Construction Industry Counts on Oh BAMA

Hopes for 2009 Rest with Economic Stimulus Plan???? 

As the economy slowed last year, the commercial-building unit of Kokosing Construction Co. had $130 million in projects -- a year's worth of revenue for the division -- halted in a three-week stretch. But now, with the prospect of a massive public-spending package by the Obama administration, the Ohio-based contractor is out recruiting workers.

"I told my managers that based on the expectation of a stimulus plan, we should continue interviewing people at colleges, hoping to have work for them by the time they graduate in the spring," says Brian Burgett, president and chief executive of Kokosing, a family-owned firm in Fredericktown, Ohio, that has built highways and industrial facilities for half a century.

After a rough year on the ground and in the stock market, engineering and construction companies are eager for the financial tap to be reopened. As the incoming administration assembles its stimulus plan, many contractors are lobbying hard for projects that will spend money fast rather than focusing on longer-term environmental and smart-growth policy goals.

That is largely because the industry has had steep job losses and foresees more bloodletting this year unless the government applies shock treatment to the economy. In December, construction accounted for 101,000 lost jobs, or nearly one-fifth of all U.S. jobs, capping a year in which the sector shed 632,000 jobs, according to the Bureau of Labor Statistics. Employment in nonresidential and heavy-engineering construction shrank by 7% and 9%, respectively.

The Associated General Contractors of America, the country's largest trade association of nonresidential builders, recently polled its members and found that, barring a change in the business climate, expected layoffs could cut construction employment by 30% this year.

 

If a stimulus package included funding for infrastructure projects, however, some 85% of the survey's respondents said they wouldn't lay off workers and in fact would hire more.

The contractors association has submitted a white paper to the presidential transition team and to Congress that outlines the economic benefits for all types of infrastructure and emphasizes road and bridge work.

Mr. Burgett of Kokosing, who hopes to add fresh college graduates to his payroll, notes that Ohio has identified $1 billion in highway projects that could be started by June. Repairs to a bridge in Cleveland and upgrading an Interstate highway junction, not to mention the state's crumbling sewer lines, mean that "there is just an immense amount of work," he says.

Highlighting the industry's holding pattern, though, Mr. Burgett has put all equipment orders on hold until the stimulus package clarifies the environment. Typically, he orders $35 million of equipment a year.

Stephen Sandherr, chief executive of the contractors association, says there are some $64 billion of approved "shovel ready" transportation projects. The imperative to spend big and spend fast creates a potential clash between some contractors and proponents of environmentally friendly policies that President-elect Barack Obama espouses. "If the objective is to get things out quickly ... it would be counterproductive to add smart-growth requirements to any of these projects," Mr. Sandherr says.

The public-relations battle is on for portraying major infrastructure projects -- whether or not they are part of the stimulus plan -- in the greenest possible light. Shaw Group Inc., a Baton Rouge, La., engineering firm, has attracted investors' interest after firming up a $4 billion nuclear power-plant contract.

"With the importance that is being placed on developing new sources of clean energy, we are anticipating a nuclear renaissance that will assist in reinvigorating the U.S. economy," says Gentry Brann, director of corporate communications at Shaw.

Company executives last week said they also are well positioned for levee, environmental remediation and other potential infrastructure work in a stimulus plan. The company is adding about 1,000 jobs to its 26,000-strong work force.

Contractors point out that their work is often subject to increasingly stringent environmental regulations. "A lot of the stimulus [spending] will go to projects that are green at some level," says J. Doug Pruitt, chairman and chief executive of Sundt Cos. in Tempe, Ariz.

Don Weaver, vice president of Weaver Bailey Contractors Inc. in El Paso, Ark., says, "The highway industry doesn't get a lot of credit, but we're one of the biggest recyclers."

David Goldberg, communications director for Transportation for America, a nonprofit coalition of transit, housing and urban-planning groups, counters that "the real issue is whether we are creating more car dependence and oil dependence." He and other smart-growth advocates agree that road and bridge repair can be an effective use of quick stimulus money.

