"Be glad you're here instead of Phoenix," where there's a glut of unsold new housing inventory, Haughey told the audience. "It's going to go from great to good."

Although the New York City region's commercial real estate market is in better shape than the national average in terms of vacancy rates and rent increases, Haughey said the region's economic growth has slowed to average or below average due to layoffs in office-based industries such as financial services. The slowdown in growth will persist into 2009, weakening the appetite for private construction such as office buildings.

New project starts will be off by 15% to 20% through Q1 '09, following by an upturn of 6% to 10%, Haughey said. "It's going to be grim for the next nine months," he warned.

However, Haughey said the current recession is "mild" compared to the one in 2000, and as a result the effects on commercial real estate will be less severe. The current downturn will not lead to a collapse in the real estate market lasting two to three years, as occurred last time.

Haughey's presentation, on the first day of the annual conference sponsored by the Associated Builders and Owners of Greater New York, provided a national as well as regional context for the state of the construction economy. He discussed some of the factors at play in the current economic environment: slow GPD growth, a lack of consumer and business confidence, tightened mortgage lending standards, lower expectations of returns on developing new projects, a surplus of residential stock and funding issues for heavy construction such as highways, to be followed by similar constraints in funding for public buildings. All of these factors will start to ease in '09, Haughey said, adding, "we are anticipating some pick-up next year."

Another factor that has contributed to widespread consumer and business uncertainty--along with helping to boost construction costs--has been oil prices. Haughey said prices are expected to start dropping toward the end of 2008 and return to the $80-per barrel range a year from now.

Even so, Haughey said, the cost of construction materials has risen steadily, particularly in the New York region. The newly issued Turner Building Cost Index for Q2 '08, from locally based Turner Construction Co., bears this out. The index says construction costs have risen 1.57% nationally since Q1 '08 and 6.61% year over year since Q2 '07.

"Driven by global demand and supply, construction materials and commodity costs continue to rise, with some experiencing double digit price escalation since the first quarter of 2008," says Turner VP Karl Amstead in a prepared release. "Steel, copper, aluminum, asphalt, roofing and PVC are all experiencing price spikes. Increased energy costs are also adding pricing pressure on both manufacturing and transportation." Haughey said diesel fuel costs may have risen by as much as 70% over the past year.

Instant Insights /

Construction in New York Heads for a Correction

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