In a continuous effort to get a handle on inflation, last month the Feds increased interest rates for the third time this year and predict more increases in the future. While rates are still lower than what was experienced 20+ years ago, they are much higher than what we have become accustomed to, and developers and investors are facing challenges as a result.
Interest rates are just one of the factors contributing to the challenges faced by real estate investors and developers, but they are significant. High interest rates on construction loans combined with a shortage of loan options is creating a huge problem. Investors and developers are having to get creative and find ways to make up for the cost in other areas of their construction budgets in order to see the returns they were hoping for.
Due to the volatility, many private equity debt funds are limiting their loan options by pooling together construction loans and selling them as collateralized loan obligations. The debt funds that are still providing construction loans with flexible terms are offering high leverage. This covers a huge portion of the costs of large construction projects, however, in exchange for higher leverage, they are charging higher interest rates.
Rising costs of building materials, labor, and supply and demand issues are also main contributors in this volatile environment. The good news for developers and investors is that as inflation drives these factors up, it is also driving up things like rent and property value.
Despite these challenges, developers and investors continue to move forward with new projects. Many remain optimistic and spend time and energy searching for innovative ways to reap their sought after returns. Fortunately for them, apartment rents continue to rise, and the population and job growth, specifically in the SunBelt region, is very promising.
Cleverly managing your budget, finding flexible financing, and investing in the right market are all ways developers and investors are continuing to thrive in the midst of rising interest rates and additional challenges.
The lending professionals at CALCAP Lending are experts at navigating the challenges of interest rates, providing successful outcomes for their clients.