Regional Outlook

Market Pegged for Downslide But N.Y.C. May Be Up

After outpacing the nation in 2005 construction starts, New York, New Jersey, and Connecticut are expected to pull back this year, though New York City may defy the trend.

by Tom Stabile

The construction markets in New York, New Jersey, and Connecticut outpaced the nation in 2005 - but may bring up the rear in 2006.

The region's relatively strong 2005 probably won't repeat this year, according to projections from McGraw-Hill Construction's analytics and consulting group presented at a November conference sponsored by New York Construction.

While the nation's value of construction starts was pegged to rise 8 percent in 2005, from $589.2 billion in 2004 to $636.7 billion, the regional market outpaced it with a 12 percent rise from $39.3 billion in 2004 to $44.0 billion last year, according to Jennifer Coskren, senior economist for the analytics group.

Coskren said the region's overall woes owe mostly to a projected correction in residential construction, with most other sectors faring well.

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"We expect the tristate area will see a favorable market for construction in commercial and industrial," she added. "That will be a beacon of hope for the market."

Coskren said the region's relative sluggishness shows up in slightly weaker job growth than the nation. Citing data from Economy.com, a Moody's Corp. economic analysis service, she said the national job growth rate of 1.7 percent in 2005 outpaced all three states, with New York at 1 percent growth, Connecticut at 1.2 percent, and New Jersey at 1.4 percent.

The job data for 2006 isn't much brighter, with New Jersey project to post 1.9 percent growth. New York's projected 1.4 percent rate and Connecticut's 1.3 percent both trail the nation's 1.8 percent job growth mark this year.

"Connecticut has been hit by consolidations in the insurance industry and problems in the hedge fund industry," Coskren said.

The regional slowdown may not apply directly to New York City, according to the New York Building Congress, whose president, Richard Anderson, also spoke at the November conference.

Anderson said the city was expected to log record construction spending in 2005 of $18.4 billion - 2.8 percent above 2004. The 2006 spending tally is pegged at $21.4 billion. The building congress data measures current-year spending on all active construction projects.

The $18.4 billion for 2005 fell short of the nearly $20 billion that Anderson had projected a year earlier, a gap he attributed to budget wrangling that delayed implementation of the Metropolitan Transportation Authority's $17.8 billion capital program.

"The reason we're expecting an even better 2006 is because we're carrying forward some of this work," he added. "We see a very good 2006 in all five boroughs and in every sector of construction."

A Weaker Housing Market Expected

The major obstacle regionally is the expected cooling of the residential sector.

"On multifamily housing, the tristate area has been booming," Coskren said.

The downturn is actually a national phenomenon, with McGraw-Hill Construction estimating a 1 percent dip to $365.6 billion in the value of housing construction starts, including single-family units. The three regional states would be down by 4 percent, falling from $18.7 billion estimated for 2005 to $17.9 billion this year.

The region's large multifamily housing sector had a strong 2005, with construction starts of new units pegged to rise 4 percent in New York, 21 percent in New Jersey, and 7 percent in Connecticut. The New York region led the nation through the first ten months of the year with 36,274 new multifamily units overall, thanks to groundbreakings on projects such as the $185 million Renaissance Square condominiums in White Plains, N.Y., and Clinton Green, a $170 million mixed-use project on Manhattan's West Side. But the region's multifamily engine - which roared from starts of about 14,000 units in 1995 to 51,500 units in 2005 - is projected to sputter significantly for the first time in 15 years, sinking to 42,100 units in 2006, Coskren said.

"We're going to see a contraction, particularly at the high end," she added.

The fall is expected across the region - 21 percent in New York, 14 percent in New Jersey, and 7 percent in Connecticut.

Hope Strong for Commercial Sector

For commercial development, McGraw-Hill Construction projects that the region will eclipse the nation this year. The three states are expected to expand by 17 percent, from an estimated $5.1 billion in construction starts in 2005 to $6 billion, topping a 9 percent increase nationally.

The office sector is expected to rebound regionally after an uneven 2005, in which New Jersey was slated to jump 49 percent in new square footage, with Connecticut rising 19 percent. New York was expected to plummet 44 percent in 2005, dragging the region down from 10.1 million sq. ft. in 2004 to 7.7 million sq. ft. last year.

All three states are expected to have a strong 2006, upping office starts to 11.1 million sq. ft., with a 60 percent upswing in New York. That's due partly to groundbreakings in Lower Manhattan on the 2.6-million-sq.-ft. Freedom Tower and a 2-million-sq.-ft. tower for Goldman Sachs.

New Jersey's rise in office square footage this year is pegged at 30 percent and Connecticut's at 15 percent.

"Demand fundamentals are good and vacancy rates are coming down," Coskren added.

On the retail side, the region posted a healthy rise in construction in 2005, with square footage of starts rising by an estimated 32 percent in New York and 4 percent in Connecticut, though New Jersey slipped by 7 percent.

"The strength we saw in the retail market was more from a spate of smaller stores," Coskren said.

The three-state region is projected to slump from the 17.4 million sq. ft. of starts estimated for 2005 to 16.1 million sq. ft. this year. The drop is all on New York's shoulders, whose square footage tally should fall 23 percent and offset projected hikes of 15 percent in New Jersey and 7 percent in Connecticut, according to the McGraw-Hill Construction estimates.

