Today’s real estate development landscape is undergoing unprecedented shifts. Labor shortage, technology, rising interest rates and the trade tariffs are some of the biggest catalysts for change. In recent years, construction costs have gone up and the rise is expected to continue due to the limited land supply. For some projects, other factors such as unforeseen changes in regulations or the historic value of buildings—in adaptive reuses—might add to the total amount.
Joseph Aiello, executive vice president & COO at Broadway Construction Group, sheds light upon the challenges in construction, the impact technology has on the sector and shares current development trends in New York City. He also emphasizes the benefits of value engineering and discusses how general contractors can lower costs for developers.
Tell us about the current challenges in the real estate construction environment.
Aiello: One of the most significant factors at play is labor shortage. There has been a tremendous amount of construction activity over the past few years and many subcontractors are having trouble finding manpower. With not enough workers to go around, this sometimes results in general contractors falling behind schedule.
Not surprisingly, there are similar trends playing out on the construction management side of the business, in terms of employee retention. Many firms are looking to hire, to staff new projects and headhunters are always looking to poach experienced executives.
How are trade policies impacting real estate construction? How do you expect this to change in the future?
Aiello: There’s no question that tariffs can have a real impact on construction, as rising steel costs will lead to increased overall construction costs. Building trades have already increased their prices in consideration of tariffs. However, thus far, the price hikes have been relatively modest.
The million-dollar question is how long this will last. If the tariffs are mainly a negotiating ploy for trade agreements, this may all be temporary. If they are the “new normal,” we’re looking at much higher construction costs for the long term.
How does technology impact real estate construction?
Aiello: Technology has a profound impact on the way we manage construction projects, especially in the way we share information. A big part of this is the ProCore construction management software, which gives our clients a window into their project’s progress. Another tool we use is drone photography. We are regularly taking drone photographs and giving our clients a weekly update on the project. On one of our New York City construction sites, we even have live-feed cameras, which let our clients check in on construction progress on demand.
Of course, there are also other ways technology helps the industry, including 3D laser scanning, which uses lasers to digitally capture the physical shape and size of a room with incredible precision. Also, 3D laser scanning has applications for adaptive reuse and new construction, but it’s most helpful for reuse projects. When you’re renovating an existing building, it’s often difficult to retrieve the existing plans in CAD and conventional methods would delay the start of the project. The laser survey is quick and extremely accurate.
Your company’s most notable and ample completed project is The Beekman. What were the main challenges you encountered during the construction process and how did you overcome them?
Aiello: Every construction project has its share of challenges, and this is particularly true when you’re dealing with a century-old building like The Beekman. The Beekman was built as an office building about 130 years ago, but after more than 100 years of use, it fell into disrepair.
When a new ownership group decided to recreate the property as a luxury hotel, the construction and development team had to find somewhere to house modern building infrastructure without compromising the building’s charm. With no suitable location in the building, the decision was made to place these systems in a yet-to-be-constructed condo tower on the adjoining property. So, the project consisted of renovating a 130-year-old building and building a physically connected property next door, which consisted of both hotel and residential components.
One of the greatest challenges we had was bringing the building up to 21st century fire codes. The Beekman has a beautiful nine-story atrium, but the atrium was noncompliant with current codes. Since the property is landmarked, changes to the building had to retain the original design themes and get approval from the Landmarks Preservation Commission. We were ultimately able to implement an innovative solution that smoke curtains on every floor, fans on the rooftop and a smoke purge system that draws in air from ground-floor windows and doors without disrupting the building’s original look.
How can general contractors reduce construction costs?
Aiello: We’re looking at every situation from the owner’s perspective and one way we keep costs down is by staying up to date with the latest materials and trends. For example, on one recent project, the architect designed the building with a limestone façade that we found very expensive. Our team scoured the market for a cheaper alternative and we found a new product which is made of a composite and has limestone skin. It looks and functions just like the pure limestone, but costs just half the price —savings of $175,000.
The best way for us to save our clients’ money is through value engineering. Value engineering is an essential part of the pre-construction process where we analyze all phases of the construction from the foundation up and find creative savings, without compromising the design intent. We will often recommend a peer review—a review performed by an engineer other than the project’s current engineer—in an attempt to cut costs.
The other key to keeping costs down is planning and adhering to the project schedule. A three-month delay might not seem like a major issue, but it is extremely costly for developers. Between loss of income, additional loan interest or insurance, the costs for a delay can be in the hundreds of thousands of dollars or more.
Your largest project in the pipeline, 810 Fulton, is also RXR Realty’s first residential development in New York City. What can you tell us about it and the impact it will have on the local real estate landscape?
Aiello: I don’t know if the project will directly spur additional development, but it’s a representative example of the area’s overall growth. That section of Brooklyn has been on the rise for a few years—buoyed by the Barclay’s Center—and it’s understandable why RXR chose to pursue their first residential property in such an emerging area.
What can you tell us about real estate development in NYC going forward? What are your expectations?
Aiello: I’ve been in the construction business for several decades and I’ve learned that what goes up must come down and what goes down must come up. Real estate and construction are cyclical and considering we’ve had a great run over the past few years, we’re likely to see things slow by 2020 or 2021.
For a firm like BCG, which is looking to grow, the challenge is to ensure that we have a strong and diverse business model that can sustain hiccups in the market. Another key is to diversify beyond new construction, which tends to be most affected by a downturn. Interior buildouts, public sector work and adaptive reuse are likely to stay closer to equilibrium when the market sours and we’re looking to become more active in those areas.
What are Broadway Construction Group’s short- and long-term goals?
Aiello: When I think in terms of short-term goals, it’s very straightforward—we want to fulfill our clients’ needs and complete their projects on time and on budget. In the long term, we’d like to build upon these core competencies and continue working on some of the most challenging projects in the New York area. At the same time, we also want to expand the scope of our work to included interiors and public works.
Images courtesy of Broadway Construction Group