiscal crisis of
the 1970s (the in rem program) has long since
been turned over to private developers, both nonprofit
and for-profit, to erect affordable housing. Thanks
to the city’s revitalization in recent years,
land has become much more valuable throughout the
city’s neighborhoods. Given the state of existing
subsidy programs, land’s current prices now constitute
the major barrier to constructing affordable housing.
In fact, several development companies indicate that
they have stopped purchasing land, one executive noting,
“We are waiting until the market breaks and prices
come down.”
The importance of land costs can be seen in the following
pro-forma examples of various types of affordable-housing
projects, assuming a 100-unit building outside of
Manhattan with no parking requirement, hard costs
of $225 psf, soft costs of 25 percent of hard costs,
and interest rates of 7.5 percent on the first mortgage:[9]
A. An Affordable Condominium that
needed to buy land at $120 psf and pay a developer’s
fee of 25 percent would require a subsidy of $85,000
per unit in order to yield a per-unit sales price
of no more than $460,000.
B. An Affordable Co-operative Apartment House
that needed to buy land at no more than $25 psf and
pay a developer’s fee of 25 percent would require
a subsidy of $85,000 per unit in order to yield a
per-unit sales price of $262,000 (affordable to families
of four with household income of $90,000 a year and
total housing costs not to exceed 35 percent of gross
income).
C. An Affordable-Rental Project with a construction
cost per unit of $281,000 and an average rental of
$2,782, with a first mortgage of $13.5 million supplemented
by an HDC subordinate loan with a value of $75,000
per eligible unit, would work only if the nonprofit
developer accepted a 4 percent fee and the land were
totally free.
Are There Ways to Moderate Land Costs and Expand
Availability?
The Bloomberg administration has rightly been lauded
for its reclassification of industrial or commercial
areas to permit housing development, and for allowing
greater density in some residential areas. Virtually
all experts interviewed for this report believed that
rezoning is the key to expanding the supply of land.
In fact, they argued strongly that as important as
the Bloomberg rezonings have been, they have not gone
far enough.
“Inclusionary zoning” generates affordable
housing by increasing the density allowed for development.
Rather than providing a monetary subsidy, the government
encourages the provision of affordable units by awarding
a market-oriented floor-area bonus. The classical
form of New York inclusionary zoning—going back
a couple of decades—applies in the densest areas
of Manhattan, essentially as a site-specific, ad-hoc
form of upzoning, increasing allowable floor area
by 20 percent in return for construction or rehabilitation
of affordable housing on-site or within a defined
geographical area. Each of the Bloomberg administration’s
recent major rezonings (Greenpoint-Williamsburg, West
Chelsea, Hudson Yards, 125th Street, etc.), by contrast,
has been designed with its own bonus formula. It remains
to be seen how effective and economically efficient
this system is at creating housing that people with
lower or moderate incomes can afford.
On the other hand, downzoning, which reduces the
density permitted in an area or neighborhood, effectively
drives the supply of land down—while driving
its cost up. And the requirements of “contextual
zoning,” which specifies building shapes or envelopes
and imposes absolute height limits, can hinder efficient
and economical design. One architect we interviewed
said it added “too many constraints on building
design and makes affordability extremely unlikely
in such zones.”
Decades-old rules force developers to provide off-street
parking for at least some percentage of housing units
in most neighborhoods outside the Manhattan core.
Parking that is located outside and around a building
absorbs land that would otherwise be available for
residential use. The necessity of providing these
parking spaces has rendered many potential development
sites unusable because they cannot accommodate both
the building planned and the spaces required. The
construction cost of a parking space within a building,
according to developers of affordable housing, ranges
from $30,000 to $50,000.[10]
And, since the relationship between spaces and apartments
is often not one-to-one, those costs get passed along
in the rent (or purchase price and maintenance charges)
paid by residents who may not be getting any benefit
from this amenity.
One new program, the New York City Acquisition Fund,
has been set up to provide short-term loans to affordable
housing projects for the purchase of land and buildings.
The fund, now at $230 million, is underwritten by
the city as well as financial and nonprofit institutions.
