'Nothing’s Gone Up’: Bureaucracy, Cost Of Capital Stifling Long Island Development

Development has been pretty static in Long Island over the past year — but industry players hope that will change soon as interest rates are expected to come down.

Exactly how much Long Island’s development market actually picks up is yet to be determined, developers said at Bisnow’s 2024 Long Island State of the Market event Thursday. Longstanding bureaucratic issues that have historically stymied the region’s development remain firmly in place, but players used to working in the region are seeing the light at the end of the tunnel.

“We're at the bottom of the U, and we're going to be on our way to the other side,” RXR Executive Vice President for Residential Construction and Development Joseph Graziose Sr. said at the event.

The restrictive debt market, combined with the layers of permissions needed from Long Island planning boards, zoning boards and city councils has led to some particularly acute stagnation, Graziose Sr. told Bisnow’s audience at Garden City Center.

“Over the last 12 to 18 months, nothing's gone up,” he said. 

Capital markets conditions have exacerbated an already slow-moving market over the past five years, Tritect Real Estate Co. Executive Vice President Jimmy Coughlan said.

Construction costs have nearly doubled in that period, while in the last couple of years building values have started to drop, he said. Meanwhile, rents have only grown by between 3% and 5% a year.

“It's not enough to overcome the escalations that we've seen over the past few years,” he said.

But developers believe that the market is set to change as investors look for places to deploy capital.

“Put this year to planning and figuring out a lot of good stuff, and I think over the next 12 to 18 months, we’re going to see things start going vertical,” Graziose said.

That optimism comes from impatience in the capital markets sector to deploy dry powder after a year and a half on the sidelines, Steve Simonelli, a senior managing director for the Americas division of JLL Capital Markets said. 

“We are really starting to see the first looks of some groups saying, ‘I have got to get the money out. I'm paid to put money to work,’” he said. “We're going to really see the capital outflows starting even more, because the money's there, it wants to be spent.”

But those deals aren’t being done quite yet because they don’t make sense, Simonelli said. While pricing has improved from where it was six months ago, he told Bisnow’s audience, capital will start flowing more freely again once an interest rate cut, predicted for September, comes into play.

Once that happens, Long Island’s strong fundamentals — with a rental market above $3 per SF, high incomes and historically low pace of development — could attract some big lenders, he said.

“Huge institutions like the JPMorgans, the PGIMs, who take very quick looks at other markets, they call all the time about Long Island,” Simonelli said. “They want to be here, they want to be the equity in a development here because they know how safe it is and how strong it is.”

But interest rates aren’t the only factor that makes lenders uneasy with funding Long Island projects, Graziose said.

“People do want to invest in Long Island,” he said. “When they look at the economics and they look at the returns, they're excited about it, but they're nervous about how long it takes to get things done here.” 

Development has always been slow on Long Island, Coughlan said.

“Historically, it’s always been a complicated place to get things approved,” he said.

But over the last five years, factors besides the workings of the region’s many municipalities and its 1,200 different zoning districts have made it even harder. 

One of the ways that the process could be more efficient is for towns to get developer input when they’re making their master development plans, Graziose said, because developers could guide zoning changes in a way that would make deals pencil. 

“As much as Westbury is trying to find places to put multifamily, if they had developer input early on — if they had brought us together, if we got a little bit more united, if you would — I think that it would go a long way, certainly in attracting people like us,” he said.

Consultants who work with Long Island's myriad towns and villages have been relaying the message to work more proactively with developers, H2M Architects and Engineers CEO Rich Humann said onstage. 

“We’ve been trying to deliver that message to municipalities,” he said. “We are consistently trying to suggest and encourage them to engage you guys way more than they do.”

Even following an interest rate cut or a better capital markets environment, investors’ reluctance to deal with uncertain timelines for development in Long Island may remain the sticking point, Simonelli said.

“Long Island has always been a little bit of a double-edged sword. Capital wants to be here, money wants to be here — for these reasons, because it's hard to build here,” he said. “They want to be here, but they also don’t have the patience to be here.”