Just a bit past the midway mark of 2023 is a good time to take stock of the supposed downward trend in construction in the New York City area. While some of these predictions are proving accurate, construction lending and activity are continuing in a robust manner in certain areas.
No sophisticated industry report is needed to show that commercial office space development has largely stalled. The American Institute of Architects indicates that nonresidential construction is expected to slow to a growth rate of 5.8%, down from 10% in 2022, and then fall to an extreme of only 1% in 2024.
Adding to the commercial real estate woes, an analysis of the NYC Department of Buildings (DOB) permit filings by YIMBY shows that for the first quarter of 2023, the total floor area of new building filings dropped dramatically, from 20.3 million square feet in the last quarter of 2022, to 13.4 million in the first quarter of 2023, representing a 33% decrease.
Manhattan, the borough with the consistently largest area filings, saw the average filing size fall from 117,700 to 81,000 square feet, a 31.2% decrease.
Rising capital costs and the reduced availability of capital for new projects are largely to blame. Lenders are far more cautious about new projects now, with some lenders taking a pause. During the pandemic the nation actually saw a large increase in sales volume. While bypassing central business areas and lower-tier malls, sales volumes increased from approximately $600 billion to $800 billion for commercial real estate nationally, and then grew again by more than 1/3 into 2022.
Many speculate purchasers had a “fear of missing out” mentality, wanting to capitalize on the pandemic’s depressed prices. But with the end of the pandemic came substantially increased capital costs, resulting in necessary repricing of projects and more stringent lending requirements, which in turn lead to a decrease in medium to large projects.
These factors, and the current overabundance of office space, has reduced commercial development and spurred talk of repurposing older non-Class A space. Notably, as seen in the total floor area to be built, the reduction in development extends seemingly to all areas of development, but most dramatically to office space.
While these numbers indicate less new large ground up construction, the NYC market remains vibrant in numerous respects. First, there is the construction financing that our firm is seeing for construction projects that were started and stalled during the past year or two, but which have resumed in 2023.
Examples include 125 Greenwich Street in Manhattan, where construction resumed on an 88 story residential tower after a $313 million construction loan was recently obtained. This trend of financing previously stalled projects, or additional phases of projects (for example a $297 million loan for the second phase of an affordable housing project in the Bronx), is complemented by an expansion of smaller to mid-sized projects, particularly in the outer-boroughs.
Moreover, YIMBY reports that new project filings increased from 738 buildings during 2022 Q4, to 840 buildings in 2023 Q1. While Manhattan still sees the largest average size of projects, Brooklyn, Queens and the Bronx remain steady in the number of DOB permits filed, and have growth in smaller to medium sized projects. DOB 2023 Q1 filings show 26 new high-rise developments, and filings for almost 10,000 new residences and hotel units.
The American Institute of Architects indicates that nonresidential construction is expected to slow to a growth rate of 5.8%, down from 10% in 2022, and then fall to an extreme of only 1% in 2024.
Thus, in spite of some slowing, NYC continues its expansion. Further, warehouse construction in Long Island and every borough except Manhattan continues. Vacancy rates for warehouse and industrial space remain absurdly low, below 2% for warehouses in NYC. Warehouse development may not be the rocket ship it once was, but with vacancy rates this low, we can expect continued construction. Medical and healthcare facilities likewise continue to be extremely strong, including for new construction.
The New York metro area has continued to have population growth despite a housing market that has not kept up with demand. While estimates vary, there is consensus that NYC’s population decreased recently, but will grow significantly over the next few years.
Indeed, the Metro area has seen sustained growth all through the pandemic years, rising from 18,823,000 in 2021 to 18,937,000 in 2023 as reported in Macrotrends.net. While the flight to lower tax states may feel real, the numbers show that the NY Metro area is continuing to sustain long-term growth, perhaps explaining why we see so many real estate professionals and real estate financing groups continue to remain “cautiously optimistic.”
The financial saying of “keeping your powder dry” seems applicable to the current real estate market. Indeed, while some lenders are reluctant to act on new large projects, they are ready and waiting for a calm in the market that will see them jumping in with accumulated assets that need to be put to work.
Accordingly, while 2023 has seen capital costs rise and numerous lenders waiting on the sidelines, the New York metro area continues to expand in both traditional and new ways, with trends of expansion into the boroughs around transportation hubs continuing. The early 2023 reduction in overall development, including large projects, appears to be more of a pause than a long-term shift for the nation’s largest city and its surrounding area.
Brian Gardner is Chair of Cole Schotz’s Construction group and partner in the firm’s Employment, Litigation and Real Estate departments. David T. Meglino is a member of the firm's Construction and Litigation departments.