The Impact of Rising Interest Rates and Inflation on Property Development

By August 5, 2022Industry News

No doubt, the rising inflation and interest rates continue to impact various sectors negatively. Presently, the USA inflation rate stands at 9.1%, an unimaginable increase from nearly 0% in May 2020 (Statista). On the flip side, the Federal Reserve recently increased interest rates by 0.75 again to curb record-high inflation.

But what do these figures mean to you, a land owner or potential land owner looking to build a multi-tenant facility such as an apartment, student housing, senior living, etc.? What are the implications for your property development plans? And how can you use this information to better position yourself for success? This comprehensive blog post takes a deeper dive into these topics, providing actionable insights and solutions to help you navigate the current economic climate.

How Inflation and Interest Rates are Changing the Game for Developers

Inflation and interest rates are two major factors that influence the cost of real estate. Unfortunately, these factors are expected to continue rising over the next few years. That means developers will face challenges when trying to build their projects. Here are some ways in which inflation and interest rates are affecting the game for developers:

  • Rising Cost of Materials. As mentioned earlier, inflation and interest rates drive the price of raw materials like steel, cement, lumber, asphalt, etc. The rising cost of these materials makes it difficult for developers to afford the high cost of building projects.
  • Higher Loan Rates. As the economy continues to improve, banks are raising the rate at which they lend money. That means borrowers have to pay more money to finance their projects.
  • Increasing Land Prices. Land is one of the most expensive components of any development project. As land becomes increasingly scarce, developers struggle to find ideal/strategic places to put up their projects.
  • Rising Construction Costs. Construction costs are also increasing, with workers asking for better remuneration to agree to work on projects. This is mainly due to rising inflation and interest rates. With these factors, developers must work harder to ensure their projects remain profitable.
  • Lack of Capital. Financiers are beginning to take caution before investing in real estate projects. They are becoming more selective about where they invest their funds. This is partly because there is an increase in the amount of debt in the market.
  • Falling Sales Volume. Inflationary environments reduce purchasing power in some clients due to the uneven rise in prices. Investors are also to blame for the falling sales volume, as they’re conscious of the current economic environment and choose not to buy properties during times of uncertainty.

These are just some of the top ways high inflation and interest rates have shaken the property development market. But all is not lost, as there are several actions developers can take now to position themselves for success amid the current situation.

What You Can Do Now to Prepare Yourself for Successful Real Estate Projects

If you’re planning on developing a multi-tenant property, here are a few ways to navigate the current economic climate and reap maximum returns from your investments:

1. Know Your Market

Before embarking on any real estate project, you must know your target market. If you don’t know your potential customers, how do you expect to sell them products or services? It’s essential to understand what people want and why they want it. For example, if you plan to develop a student housing facility, you should first identify the demographic group interested in such a product.

Once you know your target customer, you can create marketing strategies that appeal to this particular audience. For instance, in the case of a student housing facility, you want to entice them with affordable rents/leases and attractive yet energy-saving amenities.

2. Understand Your Project

Now that you know who will use your facilities, you need to determine what kind of space you’ll provide. Will it be a single-family home, duplex, apartment building, etc.? Once you know what type of property you’re developing, you can begin to think about its design.

For example, if you’re creating a residential complex, you may want to consider adding a swimming pool or gymnasium. These features will help make your project stand out from others and give prospective tenants something to look forward to when they move into their units.

Developermaking a budget with the blueprint of a project

3. Create a Budget

Setting realistic budgets is one of the best ways to bypass the harsh economic times and maximize profits from your real estate investment. By knowing how much money you have available to spend on your project, you can better allocate resources toward the most profitable aspects of your business.

Besides, having a budget allows you to avoid overspending on bureaucracies and unessential items like legal paperwork that can be completed online. Instead, you can focus your efforts on the things that matter most – like designing a beautiful community center or providing quality living spaces for your tenants.

4. Hire Professionals

When it comes to real estate development, hiring professionals is one of the smartest decisions you can make. A professional team will ensure that every aspect of your project runs smoothly and efficiently. They also offer valuable insight regarding the legal requirements of your industry.

For instance, when you hire a professional architecture firm, you’ll rest easy knowing that your project’s design will meet all local zoning regulations. Likewise, a professional engineer will ensure that your buildings comply with safety standards set forth by the U.S. Department of Housing and Urban Development (HUD) set forth. Other professionals you should consider working with include lawyers, accountants, and financial advisors.

5. Build Relationships

Finally, you must build relationships with other businesses within your target market. This way, you can tap into their knowledge and expertise, which could prove invaluable during the course of your project.

In addition, you can use these connections to gain access to financing options that might not otherwise be available to you. After all, many banks require that developers work with an established relationship before offering loans.

Ted Trout Architect & Associates is Your Go-To Architecture Consulting Firm!

Are you ready to maneuver the ongoing economic challenges and take advantage of opportunities in the real estate sector? If so, Ted Trout Architect & Associates can help! We’re a team of highly professional, multi-discipline architecture consultants specializing in the design of commercial properties, HUDs, private residences, student housing, and Tax Credit housing. We also help our clients with land planning, ensuring they get the most value from their property investments.

Contact us today to learn more about what we can do for you!