"We also want to make sure that for the longer term, we give ourselves a minute to think about the infrastructure we need for the post-oil-dependent economy," he says

In addition to highway maintenance, Transportation for America supports funding mass-transit authorities to preserve jobs and investment in rail, bicycle and pedestrian facilities that expand transportation options.

Write to Jonathan Karp at jonathan.karp@wsj.com

Printed in The Wall Street Journal, page C10

Apartments Try to Stay Afloat

By PRABHA NATARAJAN

The rapid reversal of fortunes in commercial real estate is taking down yet another sector: apartment complexes.

Owners and developers of multifamily buildings are trying to stay afloat as the deteriorating economy and escalating job losses create difficulties in raising rents and shortfalls in projected revenues from these buildings.

While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up.

A downturn in this sector also drags in housing mortgage giants Fannie Mae and Freddie Mac, which are already hurting from losses in subprime and other risky home loans. Together, the two mortgage giants have nearly $200 billion of these loans on their books.

"On a broader scale, these loans are performing well relative to other segments in the market," said David Cardwell, vice president of capital markets at the National Multi Housing Council, a Washington group representing apartment owners. "But conventional wisdom on apartments is that it follows the trend in jobs. It takes a few months for job losses to trickle into the rental market, as people double up in apartments or move in with their folks."

Last week, the government reported that the U.S. jobless rate rose 0.4 percentage point to 7.2% for December. Less than a year ago, the rate stood at just 5%.

Much of the multifamily sector's problems center on troubles in converting apartments to condominiums, as is the case in Miami, or on the challenges in converting rent-controlled units to market-rate apartments, as in New York's Manhattan.

In Florida, California, Arizona and Nevada, the flood of unsold condominiums entering the apartment market and is lowering rents in those areas, Barclays Capital analysts say. That has resulted in lower revenues for owners, which in some cases is making it more difficult to keep up with mortgage payments.

Meanwhile, in New York, aggressive revenue projections and poor underwriting have dragged some recently sold large properties into trouble.

For instance, the $222.5 million loan taken by Rockpoint Group and Stellar Management to purchase the Riverton Apartments was transferred to special servicing in August as the buyers warned of an imminent default of the loan. By December, they had fallen behind in their mortgage payments. The 1,228-unit rent-controlled complex in Harlem is converting to market-rent units at a much slower pace than expected, according to a Moody's Investors Service report.

At the time of the loan securitization in 2007, reserves of $48.3 million were set aside for any shortfalls in debt service and property renovation. By September, the reserves had fallen to $10.8 million.

Similarly, at the Peter Cooper Village-Stuyvesant Town property on Manhattan's East Side, only 37% of the units were converted to market rents as of September, compared with 28.5% at the time of the loan securitization, according to Moody's. In 2006, at the time of the purchase by Tishman Speyer and Blackrock Realty Advisors, nearly half of the apartments were expected to be converted by 2008. The loan's $590 million reserve had dwindled to $200 million by September, which is expected to be depleted by the end of the third quarter of this year.

In November, the delinquency rate on securitized loans to apartment and condominium properties rose to 1.9%, a sharp jump from the 0.9% at the start of the year, according to Real-point LLC, a Horsham, Pa., rating firm that analyzes commercial-property mortgages and financing. Realpoint will have December data available at the end of this month.

Delinquent multifamily loans now add up to $3.17 billion and make up nearly 45% of the delinquencies affecting the nearly $1 trillion commercial mortgage-backed securities, Realpoint research shows.

At Fannie Mae, serious delinquency rates on multifamily loans doubled to 0.21% in October 2008 from 0.1% in January.

