Inside Third & Bond: Week 62

This week, the Hudson Companies bloggers spill the beans on their projected construction costs.
Last week johnife reminded us of his question about the guaranteed maximum price (GMP) contract value and gross square footage of the development in other words, he wants to know our construction costs per square foot. Yes, johnife, we are ready to share. But first we want to talk a little about construction costs in general, since it has been coming up a lot around the office, the job site, and in the media.

What do we expect to happen with construction prices now that construction starts are dropping considerably? There are a bunch of hypotheses out there:

1) As demand drops, subcontractors won’t get enough work to sustain themselves and will shut down. The result will be a smaller supply of subcontractors and thus prices will stay where they are or rebound after a short period of bidding wars.

More hypotheses and hard numbers below.

2) NYC demand has less influence on the price of building materials than the costs of the raw materials themselves. If petroleum is expensive, then all the petroleum-based products will be expensive. Material costs might even increase.
3) NYC demand has less influence on the price of materials than global demand. India, China, Russia are all in construction booms. The latest round of natural disasters also has an effect roofing material costs aren’t budging for this reason.
4) As construction starts plummet, contractors and subcontractors will constrict to stay afloat until things pick-up that’s the routine. Overall, quality will improve because the best workers will be doing the work that remains while the others are laid off. Prices won’t move much but we’ll get more for our money. Also, when the best workers are on the job we get higher productivity and construction can be completed more quickly.
5) This is an unprecedented global crisis and the psychology of it, if not the economics, will slow everything down making contractors and subcontractors hungrier for work. They will drop prices, eroding their own margins.
6) Shortly after Obama is sworn in, there’s going to be a stimulus package with a substantial focus on housing construction.

Based on Hudson’s experiences over the last 22 years or so, we expect it will be a combination of many of these. Foremost, quality will improve. There will be some price drops but prices won’t plummet because there is enough latent demand for building materials world-over.

Trades we’re seeing drop prices now or expect to drop soon: tile, metals, cabinetry. Contractors are accustomed to the cycle of real estate those who are flexible and plan ahead for the lean times will get through by tightening their labor team and profit margins. But prices won’t go into a free-fall. If we thought that was the case, we’d be holding off on the GMP as long as possible.

Speaking of, we’re looking at a GMP for Third + Bond, which is a 44-unit, luxury, green condominium project, of approximately $250/SF. Fifteen months ago when we first estimated construction costs, we thought they’d be $235/SF. We’re not far off, especially given that in the past few years, there have been huge increases in hard costs between initial conceptualization and buy out of trades a year later. As we proceed with construction, we’ll be trying to decrease that number through value engineering but there will also be change orders for unanticipated issues that will be pushing from the other direction. Even after the GMP is in place, there are pressures on the budget.

The construction costs for Third + Bond are reasonable for this type of project. Construction costs can range from $160/SF to $400/SF for residential projects in New York City. Costs depend on the structural type a stick-built single-family house is at the low end of the spectrum and a steel high rise is at the opposite end, and the level of finish—the fancier the building, the more costly. Our costs for Third + Bond seem about right especially given some tricky soil conditions. Our foundation costs are $42/SF; our project costs could have been lower with the same building if our soil was better. The soil is far from a deal-breaker though we weren’t forced to change the design program because of it.

At the site this week, we’re continuing the underpinning of our neighboring buildings and bringing in the crushed stone to go beneath our concrete foundations.

Inside Third & Bond: Weeks 1-60 [Brownstoner]

From our lawyers: This is not an offering. No offering can be made until an offering plan is filed with the Department of Law of the State of New York.”