Recent Trends in Real Estate Development: Fall 2023

<p>This blog post is the first in a regular series aimed at informing local government partners about current conditions facing private developers and development projects in their communities.</p> <p>Lending for real estate development projects: interest rates & tighter lending standards</p> <p>In 2022, the Federal Reserve began raising interest rates to combat inflation, which increased the cost of financing new construction for real estate developments. In 2021, for example, a developer able to secure a $5 million loan with 3.5% interest to develop a new apartment building would have to pay approximately $300,000 a year in debt payments. With an interest rate of 8.5% today, debt payments on that loan would cost $483,000 a year, a 60% increase. In addition, the size of the loan would likely decrease due to the project’s inability to cover the higher debt service. According to one survey of the nation’s 30 leading apartment developers, 61% of projects were no longer economically feasible in June 2023, up from 18% in March 2022 right before the Federal Reserve began increasing rates.[1]</p> <p></p> <p>In September, 73% of surveyed apartment builders reported that projects were delayed due to the availability of financing, or loans to pay for the cost of construction. One reason why lending has declined is because lenders have tightened their credit standards.</p> <p>Figure 2 shows survey response data from the Federal Reserve’s Senior Loan Officer Opinion Survey (or SLOOS). The survey asks banks whether they are tightening standards for commercial real estate loans used for construction or land development. According to one analysis from First American Bank, [...]</p>