Write to Prabha Natarajan at prabha.natarajan@dowjones.com

Printed in The Wall Street Journal, page C11

 

 

 

Downturn Ends Building Boom in New York

By CHRISTINE HAUGHNEY

Published: December 26, 2008 New York Times

Nearly $5 billion in development projects in New York City have been delayed or canceled because of the economic crisis, an extraordinary body blow to an industry that last year provided 130,000 unionized jobs, according to numbers tracked by a local trade group.

 The setbacks for development — perhaps the single greatest economic force in the city over the last two decades — are likely to mean, in the words of one researcher, that the landscape of New York will be virtually unchanged for two years.

“There’s no way to finance a project,” said the researcher, Stephen R. Blank of the Urban Land Institute, a nonprofit group.

Charles Blaichman is not about to argue with that assessment. Looking south from the eighth floor of a half-finished office tower on 14th Street on a recent day, Mr. Blaichman pointed to buildings he had developed in the meatpacking district. But when he turned north to the blocks along the High Line, once among the most sought-after areas for development, he surveyed a landscape of frustration: the planned sites of three luxury hotels, all stalled by recession.

Several indicators show that developers nationwide have also been affected by the tighter lending markets. The growth rate for construction and land development loans shrunk drastically this year — to 0.08 percent through September, compared with 11.3 percent for all of 2007 and 25.7 percent in 2006, according to data tracked by the Federal Deposit Insurance Corporation.

And developers who have loans are missing payments. The percentage of loans in default nationwide jumped to 7.3 percent through September 2008, compared with 1 percent in 2007, according to data tracked by Reis Inc., a New York-based real estate research company.

New York’s development world is rife with such stories as developers who have been busy for years are killing projects or scrambling to avoid default because of the credit crunch.

Mr. Blaichman, who has built two dozen projects in the past 20 years, is struggling to borrow money: $370 million for the three hotels, which include a venture with Jay-Z, the hip-hop mogul. A year ago, it would have seemed a reasonable amount for Mr. Blaichman. Not now.

“Even the banks who want to give us money can’t,” he said.

The long-term impact is potentially immense, experts said. Construction generated more than $30 billion in economic activity in New York last year, said Louis J. Coletti, the chief executive of the Building Trades Employers’ Association. The $5 billion in canceled or delayed projects tracked by Mr. Coletti’s association include all types of construction: luxury high-rise buildings, office renovations for major banks and new hospital wings. Mr. Coletti’s association, which represents 27 contractor groups, is talking to the trade unions about accepting wage cuts or freezes. So far there is no deal.

Not surprisingly, unemployment in the construction industry is soaring: in October, it was up by more than 50 percent from the same period last year, labor statistics show.

Experience does not seem to matter. Over the past 15 years, Josh Guberman, 48, developed 28 condo buildings in Brooklyn and Manhattan, many of them purchased by well-paid bankers. He is cutting back to one project in 2009.

Donald Capoccia, 53, who has built roughly 4,500 condos and moderate-income housing units in all five boroughs, took the day after Thanksgiving off, for the first time in 20 years, because business was so slow. He is shifting his attention to projects like housing for the elderly on Staten Island, which the government seems willing to finance.

Some of their better known and even wealthier counterparts are facing the same problems. In August, Deutsche Bank started foreclosure proceedings against William S. Macklowe over his planned project at the former Drake Hotel on Park Avenue. Kent M. Swig, Mr. Macklowe’s brother-in-law, recently shut down the sales office for a condo tower planned for 25 Broad Street after his lender, Lehman Brothers, declared bankruptcy in September. Several commercial and residential brokers said they were spending nearly half their days advising developers who are trying to find new uses for sites they fear will not be profitable.

“That rug has been pulled out from under their feet,” said David Johnson, a real estate broker with Eastern Consolidated who was involved with selling the site for the proposed hotel to Mr. Blaichman, Jay-Z and their business partners for $66 million, which included the property and adjoining air rights. Mr. Johnson said that because many banks are not lending, the only option for many developers is to take on debt from less traditional lenders like foreign investors or private equity firms that charge interest rates as high as 20 percent.