The Department of City Planning, in a major review
it conducted in early 2006, estimated that some 40,000
empty parcels of land, primarily in Brooklyn and Queens,
were available for residential construction, while
another 518,000 residential parcels have structures
on them that are smaller than the existing zoning
would allow.
In addition, developers estimate that schools, religious
organizations, and other nonprofit institutions own
several thousand parcels of land that could be used
for housing development.
Finally, as one developer remarked, “We can
always build up and leverage off air rights. Even
in an already dense city, we have land.”
Other Issues Facing Developers of Affordable Housing
Insurance
While the availability and cost of general liability
insurance and surety bonds have improved markedly
since the early part of this decade, when premiums
increased sharply and few insurance companies were
offering coverage in New York State, insurance costs
of construction in New York City remain high, say
industry experts.
According to one housing developer, “The issue
is liability insurance, which is much more expensive
here.” The main problem is New York State’s
Scaffold Law, formally known as Labor Law 240-241,
which imposes absolute liability on the builder in
the event a worker falls, e.g., from a scaffold or
bridge, regardless of whether he or she has been negligent.
Because of the Scaffold Law, some insurance companies
refuse to write general liability policies in New
York State, and others have publicly stated that their
rates in New York are substantially higher as a result.[11]
Legislation that would turn New York into a “comparative
liability” state is regularly introduced but
has never reached the floor of the legislature for
a vote.
Green Technology
One architect estimated that adding basic green features
(e.g., energy-efficient design for heating and cooling,
recycling gray water for non-potable uses) to residential
construction now adds between 3 and 5 percent to construction
costs, with payback of those additional sums expected
within a two-to-five-year period. He suggested that
a more accurate way to evaluate the return on these
investments is by calculating it over the building’s
full life span. “When operating costs are taken
into account, greenness contributes to affordability.
It costs so much less to heat and cool a green building
that even with the 3-to-5 percent construction premium,
the structure’s total cost (both to build it
and to maintain it over its useful life) is 12-15
percent less than it would be for its conventional
counterpart.” Investing in green features appears
to be more attractive to developers of rental buildings
than to condominium developers because they are more
likely to benefit directly from the longer-term payback
in operating costs.
Chapter
5. New York City’s Ambitious Program to Provide
Affordable Housing
“ Affordable housing is fundamental to our
long-term economic prosperity.” — Mayor
Michael Bloomberg
Mayor Bloomberg launched his New Housing Marketplace
Plan on July 1, 2003. By February 2006 it had grown
to become a $7.5-billion program to create and preserve
165,000 housing units for lower- and middle-income
households by 2013.
By March 2008, the construction or preservation of
almost 71,000 units had begun, according to a May
2008 HPD press release. Ultimately, 55.5 percent of
the units included in the Marketplace Plan will have
been newly constructed. The balance will be either
existing units that have been rehabilitated or units
already in the Mitchell-Lama middle-income housing
program that the city’s Marketplace Plan paid
to keep there through restructuring mortgages and
financing capital improvements.
About $5.8 billion ($4.5 billion from the capital
budget and $1.26 billion from the expense budget)
of the plan’s $7.5 billion total funding will
be supplied by the city. Non-city sources are expected
to fund the remaining $1.1 billion. That amount breaks
down as follows:
-
Almost
$600 million to be derived from federal Low-Income
Housing Tax Credits
-
$360
million from the New York City Acquisition Fund,
which the city, businesses, and nonprofit organizations
together created for the acquisition of land and
buildings owned by the private sector
-
$130
million from the New York City Housing Trust Fund,
representing surplus revenues from the Battery Park
City Authority
-
$50
million in funding received by the Lower Manhattan
Development Corporation (LMDC) from the federal
government to help New York City recover from the
destruction inflicted on September 11, 2001
New York City’s Independent Budget Office (IBO)
conducted a review of the first four years of the
program.[12] It noted that the
plan had preserved 40,200 units, or 55 percent of
the ultimate number to be preserved. Less new construction
was accomplished—some 23,700 units, or 26 percent
of the ultimate number.
