>From The Record
Tuesday, September 23, 2008
BY ANDREW TANGEL
STAFF WRITER
When Mountain Development Corp. moved into its Clifton headquarters in early 2002, the company estimated it would pay about $12,000 for each space in a new parking garage. A new garage could have added as many as 300 spots.
Since then, Mountain Development has brought more tenants into its seven-story building at 100 Delawanna Ave. So when the company again considered building a garage late last year, executives were shocked at the new estimates: costs would range from $22,000 to $28,000 a space, said Michael Seeve, the firm’s president.
“The cost has gotten totally out of control,” Seeve said. Mountain Development decided to stick with surface parking for now and attract tenants that require fewer spaces.
The costs of steel and concrete – the main materials of parking garages – have soared in recent years, fueled by rising demand in rapidly developing countries such as China and India. Prices for products made at steel mills, meanwhile, shot up 34 percent in 2004 alone. Following further annual increases, the cost has risen more than 20 percent so far this year, according to the Bureau of Labor Statistics.
The gains are reflected in estimates provided by Walker Parking Associates, an industry consulting firm. A parking space in a garage in New York City, which most closely approximates the New Jersey market, cost about $14,600 to build in 2000, according to Walker’s estimates. This year, an average parking space in New York City runs about $20,100. The price includes costs for financing and engineering, but not land.
The expenses are posing challenges to developers. For builders of office properties, particularly those in suburban areas such as Bergen County, the soaring costs of constructing parking garages pose a dilemma, Seeve said. Developers have treated parking garages as sunk costs, meaning they didn’t intend to pass them on to tenants, he said.
“When you rent space, and tenants compare buildings, they don’t really pay you more because you’ve spent the money on structured parking,” Seeve said. “But if you don’t spend the money on structured parking and you don’t have the requisite parking to lease office space, people just aren’t going to take the space.”
And, he added: “If your employees can’t park when they have to be there, then the building doesn’t work for you.”
The costs also pose problems for developers in urban areas, where space is scarcer and more expensive, and where many tenants often rely on cars even if mass transportation is more available.
“It’s nearly impossible to look at urban development without having a parking deck of some size,” said Russell Tepper, vice president of development at Matrix Development Group in Cranbury.
With pollution remediation and features such as retail space built into the decks, parking garages can wind up costing as much as $35,000 a space in urban areas or more, said Richard Johnson, a senior vice president at Matrix.
For developers to break even on a project, with traditional financing arrangements – for example, an 8.5 percent interest rate for a mix of a bank loan and equity over seven to 10 years – each space would need to generate revenue of nearly $300 a month, Johnson said. That’s generally too expensive for markets in New Jersey.
Parking garage authorities, which can issue bonds that have a lower interest rate over a longer period of time, need to generate roughly $140 a space per month, said Leonard Bier, executive director of the New Jersey Parking Institute, an agency whose primary members are the cities and parking authorities that run garages.
As construction costs for parking garages increase, so too do the prices drivers pay to park. Five years ago, parking authorities needed to generate about $125 a space per month, Bier said.
“There’s an obvious cause and effect” between higher construction costs and more expensive parking, Bier said.
Garage operators must service the debt they incurred when issuing bonds, as well as pay for operating costs and set aside some funds for future improvements, he said.
As garage costs climb, developers have sought tax credits to offset the rising expenses. Johnson said Matrix has sought to reclassify the garages as infrastructure and not real estate, which underwriters expect to pay for itself in relatively few years.
Also, developers have struck public-private partnerships with parking authorities, Bier said. Developers may provide the land, for example, but parking authorities may seek the financing because they typically can issue bonds at lower rates.
On the construction side, engineers have sought to minimize the use of steel in parking garages. One technique involves stretching steel strands, pouring concrete over the steel and then releasing the stress, making the concrete very stiff.
“Almost nobody will build a parking garage unless they have to,” said Greg Neiderer, director of operations in Walker Parking’s mid-Atlantic office in Wayne, Pa. Garages often cost 25 percent of a development, he added.
“The deal might make sense or might not make sense based on the garage,” Neiderer said. “For developers, parking can kill a deal. I see it somewhat often. We have some developers who come to us over and over again to try to salvage a project.”