NEW YORK: An Introduction to Construction

Challenges and Opportunities in New York Construction in 2024 and 2025 

The New York construction sector faces challenges and uncertainty in 2024 and 2025, but there are also many opportunities. In New York City, infrastructure and health care construction are booming. As office, residential and retail construction face headwinds in the wake of the coronavirus pandemic, real estate developers and investors are adapting creatively. Surprisingly, the political climate for these adaptations is favorable, which bodes well for residential development, especially in the area of affordable housing.

Challenges have always presented opportunities for leaders, risk takers, owners and developers who recognize business and economic changes and adopt challenges to future needs. The owners, investors and developers who can navigate these changing waters will be the winners of the NYC development and construction world.

Post-Pandemic Construction in New York City 

In New York City, a construction project in progress does not reflect the state of the sector in the present, but rather in the past. Exciting megaprojects such as Hudson Yards and Manhattan West, which are underway now, reflect planning that started years ago. From conception to groundbreaking, there are many steps along the road to build in New York City: planning and design, financing, zoning, municipal approval, and negotiating neighbor access agreements. That’s why construction activity at face value is a lagging indicator.

Today, office, residential, and retail construction and real estate are suffering in the aftermath of the coronavirus pandemic. This is because of hybrid work — the “new normal” — and because of interest rates that shot up to address the inflation caused by the influx of government aid during the crisis. Financing is more expensive and difficult to secure in an environment of low demand.

Retail had been weakening long before the pandemic because of changing shopping habits and the rise of ecommerce, but the shift to widespread delivery during the pandemic has further challenged the sector (while helping fuel investment in logistics).

Office vacancies are low in general. Newer Class A buildings have vacuumed up large corporate leases as large companies gravitate toward new buildings such as Hudson Yards and high-end trophy properties on Park Ave. Class B and Class C commercial properties are suffering from high vacancies, making investment in new construction unappealing for investors who see little prospect for near-term return.

Building Conversions Create Unlikely Political Consensus 

Real estate developers and investors are adaptable and creative, finding new opportunities in the current climate. Where commercial and retail construction are weak, there is demand for residential space, and investment is flowing toward conversions of older buildings to housing.

New York City Council is considering proposals to amend zoning requirements to facilitate conversions. Traditionally, these types of legal changes are difficult to move through the political process. However, conversions have found support among unlikely political allies who want to encourage this type of development.

Leftward leaning New Yorkers who normally oppose new high-end developments are showing support for conversions, seeing them as a means of creating more affordable housing. The city’s Office Conversion Accelerator Program, launched in 2023, streamlines the regulatory process and incentivizes investment in the renovation of commercial office buildings into housing.

Infrastructure, Schools and Healthcare 

The Biden administration’s investment in infrastructure has resulted in a boom era for exciting transportation construction projects. The USD8 billion renovation of LaGuardia elevated it from one of the worst airports in the world to one of the best, according to several travel guides. Billions of dollars are being poured into renovations at JFK Airport. And our firm is thrilled to be involved in MTA’s USD7.7 billion renovation of the Second Avenue Subway.

Other areas of construction that have withstood economic headwinds include nonprofits, schools, hospitals, and luxury residences. Recent hospital projects include a USD560 million hospital in Long Island, and there are several large projects underway in the Upper East Side of Manhattan.

In addition, New York is closing the historic Rikers Island prison and replacing it with detention centers in each borough. The deadline to close Rikers is 2027, and while the city already knows it won’t meet that deadline, it is issuing contracts for the construction of replacement jails worth billions of dollars.

Our firm has seen healthy activity in the education and nonprofit sectors, especially in the charter space. The city’s investment in charter education is bringing new facilities equipped with the latest technology to students all over the five boroughs.

Construction in New York City rises and falls with macroeconomic tides, but local laws determine whether projects sail smoothly. Investors, developers, and construction companies should be aware of some recent and upcoming changes in local construction law.

Sustainability Costs, Retainage and Underpinning 

Three major rule changes recently enacted or likely to pass soon involve ambitious climate change goals that are often costly to developer-owners, contractual issues concerning retainage, and for some good news, rules favoring developers in underpinning when it comes to neighbor access.

In 2019, New York City Council passed Local Law 97, an ambitious plan requiring most buildings over 25,000 square feet to implement incremental reductions in greenhouse gas emissions and meet new energy efficiency standards. The first goalpost is in 2024, and by 2030 the city’s largest buildings should reduce emissions by 40%, reaching net zero by 2050. Building retrofits are underway, a plus for contractors but costly for owners.

Another recently passed law that shifts more risks to owner-developers pertains to retainage in contracts. Retainage — the amount of money that owners may retain from contractor fees until project completion to offset the risk of repairs or default — was traditionally up for negotiation. In late 2023, the state legislature capped retainage on private projects to 5%. The new law has created uncertainty, reducing the negotiating power of owner-developers, and attorneys are trying to be creative to regain leverage.

In positive news on the owner-developer side, there is a proposed amendment to the state law dictating access to neighbor properties and underpinning. The New York State Senate passed S1305 in March 2024 and it has moved to the Assembly, and the bill has significant support from the construction industry to help ease access to neighboring properties.

In cities across the state, especially in New York City, gaining access to neighbor properties is critical to the construction process. Successfully securing neighbor access is an art requiring effective negotiation skills and deep legal and construction knowledge. We try to negotiate agreements outside of the courts, including terms, indemnity, compensation, and insurance to dictate the scope of access. Naturally, a good relationship with neighbors helps construction projects run smoothly. But if neighbors remain intractable, attorneys can file petitions with courts to compel access and dictate terms.

This is not the case with underpinning, the practice of pouring concrete to stabilize a neighboring property when excavation would be lower than its foundation. A proposed amendment to the New York Real Property Actions and Proceedings Law (RPAPL) Section 881 could change the entire process and allow courts to compel underpinning. At the time of writing, the bill was in committee in the New York Assembly.