On balance, the IBO found, “the city’s
ability to accomplish the remaining plan goals for
preservation appears fairly solid … with expected
resources available to finance 92 percent of the target,
but that the city’s capital budget would be able
to finance only 49 percent of the units needed to
meet the 2013 goals for new construction.”[13]
The discrepancy between rates of preservation and
new construction can probably be explained by the
steep and inflating costs of the latter. Rehabilitation
programs entail many of the same cost challenges as
new construction, but the preservation program includes
financial remedies as well as physical reconstruction,
bringing down the average cost per unit.
The IBO report raised concerns that HDC may incur
difficulties in financing its remaining share of 11,000
units by 2013, partly because the portion to be paid
out of HDC reserves was largely used up in the first
four years, and partly because the volume cap for
both tax-exempt and taxable private-activity bonds,
which are used to finance primary mortgages, is being
approached.
In addition, the IBO report questions whether the
amount of money expected from off-budget sources will
be available—particularly the market-driven programs
of 421-a, which are expected to yield 4,500 units.
There is also concern that the 2,550 units expected
from the inclusionary zoning program will not materialize
by 2013, since the number of affordable-housing units
that are produced directly depends on the volume of
market-rate development.
The IBO report concludes that “a reassessment
of the goals and assumptions may be necessary to help
ensure that the plan carefully balances its ambitions
with the means available to achieve them.”
Chapter
6. Recommendations
Just about every aspect of constructing a building
has long been more expensive in New York City than
elsewhere in the nation. Most of the cost factors
responsible are beyond any individual’s direct
control, being subject to the dynamics of national
and global markets in materials and labor. The high
and rising levels of these costs in the face of shrinking
credit, growing unemployment, and declining income
growth suggest that the economic context of supply
and demand for housing is becoming less robust than
it has been for the past few years. These trends will
affect the volume of all forms of construction to
varying degrees, despite today’s low vacancy
rates, which is an indication of pent-up demand.
To counter these trends, policymakers need to focus
on those areas of construction costs that are within
their power to reduce. Because every sector of New
York’s construction world is competing for the
same supply of goods and services, cost reductions
in some sectors (e.g., commercial, institutional)
will benefit the other sectors (residential, public
works). The segment least able to survive the growing
gap between prices, which reflect high and rising
construction costs, and incomes, which have been declining
in real terms, is a component of the residential sector—housing
for lower- and middle-income people. Because currently
available subsidies are not large enough to close
that gap, the focus of New York City’s government
should be on removing from the building process the
arbitrary and redundant factors that unnecessarily
drive up costs. By establishing conditions that permit
the construction of housing inexpensive enough for
this population to afford, the city gives itself some
chance of remaining a place where every income level
is represented.
Land is the single most important cost factor, but
high wages, hidden labor costs, regulatory requirements
that delay local builders while discouraging outside
builders from entering the market, and transportation
difficulties all contribute their own premium to the
cost structure of construction. To make a dent in
the problem, New York needs to address above all the
challenge of land costs, while not failing to address
the policies and practices that make a difficult set
of conditions worse than they need to be.
1. Reduce delays in construction time, and
thus cost, by streamlining the city’s regulatory
and permitting processes.
Complaints about the inefficiencies and contradictions
in the city’s permitting requirements and inspection
practices were recurrent in the interviews conducted
for this study. The issue is not so much the purposelessness
of the required regulations and permits but the costliness
of the process and the amount of time it consumes.
Reducing the difficulty and costs of meeting regulatory
requirements could also help to reduce the barriers
to entry confronting contractors and subcontractors
based outside New York City, thus easing a major shortage
in the city’s construction economy and lowering
overall costs of construction.
No element in the regulatory process has been identified
as the prime culprit in adding to cost; rather, the
cumulative effect of the myriad steps required throughout
the process causes frequent and protracted delays
and thus adds substantially to the overall costs of
construction. While the details can be best addressed
by agencies working in concert with developers, three
areas of improvement can be identified:
Reviews
-
No
longer impose various forms of review on forms of
construction identical to those that are exempted.
Mandatory reviews of the environmental impact of
new government-subsidized housing, for example,
encourage developers to build nonsubsidized housing,
which does not require them.
