The featured speaker at the breakfast forum acknowledged thecity's role in widening the gap between New York and other markets."We're a bad client," said Robert Lieber, deputy mayor for economicdevelopment. "We think that competition is the key to keeping costsunder control, and we recognize that we have not presented aparticularly competitive environment."

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As a result, Lieber said, "we don't get a very robust response"on RFPs, and city construction projects often come in over budgetand behind schedule. Improving the level of competition on cityprojects is key, he said, citing a projection that for every bidreceived, the final costs of a project can be reduced by 2% to3%.

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Lieber expressed the hope that the Bloomberg administration'sefforts to address inefficiency and lack of competition for bidswill create a "spillover" effect into how the private sector doesbusiness. He discussed five reforms in the process for city capitalconstruction projects, as revealed on Monday by Mayor MichaelBloomberg. One is a program to develop accurate project scopes andcost estimates before budgets for the projects are approved.Another is a three-year pilot program that will eliminate the "nodamages for delays" clause from 25% of city construction projects,thus allowing contractors on those projects to collect damages fordelays caused by the city.

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The city is also looking to halve the time it takes to processchange orders on contracts, which currently take as long as 300days to turn around. "We recognize that half of 300 days is 150,"Lieber said. "That doesn't mean 150 days is acceptable."

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Other reforms which take effect immediately include theimplementation of a centralized tracking system for constructionbids on city projects and a move to "operationalize" changes to theWicks Law that were approved this spring by the New York StateLegislature. One of the Wicks Law changes raises the dollarthreshold for mandating multiple prime contracts on city projectsfrom $50,000, a figure that was set in 1961, to $3 million. Liebersaid the city is considering other reforms, including changes tothe bonding requirements on city projects.

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Discussing the NYBC report, Anderson pointed out that there's"no single reason" why costs have escalated 400% in 35 years. "It'sa lot of things," including labor costs and commodity prices. Onthe other hand, he noted that while base costs are higher in NewYork, they've escalated more slowly over the past couple of yearsthan in Las Vegas, Los Angeles, San Francisco or Seattle.

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According to the report, costs rose 32% between the firstquarter of 2004 and the first quarter of 2007. General contractorsin New York City reported a 5% to 6% increase in 2004, an 8% to 10%increase in 2005, and a 12% increase in 2006. The rate ofescalation moderated to 11% annually in 2007 and is expected toreach 1% a month over the next two to three years. At present,construction in New York City is more than 60% more expensive thanin Dallas; 50% more than Atlanta; 25% more than in Seattle; and 20%more than in Los Angeles.

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Some of the report's findings include:

  • Construction costs today represent a 50% increase from fouryears ago and reflect a 150% differential over the trade costs fora comparable office building in Chicago.
  • In 2007, the hard costs of constructing a high-rise officebuilding in New York City ranged from $285 to $375 per sf, comparedto a $230 per sf average in 2003 and roughly $120 to $130 per sf inthe mid-1990s.
  • When contingencies, general conditions, insurance,subcontractor bonds and construction management fees are added,total project costs of high-rise office buildings in New York canexceed $400 per sf--exclusive of soft costs, land costs anddeveloper profits. This compares to $150 in Atlanta; $180 inChicago; and between $200 and $300 in other major cities.
  • In January 2008, the Bureau of Labor Statistics estimated a3.3% increase in office building construction costs nationally over2007. By comparison, New York City contractors currently report a10% to 12% increase.
  • Total hard costs of school construction in 2007 were $512 persf in New York City, compared to $289 in Chicago.
  • Hospital construction currently averages $600 per sf in NewYork City, compared to Boston and Washington, DC, where costs rangefrom $500 to $555 per sf, and Los Angeles and San Francisco, wherecosts range from $380 to $400 per sf.

Lieber called rising construction costs "an incredibly importantissue for all of us." Borrowing a term from the world of economics,he said there's a "crowding out" effect that results from a finitesupply of labor and materials coupled with heavy demand. Even withthe reduced number of housing permits, the pace of constructionhere is still three times that of the recession of the 1990s.

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New York City and its construction industry are "poised forgrowth, not just today, but in the long term," Lieber said. PlaNYC,a comprehensive rezoning program and a push to create affordablehousing are all steps the Bloomberg administration is taking tospur that growth. The city's infrastructure is in "dire need" ofinvestment, Lieber said, noting that much of the infrastructurewill reach the century mark between now and 2030, when the city'spopulation is expected to reach nine million.

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As for price hikes in fuels and building materials, "who knowsif that's sustainable?" Lieber asked. "But it's the reality we haveto deal with." New York City feels the pain of rising constructioncosts more than other markets, he said, because it's "the center ofthe universe." He drew a laugh when he suggested that buildingcosts are not as high in other cities "because nobody wants to livethere."

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During a Q&A session following Lieber's presentation,Anderson expressed concern that some of the reform programs beingimplemented by the Bloomberg administration could be hobbled by thebureaucracy that will remain in power after Bloomberg leavesoffice. He suggested that the city push for legislation that willmake some of the reforms more permanent.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.

Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.