That doesn’t mean that all construction in New York will grind to a halt immediately. Mr. Guberman is moving forward with one condo tower at 87th Street and Broadway that awaits approval for a loan; he expects it will attract buyers even in a slowing economy. Mr. Capoccia is trying to finish selling units at a Downtown Brooklyn condominium project, and is slowly moving ahead on applying for permits for an East Village project.

Mr. Blaichman, 54, is keeping busy with four buildings financed before the slowdown. He has found fashion and advertising firms to rent space in his tower at 450 West 14th Street and buyers for two downtown condo buildings. He recently rented a Lower East Side building to the School of Visual Arts as a dorm.

Mr. Blaichman had success in Greenwich Village and the meatpacking district, where he developed the private club SoHo House, the restaurant Spice Market and the Theory store. He had similar hopes for the area along the High Line, where he bought properties last year when they were fetching record prices.

An art collector, he considered the area destined for growth because of its many galleries and its proximity to the park being built on elevated railroad tracks that have given the area its name. The park, which extends 1.45 miles from Gansevoort Street to 34th Street, is expected to be completed in the spring.

Other developers have shown that buyers will pay high prices to be in the area. Condo projects designed by well-known architects like Jean Nouvel and Annabelle Selldorf have been eagerly anticipated. In recent months, buyers have paid $2 million for a two-bedroom unit and $3 million for a three-bedroom at Ms. Selldorf’s project, according to Streeteasy.com, a real estate Web site.

“It’s one of the greatest stretches of undeveloped areas,” Mr. Blaichman said. “I still think it’s going to take off.”

In August 2007, Mr. Blaichman bought the site and air rights of a former Time Warner Cable warehouse. He thought the neighborhood needed its first full-service five-star hotel, in contrast to the many boutique hotels sprouting up downtown. So with his partners, Jay-Z and Abram and Scott Shnay, he envisioned a hotel with a pool, gym, spa and multiple restaurants under a brand called J Hotels. But since his mortgage brokers started shopping in late summer for roughly $200 million in financing, they have only one serious prospect for a lender.

For now, he is seeking an extension on the mortgage — monthly payments are to begin in the coming months — and trying to rent the warehouse. (He currently has no income from the property.)

It is perhaps small comfort that his fellow developers are having as many problems getting loans. Shaya Boymelgreen had banks “pull back” recently on financing for a 107-unit rental tower the developer is building at 500 West 23rd Street, according to Sara Mirski, managing director of development for Boymelgreen Developers. The half-finished project looked abandoned on two recent visits, but Ms. Mirski said that construction will continue. Banks have “invited” the developer to reapply for a loan next year and have offered interim bridge loans for up to $30 million.

Mr. Blaichman cuts a more mellow figure than many other developers do. He avoids the real estate social scene, tries to turn his cellphone off after 6 p.m. and plays folk guitar in his spare time.

For now, Mr. Blaichman seems stoic about his plight. At a diner, he polished off a Swiss-cheese omelet and calmly noted that he had no near-term way to pay off his debts. He exercises several times a week and tells his three children to curb their shopping even as he regularly presses his mortgage bankers for answers.

“I sleep pretty well,” Mr. Blaichman said. “There’s nothing you can do in the middle of the night that will help your projects.”

But even when the lending market improves — in months, or years — restarting large-scale projects will not be a quick process. A freeze in development, in fact, could continue well after the recession ends.

Mr. Blank of the Urban Land Institute said he has taken to giving the following advice to real estate executives: “We told them to take up golf.”

This article has been revised to reflect the following correction:

Correction: December 31, 2008 
An article on Saturday about the end of the building boom in New York City referred incorrectly to the family relationship between the developers William S. Macklowe, whose planned project at the former Drake Hotel is in foreclosure, and Kent M. Swig, who shut down the sales office for a condominium tower on Broad Street after his lender, Lehman Brothers, declared bankruptcy. Mr. Swig is Mr. Macklowe’s brother-in-law, not his son-in-law.