-
Instead
of sequentially granting permits demanded by laws
covering different aspects of the building process,
do so in parallel. For this to occur, there needs
to be better coordination between agencies, particularly
the Department of Buildings and the Department of
Transportation. The standard eighteen months from
first application to last approval could be reduced
to six to eight months in this fashion.
Certificates of Occupancy
2. Continue to increase the amount of buildable
space available for residential development.
The Bloomberg administration’s rezoning of vast
swaths of the city, such as Hudson Yards, Atlantic
Yards, the Brooklyn waterfront, downtown Brooklyn,
and Flushing and Jamaica in Queens, has opened these
areas to redevelopment. Although the increased availability
of land, and the more intensive use of it that is
now permitted, have not yet slowed the rapid appreciation
in prices, continuation of this effort will surely
do so. Such measures are particularly necessary in
view of the depletion of the in rem stock, which the
city acquired through tax foreclosures during and
after the fiscal crisis of the 1970s, and which it
then sold to developers at almost no cost. At present,
the rejuvenation of formerly depressed neighborhoods
where in rem housing was plentiful has opened would-be
developers of affordable housing to competition from
for-profit developers who seek to acquire the same
parcels. The antidote to the price escalation that
has resulted is in effect the creation of more developable
land through changes to the zoning resolution.
Steps should include:
-
Rezoning
large tracts of underdeveloped land that still lie
fallow along the city’s waterfront and in old
manufacturing districts, particularly in Brooklyn
and the Bronx. These could be prepared to receive
mixed-income housing, stores, schools, and recreational
facilities.
-
Upzoning
more areas of low density, particularly those near
subway stations outside of Manhattan’s central
business district (CBD). Since the city cannot expand
its boundaries, it must permit increased density
(and thus higher buildings) in many of its neighborhoods
if it is to accommodate growth while attempting
to keep land costs manageable. Given the superior
economics of mid-rise (twelve-fifteen story) buildings,
City Planning should set density levels for some
neighborhoods that would correspond to the residential
capacities of such buildings as a way of promoting
their construction.
-
Eliminating
or drastically limiting the obsolete 1961 requirement
to provide on-site parking in mid-density residential
zones outside the Manhattan CBD. The requirement
applies even to areas and projects whose residents
are unlikely to own cars. Where the requirement
is now satisfied by on-site surface parking, doing
this would make more land available for housing.
Where the requirement is now met with on-site garage
space, this change would significantly lower construction
costs, since building parking facilities placed
within buildings costs between $30,000 and $50,000
per space.
-
Encouraging
the granting of variances to schools, religious
institutions, and other nonprofit organizations
that own adjacent parcels on which affordable housing
could be built.
3. Preserve the use of nonunion labor in the
construction of affordable housing.
While unions have, in recent years, shown greater
willingness to allow their members to work on projects
that involve a mix of union and nonunion labor, the
bulk of affordable housing outside the Manhattan CBD
is still being built with nonunion workers, who earn
wages 20-25 percent lower than those of their union
counterparts. The unions are now, however, applying
considerable pressure to adopt “prevailing wage”
rules at mixed-workforce building sites, which would
require developers to pay nonunion workers the same
wages they pay union workers, thereby removing the
incentive to hire the former in order to realize cost
savings. Prevailing-wage rules add further costs by
requiring developers to prove that they are in compliance
with the law.
4. Reform the state’s negligence laws.
Legislation has regularly been introduced in Albany
to amend the state’s Scaffold Law (Labor Law
240-241) to state that when worksite injuries occur,
principles of comparative liability will apply to
contractors and building owners, rather than absolute
liability principles, which have been in effect for
more than a century. In other words, damages for negligence
would be apportioned according to the various parties’
degrees of negligence. This single action would lower
the costs of litigation; it would also lower the cost
of insurance by attracting more insurance companies
willing to write general liability policies in New
York City and New York State. In addition, the legislation
would bring New York State’s liability laws into
alignment with such laws in the other forty-nine states.
5. Monitor the unfolding impact of the recent
curtailment of tax abatements.
