Negotiating Challenges as Construction Reopens in New York City
New York City has faced one challenge after another in recent months. On the positive side, however, Phase One of reopening begins Monday, and with it…
New York City has faced one challenge after another in recent months. On the positive side, however, Phase One of reopening begins Monday, and with it the restart of construction. After a three-month delay, with significant distress on everything from financing to staffing, developers face numerous hurdles as they scramble to get back to work and complete their projects.
In Q1 of 2020 alone, applications for 11 million square feet of new construction and about 890,000 square feet of alterations were submitted in New York City. During the crisis, approximately 32,000 non-essential New York City construction sites, including both large-scale construction and smaller renovation projects, were shut down. All of these are now behind schedule and over budget. Although roughly 9,500 sites were deemed essential, they are struggling to stay on schedule and under budget while following social distancing protocols in an industry that requires working in close quarters.
Developers of so-called non-essential projects, who have missed critical project milestones and who are now under enormous financial pressure, are seeking to advance construction as swiftly as possible. They will face a series of issues.
To begin, the Department of Buildings will be inspecting sites to ensure compliance with new hygiene and safety requirements, including hand-washing stations, sanitizing stations, disinfecting tools, wiping down all surfaces at entries and temporary bathrooms, utilizing temporary barriers, maintaining social distance and wearing masks at all times. Construction work is often incompatible with social distancing, and many construction sites cannot both fully open and comply with social distancing rules — there is not enough room. How can a project advance when multiple people are required to work closely together to assemble building components? This will require a higher level of coordination than in the past.
To conform with new requirements and to protect personnel, developers are adding extra precautions including thermal forehead scans to check for fevers, floor markings to maintain social distancing, requirements for all delivery personnel to stay in their vehicles, and staggered shifts to prevent a rush during commuting hours. Developers are also lobbying the city for 24-hour construction permits to reduce the number of workers on a site at one time.
While the City has recommended strict social distancing and safety guidelines for construction sites, it is up to the developer and the contractors to establish best practices and to enforce social distancing. Department of Buildings inspectors will visit sites and issue warnings and fines to teams not following the city’s established protocol. However, given the nebulous language in state guidelines, which provides a certain amount of leeway, it is critical that developers communicate with their legal, management, and insurance teams to establish procedures and best practices for their specific construction site and circumstances.
To complicate developers’ schedules, the Department of Buildings will receive a flood of post-approval amendments (PAA’s) as developers make cost-saving, and time-saving, adjustments. The DOB will have months’ worth of applications to review, while still working with reduced staff, and it has a monumental task ahead to approve all ongoing project changes. It is likely that we will see a significant backlog for new projects, and these delays will add even more costs and time constraints to projects.
While the residential and commercial markets remain in flux, there is no doubt that circumstances have changed dramatically in a very short time. Many developers are now reassessing their projects, which were underwritten based on numbers and demand that may no longer exist and may not quickly return. Many developers with projects in early stages already are considering changes of use to ensure there is demand when they reach completion. It is hard to imagine current early-stage hotel projects finding a receptive market upon completion, and developers are considering amending uses to adapt to current realities. Unfortunately, realities are still changing by the day and making such changes is not simple. Developers will need to work with the city and with lenders to make these changes and get back on budget. This process may require ULURP, BSA, Community Board approvals, City Planning, and any other relevant Governmental agencies. It is unclear what the impact on those processes will look like.
Lenders and equity partners, not surprisingly, have an enormous number of concerns. While many projects are in forbearance, or entering actual default, most lenders don’t want to take them over — they simply want to get the projects completed. Even if a project will not be profitable, many lenders will encourage developers to limp to the finish line because this is the best path to get out from under the project. This will require flexibility from all stakeholders in order to create a viable path to completion.
Developers also are struggling to manage personnel. Not only are some of their staff unable to come back to work, but contractors and consultants have lost many employees, as well. The construction personnel market is in a state of confusion after widespread layoffs in March and April, and it is difficult to source qualified project managers, site supers, and other support personnel. Roughly two percent to three percent of New York City residents have fled as a result of COVID-19 and while many will surely return, a significant number that will not. Developers and builders are also finding that they are having to replace subcontractors mid-project because of COVID-19. Many smaller subs, and even larger ones without the financial wherewithal to withstand the last three months, are simply not in business anymore. Many projects will have to figure out how to adapt to these types of realities.
Less-experienced developers are now especially at-risk. Those without the experience, the personnel, and the balance sheets that would typically be able to adapt to changing market conditions, are going to have a particularly challenging time now. The added pressure of dealing with lenders (both debt and equity) that are proceeding with more caution than ever, as well as the new market conditions, will require new developers to proceed carefully and deliberately.
There is tremendous uncertainty on the insurance side of things as well, both on managing claims as well as extending policies that expired over the last three months. Do underwriters want to extend General Liability policies on projects that now carry more risk? Underwriters of builders risk policies – a less popular but tremendously valuable policy on all projects – have the same concerns. Many insurance claims that have already been filed by developers for COVID-19-related delays have been rejected by the carriers, but they will surely be litigated in the near future. There is no consensus as to what the new insurance landscape will look like.
Both developers and lenders are turning to owner representatives and outside consultants to offer guidance on how to cut costs, negotiate with contractors, manage personnel, coordinate with the DOB, oversee quality control and keep projects on schedule. The success of projects will hinge on independent third-party teams that can assess the development, implement the types of project controls that will offer a clear path to completion, coordinate with consultants and provide a high level of credibility and assurance to lenders.