Taking a Bite Out of the Big Apple: A 2024 NY Construction Market Update

Construction spending on projects across New York City was projected to reach $83 billion by the end of 2023, according to an October 2023 report from the New York Building Congress (NYBC).¹ This amount represents a gain of about $13 billion from 2022 and a 10% jump from pre-pandemic levels.

Last year's growth stemmed from a surge in manufacturing, institutional, retail, hotel and office projects. Nonresidential work accounted for nearly 42% of total construction spending in 2023 and will reach almost $115 billion between 2023 and 2025 — 32% higher compared to the pre-pandemic years of 2017 to 2019, according NYBC's report.

In fact, office occupancies have experienced an uptick since the pandemic. According to Metro Manhattan Office Space, by year-end 2023, more than half of the workforce returned to the office.² At the same time, there's been a shift for smaller office space. The outlook for Manhattan retail space retail is also optimistic, with luxury retailers making a comeback after the high vacancy rates of 2021-2022.

The commercial construction market optimism is partly due to lower interest rates and an overall improved economic view from early 2023, which should generate better financing terms and more deal-making.

More Infrastructure Spending

The New York construction market is also getting a boost this year from Governor Kathy Hochul's $23.2 billion budget for projects across the state, including in New York City. The 2024 budget allocates spending for road and bridge repairs, mental health housing, clean water projects, New York City Housing Authority projects and emergency operations.

The Residential Market

New residential development permits in 2023 fell sharply, according to NYBC research, despite the increase in nonresidential construction spending. NYBC reported that the number of new units in 2023 fell from 30,000 to 11,300.

The Construction Insurance Market in NYC

So, how do these trends tie back to the Construction insurance market?

The Commercial Property insurance market, including Builders Risk insurance, continues to see rate firming due to multiple billion-dollar weather events and resulting insured losses.

"Add capacity restrictions to this, particularly in the Builders Risk insurance market. Depending on the size of the project, catastrophe exposure and type of construction, you see more stringent terms and higher rates," says Mike Mulvey, executive vice president and leader of the Northeast Construction practice for Risk Placement Services (RPS).

In 2023, 28 confirmed weather/climate disaster events had losses exceeding $1 billion each in the US, according to the National Oceanic and Atmospheric Administration (NOAA).³ Insured losses for 2023 from natural catastrophes will exceed more than $100 billion, according to Swiss Re, of which $60 billion is from severe convective storms.⁴

"In addition to focusing on flood and windstorm risks, carriers are applying the same underwriting strategy for severe convective storm exposures in the Builders Risk insurance market," explains Mulvey.

"Valuations continue to receive underwriting scrutiny," he continues. "Clients should stay ahead of valuations by demonstrating that the replacement costs they provide are supported by estimates of the cost of reconstruction following a disaster."

Project extensions for Builders Risk coverage and securing favorable conditions from carriers for extended policy periods continue to be challenging. Some carriers add surcharges to rates or raise deductibles for extensions.

The Automobile Liability insurance market continues to experience double-digit increases for construction accounts with heavy-vehicle schedules. Underwriters are closely analyzing an insured's safety procedures and paying particular attention to those with a large and heavy fleet.

On the Excess Liability insurance side, carriers require a minimum of a $5 million attachment point.

"We still need five carriers to reach $25 million of limits in place of two or three," says Mulvey.

New York Labor Law

New York Labor Law claims continue to impact insurer loss experience, with nuclear verdicts and multimillion-dollar settlements commonplace.

"The laws and resulting claims have driven up insurance costs and limited the number of carriers willing to write coverage in the state," says Mulvey.

Construction Trends to Watch

Modular construction, a specific type of prefabricated construction, continues to gain traction as construction companies look to significantly reduce project timelines, save on labor, lower materials costs with bulk purchases and reduce the risk of material theft or damage, further lowering costs. Modular construction is also a greener alternative to traditional construction methods. The off-site manufacturing process generates less waste, as materials can be reused and recycled more efficiently.

When putting together a Builder Risk insurance program, it's important to review the contract documents to determine the insurance requirements. This review encompasses design, construction and finance arrangements. In the case of modular construction projects, the agreements with each fabricator should be evaluated, including who, what, where, when and how the Builders Risk policy should give coverage.

New construction materials and methods, such as the use of digital construction and mass timber, are being deployed. For example, timber products made by engineering several types of softwood together can produce a lumber material with the power to replace steel and concrete, which means fewer emissions and less waste during the manufacturing process.

Underwriters will extensively examine how the engineered materials are assembled, as well as any additional insured risks that may arise. Carriers, for example, are concerned about water damage since timber is more vulnerable to this hazard. Concerns are raised about the potential of engineered timber products delaminating and the risk of structural damage due to long-term, hidden water seepage.

The New York City construction has always been, and will continue to be, a unique behemoth. Our RPS team is here to help you make sense of things, from Battery Park to Harlem and everywhere in between.