Recently the state revised New York City’s 421-a
program in a number of ways, including reducing the
areas where property taxes on new housing could be
for all intents and purposes automatically abated.
(Depending on the project, the abatements may remain
in effect from ten to twenty-five years.) It remains
to be seen whether the areas now excluded from the
program have progressed as far as the state and city
believe they have and whether they are, in fact, able
to attract development without the spur of the program,
which makes housing more affordable by reducing purchasers’
overall carrying costs.
Appendix A. Changes to the 421-a Program
In 2006-2007, the city and state enacted legislation
to modify the 421-a provision of New York’s Real
Property Tax Law just before it was scheduled to sunset.
The changes take effect as of July 1, 2008. There
is wide agreement in industry and government circles
that many projects were accelerated so that they could
“get into the ground” before this date and
so maintain eligibility for tax benefits under the
previous 421-a scheme.
The original Section 421-a was designed to encourage
development in the early 1970s, when virtually no
new housing was being built in the city. It served
as a corrective to the property-tax system’s
long-standing imbalances in favor of existing structures
over new construction of multifamily housing by providing
a tax abatement that diminished over some number of
years. (The exact period of time depended on location,
use of government subsidy in construction, and provision
of affordable housing.) Essentially, 421-a eases a
new building into the property-tax system over time.
However, as documented in this report, by 2007 housing
construction was entering a fifth year of strong activity
throughout the city. Advocates for affordable housing,
internal and external experts on the municipal budget,
and a range of politicians asked why the city should
forgo hundreds of millions of dollars in tax revenues
from the residents of luxury buildings, who could
well afford to pay their full share of property taxes.
In fact, the abatement program made possible a wide
range of construction. Perhaps the main beneficiaries
were smaller developers, outside the Manhattan core,
who were able to build homes, both with government
subsidies and without, that moderate- and middle-income
New Yorkers were able to afford specifically because
of the reduced carrying costs resulting from the abatement.
Major changes made to 421-a include:[14]
Replacement of the negotiable certificate program
with an Affordable Housing Trust Fund. In anticipation
of the 2008 changes, the city stopped issuing written
agreements for negotiable-certificates projects as
of December 2007. This program had provided developers
of affordable housing projects with certificates to
sell to developers of market-rate condominiums, co-ops,
or rental apartments in the city’s more affluent
neighborhoods. These sales directed a funding stream
to low-cost development, and market-rate developers
cashed in their certificates for greater tax benefits
than they would qualify for otherwise.
Tax revenues realized from elimination of the certificates
will be allocated to an Affordable Housing Trust Fund,
targeted at the city’s poorest communities.
Expansion of the “geographic exclusion area”
from central Manhattan and Greenpoint-Williamsburg
to all of Manhattan and neighborhoods throughout the
other four boroughs. (See map.) In the areas in which
participation is not as of right, abatements are available
only to those projects that provide affordable housing.
Maximum (twenty-five-year) benefits are limited to
projects providing the affordable units on-site. Now
developments in not only the Upper East Side and Park
Slope but in Bushwick, Crotona, and New Brighton must
meet these requirements for abatement eligibility.
Establishment of a cap on the total amount of
421-a tax benefits that any market-rate unit may receive,
based on its assessed value. In 2008, only the
first $65,000 of an apartment’s billable exempt
assessed value will be eligible for the exemption;
the cap will be increased by 3 percent, compounded
annually.
Notes
- “General conditions” is a catchall term
to account for unbudgeted costs to contractors from,
for example, delays and the additional bond and surety
coverage that consequently must be purchased, as well
as from escalation in the cost of materials.
- There were two exceptions. One developer, familiar
with working in other U.S. cities, regards New York
City’s zoning and building codes, which allow
significant building to be carried out “as of
right,” as a major advantage. A developer of
affordable housing said that he did not see the city’s
regulations as a major barrier: “Even though
these slow things down, and time value is an enormous
cost, complex regulations make sense in New York.”
- The American Community Survey (ACS) for New York
City 2006, U.S. Bureau of the Census.
- U.S. Bureau of Labor Statistics, New York Regional
Office.
