Monday, September 15, 2014

Latest estimate halves cost-savings from (best-case) modular construction, but delays make it worse; platform cost mitigated by leap in land value

Even before we learned that Forest City Ratner's modular construction gambit was not working as planned, a revised New York State document estimated that the cut in costs/wages from a best-case modular buildout would be only 11%-12%, rather than the 22% previously estimated.

Why? The previous document had left out a key element in Phase 2 of the Atlantic Yards project: the platform over the railyard.

The revised estimate translates into a 12% cut in tax revenues--half the previous projection--compared to conventional construction. On this specific metric, it would be not as bad a deal for the public than previously estimated.

Overall, the revised estimate suggests that, in the best case, the savings from modular would be far less than the 25% Forest City was projecting only a year ago (or 15-20% less, in other projections).

Without more detail, we don't know exactly why the projection changed so much. Either the savings were overstated from the start, or two estimates, issued this year as part of the court-ordered Supplemental Environmental Impact Statement, were already acknowledging that the first tower was taking long than assumed.

Cost overruns/delays change the picture

For now, however, any cost estimate is suspect, since the best-case projection of the modular buildout is unlikely, given the news of extensive cost overruns for the first modular tower, B2, and the bitter legal dispute between Forest City and Skanska.

Forest City's new partner/overseer on Atlantic Yards/Pacific Park, the Chinese government-owned Greenland Group, has decided that the next towers will be built conventionally.

So we won't be hearing the much-promoted claims that modular construction, shifting most work to the factory at the Brooklyn Navy Yard, would mean fewer trucks, less waste, and safer working conditions.

Modular construction was supposed to save time, but hasn't. B2, which broke ground in December 2012, was originally said to take 20 months (though Forest City in one earlier interview hoped for 14 months!), The delivery date then became December 2014, a two-year buildout.

As of April 2014, it was slated to open in the fourth quarter of 2015, a three-year buildout. Now there's no projected opening date. Savings evaporate with delay, and clearly the cost projections are altered by increased, unanticipated costs.

Error in environmental review leads to recalculation

This article revises what I wrote on 3/31/14, Revealed: Atlantic Yards modular construction means 22% drop in costs/wages, 10% cut in jobs, 24% loss in tax revenues.

I didn't miscalculate. I was merely reporting on the data in the Draft Supplementary Environmental Impact Statement (Draft SEIS), released by Empire State Development after preparation by the ubiquitous consultant AKRF.

It  seemingly contrasted with the Forest City Ratner statement, as shown in the slide at right, that modular construction would require the same amount of person-hours as conventional construction (though with lower wages).

Yes, my doubt was unfounded, it turns out, but Forest City had not released detailed information to bolster its statement. (When it comes to statistics, well, the developer's record is less than stellar.)

When ESD accepted and approved the Final SEIS on 6/12/14, the Executive Summary indicated an error, though without a clear admission: "The numbers included in this FSEIS have been revised to reflect inclusion of the costs associated with the platform work, which were not included in the DSEIS."

That led to the recalculation: "the investment for construction of Phase II of the Project using modular construction methods is estimated to equal about $2.15 billion in 2013 dollars. This would represent about a 12 percent reduction from costs using conventional construction methods."

That also means an 11% cut in wages, and only a 1% cut in job-years.

The statistics, from Final SEIS

From Final SEIS
Direct employment would be about 9,051 job-years, a cut of 97 job-years. The use of modular would generate 7,538 job-years in the state, bringing the total direct and generated jobs from construction of the projected development to 16,589 job-years, a cut of about 176 job-years.

Direct wages and salaries would be $653.20 million, in 2013 dollars, an 11% reduction from conventional construction. In the broader New York State economy, total direct and generated wages and salaries from construction would be about $1.11 billion, again an 11% cut.

The total $153.41 million in tax revenues for New York City, MTA, and New York State, in 2013 dollars, is about 88% of the total estimated for conventional construction, or, a 12% cut.

The statistics, from the Draft SEIS

As I wrote, the Draft SEIS stated:
Based on the preliminary estimates, the investment for construction of Phase II of the Project using modular construction methods is estimated to equal about $1.90 billion ($1,895.66 million) in 2013 dollars. This would represent about a 22 percent reduction from costs using conventional construction methods.
From Draft SEIS
The cost of the platform, and who's paying

The Final SEIS estimates the total cost of Phase 2 at $2,145,650,000, while the Draft SEIS estimate was $1,895,000,000. The difference is just about $250 million, or $249,990,000.

That $250 million sum apparently represents "costs associated with the platform work," which may or may not include spinoff costs.

The cost of the platform has been estimated at between $200 million and 300 million. In March 2010, then-Daily News columnist Errol Louis wrote:
State agencies and the Ratner company haven't been blameless. We still don't know who will pay to create an expensive deck over the Vanderbuilt railyards, the section of the project area where thousands of units of housing are supposed to be built.

The expected cost - as much as $200 million to $300 million by some estimates - may get picked up by Ratner, or the bill may get handed to the city or state a decade from now, long after human and institutional memories of the original deal have faded.
May get picked up by Ratner? That's the developer's responsibility, and part of why the cash payment for the 8.5-acre railyard--$100 million, with a gentle interest rate--was so little.

Now Greenland Forest City Partners, the new joint venture, is responsible for the platform. They may use current or--I'd bet--future EB-5 funds to pay. If they get the city or state to pay, well, that would great for their shareholders, less so for the public.

The value of development rights: more than $1 billion?

As I wrote, development rights for the 8.5-acre Vanderbilt Yard, after a MTA-requested appraisal, were appraised in 2005 at $75/square foot, for 3,615,790 developable square feet.

That appraisal estimated the platform cost at between $54 million and $72 million and thus arrived at a value of $214.5 million.

But development sites in downtown Brooklyn are now valued at $350/square foot, a broker stated this past April. (The Junior's site got a bid of $450/sf, as noted by Noticing New York, which analyzed land values at some other development sites.)

If we calculate platform development rights at $300/square foot, the value would be $1,084,737,000. At $350/square foot, the value would be $1,265,526,500, and at $400/sf, the value would be $1,446,316,000. 

If Forest City and partner are paying some $500 million--a rough estimate if you add the cash, the (higher-cost estimate) platform, the cost of the new subway entrance and carrying costs--that looks like a very good deal.

How much will railyards support?

It's not clear, the development rights over the railyard may cover more than than 3,615,790 developable square feet. 

The six towers north of Pacific Street east of 6th Avenue--B5 through B10-- would total 3,487,392 square feet, though they would not be coterminous with the railyard. They would be built partly over what is now private property jutting south Atlantic Avenue, but they likely cannot be built without the platform. (See first graphic below.)

Add in part--40%--of the 670,000 square foot arena that sits over the railyard, as well as much of B4, which should have 824,629 square feet. It deserves a recalculation.
From Develop Don't Destroy Brooklyn

Two recent versions of  Atlantic Yards/Pacific Park 

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