Where Do We Go from Here?

Mid-year Check-in with New York’s Construction Association Heads

Compared to 2019 and the early months of 2020, today’s construction industry is almost unrecognizable. The sector went from all-time-high construction spending and nearly full employment to shuttered or socially distanced job sites and near-record unemployment. Contractors were introduced to a new way of doing business, from on-site medical professionals and sanitation protocols to the Paycheck Protection Program (PPP) and COVID-19 response plans.

This new environment makes the age-old question that much harder to answer: What will the construction industry look like in 6 months, 12 months, 18 months and beyond?

Grassi’s Construction professionals partnered with four of New York’s trade associations to answer this question as contractors continue to recover and the state continues to press on through reopening with an eye towards rebuilding.

Here are the key observations and takeaways from our discussion with Louis J. Coletti, Building Trades Employers Association (“BTEA”); Marc Herbst, Long Island Contractors Association (“LICA”); Hank Kita, Subcontractors Trade Association (“STA”); and Carlo Scissura, New York Building Congress (“NYBC”).

We’re in the calm before the storm.

Right now, architects are getting busier and backlogs are burning off, which will help many contractors sustain their companies for the next few months, according to Coletti. But the real concern, he said, will be heading into 2022 and 2023, when it will take time for major projects to get designed, approved and built. So, the question is, how do we get from mid-2022 to 2-3 years from now?

Herbst agreed, saying that the success coming into the COVID pandemic, and the fact that most construction was considered essential work, meant a lot of contractors were able to hold strong in 2020. His greater concern is the delivery of projects and government work down the road.

Kita supported this outlook by referencing the great recession of 2008-09. Recovery took a good three to four years for the industry to get on firm footing so that contractors could be profitable in the New York City marketplace, he pointed out.

Don’t count on the federal infrastructure plan for immediate relief.

Even with President Biden’s infrastructure plan, it will take 2-3 years before the money gets into the city and contracts are awarded, Coletti observed. Herbst agreed, questioning how prepared the government will be to have projects designed and ready to put out on the streets to keep work going as backlogs shrink.

There’s reason for optimism in New York.

Scissura painted a somewhat rosier picture by pointing to the governor’s current, robust plan, which he says will be critical for 2022 and 2023. Associations like the Building Congress will advocate for the city’s capital budget to be increased and strongly focused on planning for 2022, 2023 and 2024.

Opportunities are available for those willing to refocus their vision.

When asked what opportunities are available for contractors, architects and engineers in this challenging market, Kita emphasized the importance of being able to adapt to marketplace changes.

Scissura concurred, recalling many contractors who vowed never to take on work in school construction, outer boroughs, public projects or residential construction, only to find themselves rethinking that strategy after COVID-19 hit. Others looked to partnerships and working in unison, which is one of the better things to come out of the crisis.

Coletti identified healthcare and warehouse construction as two markets that contractors are currently pursuing. Specifically, he and Scissura cited the incredible amount of warehouse space being built throughout the boroughs outside Manhattan as a viable opportunity for contractors looking to expand into new types of work.

Herbst agreed that many contractors learned to “never say never” throughout this crisis. He has seen significant changes in jurisdiction, with local Long Island contractors pursuing projects in New York City for the first time, and vice versa, as city-based contractors change their business models to bid on Long Island work.

The true cost of COVID-19 may never be known.

When it comes to measuring the full damage the pandemic caused industry-wide, there are a variety of monetary and non-monetary factors to consider, such as how and when the federal infrastructure dollars are allocated, how quickly backlogs can be replenished and the true cost of productivity decreases caused by social distancing requirements.

According to Coletti, the biggest determinant for an individual contractor will be the ability to get full payment on current jobs. While many developers and public agencies were understanding of change orders and delays caused by reduced workforces and social distancing, that patience is wearing thin 12-15 months into the crisis. As costs continue to rise for the contractor, through the HERO Act and other expenses, this could cause significant cash flow issues, Coletti pointed out.

Kita expressed doubt that an industry-wide cost will ever be known, given the length of the pandemic, wide-ranging safety expenses and various forms of new legislation. But he credits individual contractors for their innovation in quickly putting together models for calculating extra costs and the impact of additional demands from regulatory agencies and private owners.

As expected, most of the additional costs were pushed down to the contractor, but the industry is seeing some easing of that now, according to Kita.

Things could have been worse.

Compared to other industries and past crises, the construction industry has been fortunate during the pandemic, Herbst reflected. With construction for the public good being deemed an essential service and most work performed outdoors, LICA saw a number of their members continue to operate as feasibly as possible.

Contractors were already familiar with strict OSHA standards and therefore had an easier adjustment to COVID-19 safety requirements, he added. While industry losses are in the billions, the industry would have fared much worse under the restrictions placed on the restaurant, hospitality and fitness industries.

Impact on labor was not as significant as feared.

Pre-pandemic, the construction industry was challenged with attracting and retaining talent. During the crisis, while those issues remained, the concern turned to convincing existing employees to return to work amid health concerns and large unemployment benefits.

According to Kita, these fears have been largely addressed. Union job sites in particular have perfected the sanitized job site, easing employee health concerns. The PPP was a godsend to keep back-office employees paid and off unemployment throughout the pandemic, he added.

Coletti also credited the industry’s emphasis on education to workers and their families on COVID-related topics to assure them that their health was a top priority. He shared a bright outlook for trade labor due to institutional systems and robust apprenticeship programs, such as the Construction Skills Program and Helmets to Hardhats.

The whole industry needs to be part of the solution.

The panelists all agreed that the industry as a whole needs to pull together and make their voices heard in Albany and beyond to affect meaningful change.

As Kita pointed out, New York State currently has a progressive legislature and aggressive leadership that are over-prescribing rules, regulations and laws for the construction industry. As an industry, he said we need to pull together and try to fight off some of this well-meaning but tough-to-implement legislation that will make it tough to be profitable.

Herbst agreed, adding that if our legislators are not engaged in the industry and we’re not having these conversations, it’s easy for others’ needs to be put before ours. There are challenges that the legislators need to appreciate and have dialogue with us, he concluded.

Scissura mentioned the June 22 New York City mayoral, council and comptroller elections as another important day of action. Educating people on elections and getting staff members that live in the City to come out and vote is critical, and this engagement has to happen on the Federal level too, he said. Reaching out to contacts in the U.S. Senate or House is crucial to getting a real infrastructure bill passed with real money for real projects.

Coletti emphasized this need for more industry involvement by pointing to the years of opposition from community/civic organizations that construction projects have faced, which would have benefited those communities. By industry advocates getting more involved in the awareness and education process, billions of dollars in projects could come back to New York.

Where do we go from here?

Carl Oliveri, Construction Practice Leader at Grassi, closed out the conversation asking each panelist to provide one last thought which centered around staying bullish on New York construction, as this industry has always led the economy out of any downturn – and this time will be no different.

Remember, our industry associations are a tremendous resource and always a great help – utilize them and support them.

To view the entire recording of our conversation with Louis Coletti, Marc Herbst, Hank Kita and Carlo Scissura, click here.

Carl Oliveri Carl Oliveri is the Construction Practice Leader and a partner at Grassi. He has over 25 years of experience advising owners and executives in the Construction industry, particularly in project-centric and companywide financial modeling, operational strategy development, financial statement accounting services and income tax method analysis. This extensive industry experience allows him to provide insight and advice to construction clients on marketplace trends and... Read full bio

Categories: Advisory