Interest rates and the commercial construction need gap

While some developers are pressing pause on projects, the need presses on

When interest rates push upwards, it’s natural for developers to consider pressing pause on the projects in their pipeline, hoping to wait it out until rates ease up. As a design and build firm, we’ve watched this trend as interest rates have climbed in the past two years.

But when the Federal Reserve met on December 13 to determine the trajectory of interest rates, they decided to hold rates steady as inflationary pressures begin to ease. Moreover, the Fed indicated there could be multiple rate cuts coming our way in 2024.

In addition to launching the Dow skyward, an almost audible sigh of relief could be heard throughout the halls of the commercial property construction and multifamily housing sectors. The change in direction is particularly promising as it marks a pause or potential shift to the 11 concurrent rate hikes leading up to the December Fed meeting.

The rationale behind delaying commercial construction and the need gap

If you are among those who have waited to break ground on your next project due to economic pressures, rest assured, you’re certainly not alone. Historically, this has been a popular choice when investors are looking to reduce risk. But there may be a reason to break away from the crowd. Delaying projects in favor of potentially lower interest rates may seem like a sound choice, but if we dig deeper, it becomes obvious there is an opportunity cost that comes along with this approach to investing in commercial real estate development. We call it “the need gap.”

Simply put, demand for certain commercial spaces and multifamily housing continues to grow, even when developers and commercial construction general contractors wait out high interest rates.

The key, of course, is in your growth strategy. Research shows that while demand for certain office space is soft, just 10% of office spaces comprised 80% of the tenant occupancy declines in 2022. Those declines are most often seen in aged buildings in less desirable locations.

So, what’s particularly hot right now? For one, we’re seeing a shift toward high-quality office spaces in prime city centers. Likewise, the landscape for mixed-use properties is shifting somewhat, with an uptick in interest in suburban zones among retailers who may not see as much foot traffic due to the remote or hybrid working world we have today. Of course, multifamily housing remains in demand as many buyers continue to be priced out of the home-buying market, and inventory remains tight in many markets. And demand for industrial space, tech/data center real estate and senior housing remains robust.

Ready to build again? Design and build can make all the difference.

Developers in the know recognize that the need for various types of housing products and commercial space may change in scope or location but never truly fades away. If you’re ready to revisit commercial construction projects you’ve put on hold waiting for interest rates to ease, we’re here to help.

With design-build construction, you can be assured you have a team looking out for your best interests, no matter where interest rates may be headed. Contact us today to learn more about our valuable pre-construction services and how design-build can help you take advantage of need gap-induced opportunities.