Outlook 2014: Sandy Work Still Helping Region's Gradual Recovery
it may be more than a year since Superstorm Sandy pummeled the tristate region, but its powerful punch is still fueling industry activity and is expected to continue contributing to a gradual recovery. While emergency repair work flourished in nearly all sectors immediately after the late-October 2012 storm, rebuilding efforts in some regions have helped boost the 2013 bottom lines of many firms, industry executives say. Sandy-related activity is expected to continue into 2014, both in terms of rebuilding and as the public and private sectors fine-tune longer-term resiliency plans.
"One of the big factors to increased activity has been the response to the hurricane. There's two parts, with the first being the recovery effort," says Kevin Max, a director at KPMG's Energy and Construction Advisory Practice, New York. "The secondary factor, which is spurring optimism, is the plans for resiliency and redundancy."
Next year, the region is likely to see more projects involving the installation of redundant power systems, elevation of IT and mechanical systems above flood levels, shoreline restoration/upgrades and other such measures aimed at limiting the impact of harsh storms on critical infrastructure, executives says.
"It's hard to look at the [tristate] market without looking at Sandy, because the short-term outlook—with the billions of dollars being spent—is going to keep a lot of folks going," Max says.
Tom Webb, Skanska USA Building's executive vice president of the Metro New York region, agrees. "Sandy recovery work has certainly poured more work into the pipeline," he says. "In the annals of New York construction, across the board, the overall Sandy recovery efforts from the Port Authority ... to the contractors [and other industry players] will be one of the best chapters written." Skanska was part of the group of contractors participating in New York City's Rapid Repairs program, helping to repair 2,500 Sandy-battered homes in the months following the storm.
Apart from Sandy work, other encouraging signs this year include the continuation of robust multiyear building plans at many of the region's major universities and health care institutions, Webb says. These include Columbia University's multibillion-dollar expansion now under way at its Manhattanville campus and Stamford Hospital's $450-million expansion.
Health care institutions are expected to continue to "be a mainstay of our business for years to come," Webb says.
Other factors spurring optimism for 2014 include the power sector, where utilities are upgrading transmission systems, Max says. Utilities, including two in New Jersey hit hard by Sandy—the Public Service Electric and Gas Co. (PSE&G) and Atlantic City Electric (AC Electric)—are also looking to start putting multiyear resiliency plans in place.
AC Electric plans to spend more than $800 million over five years on infrastructure upgrades and other measures to protect against future storms. PSE&G has proposed a 10-year, $3.9-billion Energy Strong program to harden its system, although the plan's great cost and scope are controversial. The measure awaits a decision by regulators, which may come as early as January, a PSE&G spokesman says.
Yet another good sign is the multibillion-dollar programs planned or under way for some of New York City's major bridges, says Mike Elmendorf, president and CEO of the Associated General Contractors of New York State. However, he adds that while these projects are greatly needed, they are focused in only one region of the state.
"There are hundreds of other bridges in the rest of the state that don't do the volume that the Tappan Zee Bridge does, but that are still vital to their communities" yet are not getting the necessary funding for repairs or replacements, Elmendorf says. There are also miles of highways that need funding for repairs.
"Long term, we need to find a different way to pay for this stuff," he adds.
New Mindsets Needed
Many tristate executives view the year ahead with guarded optimism. Activity and project financing are still far from prerecession levels, says Max at KPMG, which recently issued its 2013 Global Construction Survey of 165 C-level executives.
Max says the industry remains a buyer's market but adds that the margins and backlogs of firms are, at least, "off the floor now." While lenders are still closely scrutinizing deals, there is more funding available now than there was at the peak of the recession, he adds.
"The top-tier development projects with solid financials and pro formas are being well-received by the credit institutions," Max says. "It is some of the more speculative projects, which were able to receive funding prerecession, that are having problems today."
The best firms have emerged from the recession with leaner practices and management structures, more efficient operations and better cost and risk management practices, Max says. They have also "really embraced the technological advances such as BIM and cloud computing for project management," he adds. "Those advanced technologies used to be nice to have for contractors, but what they are finding now is that the cost-savings benefits [of these systems] are critical to capturing the somewhat meager margins that are available."
Max and other industry executives say they expect 2014 to be reflective of 2013's slow but steady pace.
That is a good sign as industry is moving in the right direction, says John Butts, executive director of the Associated General Contractors of Connecticut. But people should stop looking back, he adds.
"Everybody seems to go back to 2007" as a benchmark, Butts says. However, "you have to change your mindset. Everybody is still downsizing; contractors are still seeing low margins and the private market is still driving a hard bargain in some areas." This is the new reality for industry, he adds.
"What has happened post-recession calls for a paradigm shift," Max says. "You can't look at the market at its peak.... There are some opportunities."