- This detail is reported in the 2008 Income and
Affordability Study, New York City Rent Guidelines
Board,
June 6, 2008.
- Miller Samuel Inc., Real Estate Appraisers &
Consultants, www.millersamuel.com.
- Brooklyn Year End 2007, The Corcoran Report,
www.corcoran.com.
- Marcus & Millichap, Real Estate Investment
Services, www.marcusmillichap.com.
- Examples provided by a financial cost estimator
of affordable housing projects.
- This requirement appears to be even more antiquated
in a time of $130-per-barrel oil and a place where
the mayor has set out a series of recommendations
to lower the city’s carbon footprint by 2030.
The parking requirement has been widely criticized
by city planning experts including Alex Garvin, a
former member of the City Planning Commission, and
Nick Peterson, an urban planning consultant, who concluded
in an op-ed in the New York Times of December
23, 2007: “Eliminating the parking requirement
will reduce traffic congestion and pollution, and
it will free acres of land for new housing, stores
and offices. It will allow all developers to build
more affordable housing and encourage more convenient,
transit-friendly retail and commercial destinations.”
- In a memorandum in support of Labor Law 240 Reform,
April 29, 2003, Zurich North American’s Construction
Division cited rates for scaffolding insurance of
73.7 per $1,000 sales in New York City, compared with
19.1 in New Jersey, 14.5 in Illinois, and 13.9 in
Massachusetts.
- The Mayor’s New Housing Marketplace Plan:
Progress to Date and Prospects for Completion,
New York City Independent Budget Office, Fiscal Brief,
November 2007.
-
Italics added. IBO’s projections for the
2008-2013 period are based on the average per-unit
costs of the program that obtained between 2004
and 2007, and on the assumption “that construction
costs are relatively flat” in the forecast
years.
-
421-a Legislation Overview and FAQ, updated February
28, 2008, New York City Department of Housing and
Preservation Development, http://home2.nyc.gov/html/hpd/downloads/pdf/421a-FAQ.pdf,
accessed June 2008.
Bibliography
Data Sources
Corcoran Report (www.corcoran.com),
for data on median prices of co-ops and condominiums
in Brooklyn
Engineering News-Record, ENR (www.enr.com),
a division of McGraw-Hill, for data series on: cross-city
comparison of union scales in selected trades; building
cost index for New York City and twenty-city comparison
index; prices of selected building materials.
Marcus & Millichap, Real Estate Investment Services
(www.marcusmillichap.com),
for rental prices in Manhattan and Brooklyn.
Miller Samuel Inc., Real Estate Appraisers &
Consultants (www.millersamuel.com),
for data on inflation-adjusted sales prices of co-ops
and condominiums in Manhattan.
New York State Department of Labor (www.labor.state.ny.us),
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annual wages in the construction industry.
Turner Construction Company (www.turnerconstruction.com),
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U.S. Bureau of the Census (www.census.gov),
for the American Community Survey, as well as information
on building permits, population census, and U.S. housing
starts.
U.S. Bureau of Labor Statistics (www.bls.gov),
for the Producer Price Index for construction-related
products, as well as national and New York area employment
and inflation.
Reports and Documents
421-a
Legislation Overview and FAQ, updated February
28, 2008, New York City Department of Housing Preservation
and Development, accessed June 2008.
Affordable Housing in New York City, Steven
L. Newman Real Estate Institute, Baruch College of
the City University of New York, 2005.
Armstrong, Regina, with Tina Lund, Up from the
Ruins: Why Rezoning New York City’s Manufacturing
Areas for Housing Makes Sense, Manhattan Institute,
2005.
Cohen, Hope, Rethinking Environmental Review:
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2007.
Garvin, Alex, and Nick Peterson, “The High Price
of Parking,” New York Times, December
23, 2007.
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LePatner, Barry B., Broken Buildings, Busted Budgets:
How to Fix America’s Trillion-Dollar Construction
Industry, University of Chicago Press, 2007.
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November 2007.
New York City Construction Outlook, Construction
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2007.
Review of the Financial Plan of the City of New York,
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Salama, Jerry J., Michael H. Schill, and Jonathan
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