High-Rise Office Construction: The End of an Era?
The rising cost of building and higher interest rates have compounded the effects of the pandemic on the need for and construction of office space here. A construction era that began in the 1990s may be coming to an end.
New York City’s era of large office tower construction is over, if you believe a recent story featured in the New York Times. The office construction boom lasted more than 30 years, filled our street views with an uncountable number of cranes, and changed our skyline forever.
If accurate, the turn of investment will be dramatic. Starting in 2011, spending on New York construction has been increasing dramatically year over year, slowed only by the pandemic. Annual construction spending that had been under $40 billion in 2011 reached a record $83 billion in 2023.
But a report from the New York Building Congress (NYBC) on the outlook for the next few years predicts that those increases will plateau around $90 billion in 2025.
The Times story predicts that “Manhattan is entering its most significant office construction drought since after the savings and loan crisis in the late 1980s and early ’90s. Developers now concede that the next wave of large office towers may not open until the early 2030s, if not later.”
The story cites a few causes, like the rising cost of construction and higher interest rates. But the largest influence has clearly been the impact of the coronavirus pandemic. With more people determined and able to work from home, many companies extended that availability to their employees. This flexibility allowed many businesses to cut back on their office footprint here and resulted in an office vacancy rate of 17.4% in Manhattan. That’s the highest rate of empty New York offices since the real estate firm Colliers started tracking that information in 2000.
Annual increases in construction spending in New York were only dented by the pandemic. Since, spending has reached record heights, but experts expect a plateau.
New York City Needs Housing
Both the Times story and the NYBC report note that housing conversions may be one way to off-set the empty-office dilemma. While not a panacea for the problem, converting old office space to desirable and affordable living units can help address the city’s pressing need for housing.
Affordable housing is a political football in this city, especially since the 421-A tax incentive was retired. That clause encouraged builders to add affordable units to construction projects in return for favorable tax considerations from the city. Without that clause, construction of affordable housing here “has come to a stop,” according to one real estate investor.
The NYBC makes the legal and construction efforts a number one priority for the future of New York construction. The report recommends “Policies to support increasing annual housing unit production at all levels of affordability, such as a renewed 421-a tax incentive, eliminating the 12 FAR cap, authorizing /incentivizing office-to-residential conversions, and advancing transit-oriented development.”
“Manhattan is entering its most significant office construction drought since after the savings and loan crisis in the late 1980s and early ’90s."
New York’s Housing Should Be Constructed by Unions
New York’s construction unions are the best investment for doing this type of remodel. Union builders do their jobs more affordably than their non-union competitors. Two independently researched studies conclude that because of their corner-cutting, poor workmanship, mis-classification of labor, work delays, and increased violations, non-union contractors end up costing developers significantly more money than unions. Check them out here, Cornell University and the research organization Project Evaluation Systems.
Unions also do better work and they do it faster. The Cornell report stated, “…empirical research on the construction industry consistently finds that union contractors outperform non-union contractors on numerous measures of work quality and productivity.”
A construction business outlook published by the New York Building Congress says that spending on building will plateau by 2025. The only recent times that spend has not increased in New York is after the 2008 financial crisis, and during the coronavirus pandemic.
Here’s an abbreviated list of buildings that have made the attempt to go from one function (business, hotel, etc) to residential, but because the developer hired non-union labor to do it, they ran into major problems.
A Turning Point
Like most large cities of the world, the post-pandemic reality has caused New York to look hard at the future of its ample building office space. If we are about to begin a host of office-space-to-condo conversions, then let’s rely on the best construction crews in New York, our construction unions.
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