In New York City, the region's biggest market, the New York Building Congress (NYBC) forecasts a return to better times with a 14% rise to $31.5 billion in overall construction spending this year—a gain of $4 billion over 2012. The organization, which prepared its analysis with New York-based consulting firm Urbanomics, expects spending to continue to climb to $33.4 billion in 2014 and $37 billion in 2015.
"The city is doing great," says Richard Anderson, president of NYBC, which released its Construction Outlook 2013-2015 report last month. He says the private sector—including residential, institutional, office and cultural markets—is largely responsible for this. "Government is slipping a little bit but not that much."
Major projects in Manhattan include the 977-ft 4 World Trade Center office tower that opened last month, the 1,776-ft 1 WTC and the $221-million WTC Transportation Hub's Oculus, both set for completion in early 2014. Hudson Yards' 80-story North Tower broke ground earlier this month, and construction of its platform is expected to start in January.
At the Brooklyn Navy Yard, where several projects are already under way, Steiner Studios recently announced plans for a 10-year, $400-million project to restore and adapt the yard's 20-acre former hospital campus, which is adjacent to its existing film complex, into a Hollywood-style film studio, media and technology hub. Work is set to begin on the studio's new sound stages next year.
Also in Brooklyn, the $117-million, 322-ft B2 residential tower at Brooklyn's Atlantic Yards is expected to become the world's tallest modular building when completed next year.
In Staten Island, officials recently approved plans to build one of the world's tallest Ferris wheels, the 630-ft New York Wheel; construction is expected to begin next year with completion set for 2016.
But despite such developments, several question marks remain for the city, including how Mayor-elect Bill de Blasio's administration will affect industry. Most executives were reluctant to comment on this, but Anderson says he has talked with de Blasio and does not believe the new mayor will dramatically affect the overall construction market.
"In the first place, [de Blasio] doesn't have much control over the private market" and megaprojects, including Hudson Yards, are already moving forward, he says. "He is not going to stop that work. And while over time his administration might be able to hinder it, it might also [encourage] it."
Another question mark hanging over the city is its great number of stalled construction sites. While the overall number of sites fell 12% to 610 this year, that number remains high, according to NYBC, which recently analyzed the Dept. of Buildings' (DOB) stalled projects list. More than half of the 610 have been delayed for at least three years, it says. In 2009, when DOB began tracking such sites, there were only 166.
"Even though the number of stalled sites is going down, there are still a lot in there," and more need to be activated, especially in the city's outer boroughs, Anderson says. Since de Blasio has said that housing will be one of his priorities, the stalled sites list "might be a perfect place to begin," Anderson adds.
De Blasio did weigh in on at least one proposal that the New York City Council decided to table last month—the rezoning of Midtown East in Manhattan.
"For the sake of New York City's long-term economic vitality, Midtown East should be rezoned to allow the creation of a world-class 21st-century commercial district," the mayor-elect said in a Nov. 12 press release. "But it needs to be done right. We cannot afford to hand over the right to develop some of the most valuable real estate in the world without ensuring real and fair benefits for the people of New York City."
He said the proposal had many unanswered questions that need to be addressed, "including how to build the infrastructure needed to accommodate the additional density created by the rezoning, and how to ensure that new development rights are appropriately priced to create the best possible value for the city." He added that he is committed to presenting a revised plan for the area by the end of next year.
The University of Connecticut is positioning itself to become a leader among the world's research institutions with its $1.5-billion "Next Generation" program. The 10-year plan involves building facilities to support the science, technology, engineering and math (STEM) disciplines, Butts says. "They are trying to increase enrollment by 5,000, mainly in the STEM area at their Storrs campus."
Butts says that growth of multifamily housing is an emerging trend in Stamford and Hartford. "We hear that young professionals are more apt to migrate to urban centers rather than purchase houses," he says. "They are choosing Stamford for its proximity to New York, as an alternative to moving [to New York]."
In the energy sector, three firms were recently approved to convert a total of 280,000 homes to natural gas, Butts says. "They are trying to make sure that work is done locally, so a lot of the unions—especially the operating engineers—are trying to get ready for this."
Connecticut also became the nation's first state this year to launch a microgrid program, part of the state's plan to harden infrastructure against future storms. Under the program, the state is setting up a total of nine projects statewide using various energy-generation sources such as fuel cells, solar power and natural gas-powered turbines.
In New Jersey, the long-delayed $2.2-billion American Dream Meadowlands project is expected to restart as early as the first quarter of 2013.
Major projects already under way include the $750-million Newark, N.J., Energy Center (NEC), a 655-megawatt, natural gas-fired combined cycle plant located on a 23-acre brownfield site near Newark. Owned by Hess Corp. and private equity firm Energy Investors Funds, the plant is set for completion in 2015.
Those and other major projects around the tristate region bode well for industry and show that the area is digging out from the recession, says KPMG's Max. But "it's a mixed bag for engineering and construction firms," he adds. "Some are saying the outlook for the next year or two is better but, compared to when it was its very hottest, we're not there."