Cooling Inflation Hasn't Made Construction Cheaper. Builders Explain How They're Adapting

Construction costs aren’t going anywhere, but some developers and owners in New York City are getting creative with how they confront the high price of doing business in 2024.

Developers, owners and construction companies are examining every part of their process in an attempt to figure out how to bring costs down, industry players said at Bisnow’s 2024 New York Construction & Development event last week. Their methods include pushing costs back to eventual tenants, taking newer, sustainability-focused materials into consideration, incorporating prefabricated components and looking further afield for tax breaks. 

“It’s no secret that we have a perfect storm with a lot of issues that have come across over the last few years,” Silverstein Properties Vice President of Construction & Development Malcolm Williams said onstage at the New York Bar Association in Midtown.

Interest rate changes, rising insurance costs, higher construction costs and work-from-home models are all things that have affected the development industry. The only answer, he said, is to sit tight.

“You can’t out-underwrite the overall market,” he said. “Things have just gotten to a place where you have to know that the patient capital is going to win in the end. But if you look at right now, it’s a lot of projects on hold.”

Opportunities for development, particularly for rental housing, are few and far between, given the costs of construction, land, capital and interest rates at present, Rose Associates Managing Director for Development Chris Gibaldi said. It's a common refrain from developers since the expiration of the 421-a rental housing tax break in 2022.

“There's very few projects that I think we would undertake from a rental perspective,” Gibaldi said. “From a rental perspective, there's very few opportunities that we see in the New York state market at this time.”

Still, because Rose Associates is a long-term owner of the buildings it develops, leaders at the Midtown-based developer have recently been thinking about how to push some of the costs off of their own backs, even potentially offloading them to tenants.

In a recently completed project in Long Island City, Rose Associates chose to direct air handlers back to panels inside the units, making the associated costs a tenant obligation, Gibaldi said. The owner can then submeter the variable refrigerant flow, an HVAC system allowing for the heating and cooling of individual units, on a monthly basis.

“That gets back-charged back to the residents,” he said. “It’s a major effort to suppress an operating loss.”

Builders are also scrutinizing the construction process itself. Taking the time to plan out the different phases of construction is another area where developers and builders are getting creative, experts said onstage.

Sitting down with general contractors when planning out phasing can help, said BRP Cos. Managing Director Mary Serafy, as can allocating more dollars to a pre-development budget to ensure delays are minimal once construction begins.

“I have smart phasing,” Serafy said. “It's all about utilities, and maybe putting in some more pre-dev[elopment] budget on bringing the utilities to your site.”

Depending on the asset type, modular construction is increasingly an interesting option for developers looking to squeeze the maximum value out of their construction budget, said Taconic Partners Senior Vice President of Development and Construction Chris Squeo.

Squeo said modular has helped the developer save time and money on some of its recent projects, although he didn't say which ones.

“One of the things we're excited about [...] is modular construction,” he said. “That's something we're looking at quite a bit.”

Even prefabricated construction, while not strictly modular, can help bring costs down, Brookfield Properties Vice President of Design and Development Taek Park said. The Manhattan West megaproject, which featured significant amounts of steel and timber components, used prefabrication to build those elements before delivering them to the construction site, he said.

“Delivering to the site is a bit of a military operation,” he said, adding that components may have to be delivered to a specific side of a project and often at an odd hour of the day or night to avoid creating traffic jams. But, the payoff is the time that it saves on site, he said. 

“I think there’s going to be more and more of that,” he said. “I think prefab is going to be more and more of a trend.”

Thinking critically about the materials — not just which materials can shave dollars off a development budget in terms of pure cost, but also if they can help land a tax break — is another way that developers, builders and owners are thinking about reducing construction costs.

One of the materials that developers are increasingly considering is smart glass. The material automatically tints when sunlight hits, not unlike prescription glasses that contain light-responsive lenses, thereby stopping the inside of a building from heating up in the sun while still allowing natural light into a room. 

One of the industry's leaders, View Inc., has raised concerns about its viability. Last week, Bisnow reported that the company, once valued at $2B, is facing a potential asset sale or debt restructuring after previously signaling it may not be able to continue as a going concern.

Still, developers at the event were optimistic about the future of the technology developed by View.

“If you forget about some of the news, some of you may be reading the science at home,” said Nicholas Pasquenza, director of development and construction at LCOR. “You look at the technology. It’s come a long way. We’ve used View on small use cases, for amenities on other projects. They have gone right.”

View's prospects were brightened with the passage of the Inflation Reduction Act, which allows developers to secure a tax break for installing the product, giving them new ways to cut costs and prioritize sustainability.

“I think I'm accurate when I say this, that I am the first to go through this process with [View] and with the Inflation Reduction Act,” Silverstein’s Williams said.

The deal that Silverstein has been working closely on with View is due to be finalized in the next week or so, he said, and shows that the IRA can be used to help projects find additional funding.

 “You can actually get it done,” he said. “It takes a while, but it can be done.”