Three Ways Developments Fail— and How to Avoid Them
Three factors are responsible for developments falling through these days: demand dropping during delays, projects going over budget and subcontractors failing. But these risks can be mitigated, says Partner Engineering and Science principal Charles Tallinger, who spoke at last week's Bisnow NYC Construction & Development Summit. (He's above, right, with attendee Colby Swartz of Suzuki Capital; read previous coverage here.) Our panelists' recommendations: getting involved with lenders and equity partners that have certainty of closing; having the right consultants on board to eliminate all variables up front; making sure equity partners know something about real estate; starting early on hiring the GC; and make sure all economic terms are laid out in the beginning.
As the old saying goes, "measure twice, cut once," says L+M Development Partners president of development David Dishy (right, with Hidrock Realty managing director Joseph Ginex). One challenge, Joseph says, is ever-changing codes and zoning. His firm is building a 30-story, 317-room Courtyard by Marriott hotel at 133 Greenwich St. There, it struggled to get a loading berth waiver from the Department of Buildings, as an example. (It eventually went through.)
Vidaris director John Hannum (with Macro Consultants director Andreas Chizzali) says the consulting firm hired former NYC Buildings commish Bob LiMandri to help navigate these codes and zoning. For instance, people don't understand the energy code regulations and permits are getting delayed (for some projects, as much as three to four months). More development delays are looming: Andreas says there was a 60% uptick in construction spending from 2013 to 2014, and he expects another 40% jump in 2015. In turn, available skilled labor will be stressed and prices will go up, he warns.
Another major problem for developers: land prices, which have doubled from two years ago, says The Continuum Co general counsel Michael Merola (right, with panel moderator Michael Zetlin, founding partner of Zeltlin & De Chiara). Panelists noted that some deals are going for as much as $1k/SF.
The Naftali Group CIO Victor Sigoura expects the residential development pace will notch back due to these rising land prices. He's bullish on moderately priced units of $5M or less, and more developers will be shifting to smaller units after softening in the $10M-plus range.
Manhattan's development future lies in building repositioning, says Mancini Duffy president Christian Giordano, who kicked off our event's case study on shared workspaces. (He's above, right, with attendees Edward Shim of HLW and Macro Consultant's Jeff Bauman.) "There are thousands of buildings lying under the radar," he says. For instance, Mancini Duffy is working with Normandy Real Estate Partners to transform 125 W 25th St, a century-old building in Chelsea, into a haven for tech tenants.
The 140k SF building had the best bones Normandy has seen in loft-style buildings, says firm principal Travis Feehan, with the high ceilings, windows and floorplates creative tenants crave. It closed on the building in a month, even though it knew the the project would be a heavy, complicated renovation, he says. The goals: maximize density and turn it into an open-floor layout. The building is aiming for LEED Gold, and Normandy launches its formal marketing campaign this week.
Working with a 100-year-old building has its challenges, says Mancini Duffy principal Bill Mandara, whom we snapped with colleague Mary DeLaurentis. (Like resisting the urge to call it senior housing, regardless of its use?) Stairs were designed for smaller people and didn't meet code; elevators were clunky and slow. "We had to rethink the vertical flow," he says. The densification Normandy and Mancini Duffy undertook made the building 10% more efficient than others in that submarket, he says.