Cutting construction costs key to first Atlantic Yards tower; is modular option part of overall effort to get union concessions as contracts expire?

There was some useful information in the sycophantic Real Deal profile article headlined Ratner's refute: Developer insists Atlantic Yards is moving forward (and critiqued here): the effort to control construction costs, whether via experimental modular construction or union concessions, is crucial to the developer's profits, and to the timing of the promised housing.

According to the article:

Profits from the planned residential buildings are "going to depend on where construction costs wind up," [Bruce] Ratner said.

[Maryanne] Gilmartin said the company has finished the schematic design phase of the project's first residential tower, a 400-unit building on Dean Street that will be 50 percent affordable units and 50 percent market rate.

The company is in the process of developing two separate possible designs for the building -- one modular, aimed at cutting costs, and one conventional. It expects to send contract documents out to bid on both designs in the "latter part of the year," Gilmartin said.

It's possible that the modular option is aimed as leverage to get unions to make project-specific concessions, as I've suggested. So the conventional design also would be aimed at cutting costs, though in a different way.

After all, Forest City Ratner famously halted work halfway through the construction of the Beekman Tower, then renegotiated union contracts to save money.

The RPA report

That project labor agreement (PLA), the first major one in the 2009 cycle of PLAs, is cited in a new report from the Regional Plan Association, Construction Labor Costs in New York City: A Moment of Opportunity (embedded below), geared to generate discussion as 23 construction union contracts are set to expire on 6/30/11.

The report, researched and written by Julia Vitullo-Martin and Hope Cohen of RPA's Center for Urban Innovation (and both formerly of the Manhattan Institute), challenges not high wage rates but work rules and procedures. From the press release:

Regional Plan Association (RPA) today issued a major report analyzing hidden costs of union construction in New York City, making it increasingly non-competitive. As a result, "open shops" (mix of union and nonunion labor) are 20-30% less expensive than full-union shops and are growing rapidly, from just 15% of the market in the 1970s to about 40% now, jeopardizing the unionized construction industry in New York City.

The 52-page report, "Construction Labor Costs in New York City: A Moment of Opportunity," a first-ever, in-depth analysis of the structure and costs of a notably secretive industry, found the far higher costs of union construction are primarily due to featherbedding, legacy work rules and inefficient practices - some of which date back over one-hundred years - rather than significantly higher wages and benefits.

The report, which comes as twenty-three construction union contracts are set to expire in just two months on June 30, 2011, is based on interviews with seventy-four industry, labor, and government leaders and comes at a time when unemployment in the construction industry is estimated to exceed 30%.

The report finds that a 10 % cost differential between union and nonunion construction is tolerable to many major developers and contractors, while the existing 20-30 % differential is not.

Examples cited as causes of excess cost include requirements for:

• higher paid operating engineers on hoists and elevators, even though lower paid laborers could readily perform the work;
• over-staffing of two or more workers to do the work of one, such as the unique contractual mandate that steamfitters work in pairs; and
• temporary (standby) services with multiple high-paid trades on site at all times, including plumbers and electricians, whose services are rarely needed.

It's hard for me to judge this issue, but it is telling that crane operators, under fire for seeming redundancy, would not comment in a 4/9/11 New York Times article.

Then again, as one crane operator told the Times:

Still, he said, it would be foolish to assume that getting rid of those jobs would make buildings significantly cheaper through labor savings. ''They're going to put it in their pocket,'' he said of contractors.

Similarly, as one commenter suggested on the Local 157 blog in response to the Building Trades Employers' Association effort to reduce costs:

How about if we cap the contractors profit margin and massive payouts to their managers and CEOs. What exactly will the contractors be giving back.

Cost per square foot: $757?

The RPA offers an interesting analysis of

a 20,000-square-foot site (200,000 gross square feet in zoning floor area) in Brooklyn and Manhattan, using 70 percent debt financing at an 8 percent interest rate. In addition to the zoning floor area, the job requires building 20,000 square feet of below-grade space and assumes a 16 percent residential loss factor. After deducting for lobby, ground floor commercial, amenities, and above grade mechanical spaces, only 150,000 sellable square feet remain.

This is about half the size of the first residential building planned for Atlantic Yards, so presumably Forest City Ratner would have the advantage of amortizing land costs over a larger structure. And the developer could save significantly on financing if it uses some money from, say, immigrants seeking green cards.

But there may well be higher costs to build at the Atlantic Yards site. And, of course, this applies to condos, not rentals, and the first rental building would be half-market-rate, half subsidized.

So, no wonder Forest City Ratner is exploring modular construction.

No more public housing?

The report offers some chilling details about the housing market:

And while New York’s high construction costs put the city itself at a competitive disadvantage in relation to other cities, they also place a disproportionate burden on New York households. New York has become prohibitively expensive for almost all households except the extremely wealthy and the governmentally subsidized. (The government housing sector, however, is facing crises of its own. New construction for public housing, for example, now costs almost $500,000 per unit, which is not tenable.)

That latter statistic is sourced to "New York City Housing Authority (NYCHA) General Manager in private interview."

The Northside Piers mention

I wonder about the RPA report's citation of one project:

All segments of the industry agree—at least in private—that the union advantage in quality and speed of construction has diminished with every new project that is built nonunion. This may be the most important—and enduring—construction trend of our time. An excellent example is Northside Piers, a matched pair of luxury residential towers erected by Toll Brothers and L+M Development Partners on the Brooklyn waterfront. The union-built, 30-story Tower 1 took 26 months with hard costs at $365 per square foot. The nonunion-built, 28-story Tower 2 took 31 months with hard costs at $280 per square foot. For a 300,000-square-foot building, this differential translates to $25.5 million. Such savings can easily exceed the money lost in additional financing costs and delayed sales proceeds or rent collection.

But Williamsburg activist Phil DePaolo, who has chronicled residents' complaints about shoddy construction, told me that 1) Tower 1 was built in part with non-union labor and 2) the problems in the buildings seem mainly based on the developer's choice of lower-cost materials.

Bloomberg out of the fray

Crain's Insider reported 4/26/11 that Mayor Mike Bloomberg, mindful of not alienating unions, is staying out of the fray:

RPA Power Play Not Enough
The Regional Plan Association has joined the chorus of contractors and developers urging Mayor Mike Bloomberg to push for lowering the costs of unionized construction. But the mayor is still unlikely to become involved in those efforts. Gary LaBarbera, whose Building and Construction Trades Council represents about 100,000 workers, is a key opponent of any concessions and a close ally of the mayor. LaBarbera endorsed Bloomberg in 2005 and 2009, and was an outspoken supporter of his extension of term limits.

20110501 RPA Construction Costs