Slow Payments, Delayed Plans Putting More Financial Pressure On Subcontractors
As New York City's construction pipeline slows down and more developers delay building amid ongoing inflation and tough financing conditions, the effects radiate down the industry's food chain, where some of the most vulnerable companies are at greatest risk — the city's subcontractors.
“Uncertainty is the coin of the realm now,” New York Building Congress Chair Emeritus and Velez Organization President Elizabeth Velez said. “A lot of owners feel that if they wait a little bit longer, things might stabilize. But the economy hasn't stabilized, inflation hasn't stabilized, so it’s causing this ripple effect.”
Development and construction have been slowing all across the U.S. over the past six months, as stubborn inflation refuses to subside and interest rate hikes repeatedly complicate and snuff out financing deals. In the New York market, subcontractors are already feeling the effects of slower payments — and after a long period of backlogs, many are also concerned about having enough work as early as next year.
When contractors bid on developer construction proposals, they estimate their price based on current labor and material availability. When a bid is accepted, contractors and subcontractors both have to move fast to lock in prices for labor and materials. But subcontractors have less room to absorb pricing changes than contractors, which are normally larger and more diversified businesses. Subcontractors also rely on contractors to provide them with work, so have less room to negotiate on the type of work or the price they can get paid for it.
Now, subcontractors are feeling the pressure as economic currents falter — which could be bad news for the whole industry, RXR Realty’s head of construction, Greg Clancy, said at a Bisnow event last month.
“As more subs go out of business, it reduces the supply of qualified contractors, which further exacerbates pricing pressure,” he said.
Construction costs have been slowly falling, experts told Bisnow, with less volatility in materials costs and delivery timelines than a year ago, when Russia’s invasion of Ukraine added to an already complicated materials supply chain. Materials prices are still fluctuating, rising by 1% in January this year and up 5% from a year prior, which is the smallest annual increase in two years according to Associated Builders and Contractors.
But total construction starts in January dipped 27% year-over-year, according to Dodge Data & Analytics, as developers and owners delay decisions on bids amid economic and political uncertainty over projects. The delays have a knock-on effect, affecting the costs of bids and reasonable timelines.
“We were working on a project and they gave us the green light, let's say, in January,” said Mildred Tolentino, founder and CEO of construction project management firm MTO-PROS. But because of long lead times still needed to get materials in place, Tolentino would have had to hit pause part way through construction, which she says wouldn’t make sense for the project.
“So we said, 'We have to start five months later,'" Tolentino said. "So that has affected a lot of things, it pushed things a lot further.”
Brian Sampson, president of the New York chapter of Associated Builders and Contractors, said he has been hearing a lot of stories similar to Tolentino’s. But in addition to longer timelines for projects, Sampson said he has heard developers delaying as long a month to decide between bids — by which point, the costs of some materials have changed, leaving different numbers than bidders' originally calculated.
“It can have a tremendous impact on that subcontractor who bid to the general contractor, the general contractor who bid to the owner-developer,” he said. “That's what's creating the stress in the system right now.”
A part of the reason developers are being slow to make decisions is because they don’t like the message that costs are still increasing and unpredictable, despite it being evident in the market and in the bids they are receiving, Velez said.
“What we're finding in the private sector especially is that the owners don't want to hear that,” she said. “They don't want to hear that there are costs that are increasing.”
Despite the potential dearth of private work, subcontractors say they believe incoming public work — largely infrastructure projects funded by various levels of government — will give them the balanced workloads they need to survive. But that comes with its own complications.
For Tolentino, Velez and other minority- and women-owned business enterprises, public sector work has long been part of the mix, but they question whether all subcontractors will be able to survive the public sector’s payment schedules. Additionally, while most private developers are willing to share the burden of price changes with contractors and subcontractors, Sampson said that’s not always the case — and taxpayer-funded projects are even more rigid.
“There's just a number of owners that have sort of said, ‘Hey, that's your issue. You bid it, you’ve got to perform the work now,’” Sampson said. “And that is resulting in some subcontractors down the line experiencing the stress issues, and in particular, in the public work sector.”
Subcontractors who have worked in the public sector before said they are used to payments being slower. But the pipeline for future private work is also drying up due to slow decision-making by developers in NYC, whether office developers unsure of the future of existing assets, multifamily developers waiting for a 421-a replacement, or commercial developers balking at the cost of borrowing.
“This year looks to be OK,” Velez said. “People have a good enough backlog, enough work on hand. But [the concern is] the moving forward past 2024.”
Slowing pipelines have as much to do with understanding that neither the economy, the market nor the demand for office properties will return to their pre-pandemic statuses, said Pay Wu, president of MWBE Unite.
“It's a new normal. It's not going back to 2019. The baseline has been reset, occupancy has been reset. I think there's finally recognition that buildings are going to be 50% filled,” Wu said. “But in order to actually plan and act on it, they have to flush whatever is not working out of the system. And that's what we're seeing right now.”
CORRECTION, MARCH 8, 6:30 PM: A previous version of this article misstated Elizabeth Velez’s title. This article has been updated.