In the warehouse sector, New Jersey should remain a national leader. Regional square footage of starts for 2005 was projected to grow, rising 14 percent in New Jersey, 4 percent in New York, and 104 percent in Connecticut, thanks to projects such as a 217,000-sq.-ft. Bob's Discount Furniture warehouse in Norwich.

For this year, only New Jersey is expected to keep pace with a rise of 4 percent in square footage of starts, according to McGraw-Hill Construction. New York is slated to drop 22 percent and Connecticut by 5 percent, with the region sagging from an estimated 10.5 million new sq. ft. in 2005 to 9.9 million this year.

The lodging sector may have a banner year regionally after an unspectacular 2005, Coskren said.

"Of all of the commercial sectors, hotel is the one we're most optimistic about," she added.

She said 2005 is expected to show a slight drop to 4 million sq. ft. in starts - despite a 4 percent rise in New York - because of offsetting drops of 13 percent in New Jersey and 23 percent in Connecticut.

But the region is pegged to start 5.4 million sq. ft. worth of hotel construction this year, vaulting 6 percent in New York, 65 percent in New Jersey, and 160 percent in Connecticut, where the Foxwoods Resort Casino in Mashantucket is planning an 850-room hotel expansion.

Institutional Sector May Be a Wash

On the institutional side, the region is moving opposite to the nation. McGraw-Hill Construction's data projects a 7 percent hike in national construction starts this year to $101.1 billion, but a 3 percent regional decline, from an estimated $10.2 billion last year to $9.9 billion in 2006.

While region-level data on school construction starts last year was relatively stable, there was volatility at the state level. The estimated 31 percent climb in new square footage in New York, along with Connecticut's 19 percent rise, offset a 32 percent skid in New Jersey, which Coskren attributed to depletion of the state's $8.6 billion, five-year construction fund, now awaiting recapitalization.

The McGraw-Hill Construction data is charting a slightly better 2006, growing from the 13.8 million sq. ft. of starts estimated for 2005 to 14.7 million sq. ft. Projected rises of 19 percent in start square footage for New Jersey and 7 percent for Connecticut would offset an expected 5 percent slide for New York.

Health care development remains robust regionally. New Jersey led the way with a 182 percent jump in new square footage of health care construction, joined by an 11 percent expansion in New York. Connecticut tumbled 20 percent.

The region is projected to dip from last year's estimated 6.1 million sq. ft. in health care starts to 6 million sq. ft. this year. According to the McGraw-Hill Construction data, New York is expected to be up 6 percent, Connecticut up 31 percent, and New Jersey down by 21 percent after its 2005 surge.

Mixed News for Heavy Project Work

The region may miss the boat in the infrastructure sector. The nation is expected to expand this year by 6 percent to $106.5 billion in starts, while the region is pegged to sink 12 percent from $9.7 billion in 2005 to $8.5 billion.

One bright spot regionally may be in construction starts on streets and bridges - expected to finish 2005 with $3.7 billion worth of projects, thanks largely to rises of 66 percent in New Jersey and 4 percent in New York, negating a 38 percent drop in Connecticut.

If McGraw-Hill Construction projections bear out, the region would post a banner year in 2006 with $3.8 billion in starts of street and bridge projects - up 6 percent in New York and 121 percent in Connecticut. Those would cancel out an 8 percent drop-off for New Jersey.

The McGraw-Hill Construction data pegs the value of starts for the region's other public works - including river dredging, sewers, and railroad work - to fall to $4.1 billion in 2006, after an estimated record of $5.1 billion in starts last year. The prediction calls for New York to dive the most, by 26 percent, joining New Jersey's 6 percent slide. Connecticut alone would rise by 13 percent.

The region is expected to badly trail the national rise of 9 percent, to $8.6 billion, in manufacturing sector construction starts. The three states together would fall 6 percent, from about $353 million to $334 million - on top of the 11 percent plunge between 2004 and 2005.

Better Prospects for New York City

The picture for New York City appears brighter, according to the building congress, which shows construction spending hitting all-time highs this year.

"There is a boom in New York City," Anderson said. "We've doubled our construction activity overall in the last 10 years."

Residential construction has been the engine, with a fivefold increase in that 10-year window, he added. The congress estimated that the city would authorize 27,500 new residential units in 2005, up from 25,000 in 2004, and approaching previous highs from the 1960s of 30,000 units annually.

"It's transforming New York City right before our eyes," Anderson added.

But hitting the projected $21.4 billion in spending this year depends on municipal, state, and federal plans to fund $12 billion in capital infrastructure projects.

"We're not sure all of it will happen, but we feel most of it will," Anderson said.

Construction activity will flow beyond high-profile spots such as Manhattan's World Trade Center, thanks to redevelopment plans for Downtown Brooklyn, the South Bronx, Flushing, Jamaica, and Long Island City, added Joshua Sirefman, director of the city's office of economic development and rebuilding, who also spoke at the November event.

Sirefman said Mayor Michael Bloomberg's administration is assessing redevelopment programs, affordable housing, neighborhood rezonings, and park projects in a strategic growth management plan and a separate neighborhood development assessment. Both reports are scheduled for release this winter.

Those reports may also address questions Anderson posed at the conference as he discussed the city passing the 8-million resident mark and approaching 9 million.

"How big of a city do we really want?" he asked. "How crowded can we get?"

(Source: McGraw-Hill Construction)