Construction Pros Expect Interest Rate Cut to Spur New Work
Construction executives welcomed the Federal Reserve’s 0.5 percentage point rate cut announced on Wednesday, saying the move is the start of broader easing likely to spur new project starts.
“If we have a series of rate cuts over the next three to six months, that will likely start to show up in lower construction [loan] rates and greater availability of equity investment toward the end of this year and into next year,” said John Sullivan, chair of the U.S. real estate practice at DLA Piper, a London-based law firm. “As rates come down, borrowing costs will also come down for many projects and there will be more real estate investment and construction activity.”
The Fed’s move follows 11 rate hikes starting in early 2022 to combat soaring inflation. Despite an overall positive reaction to the cut, construction executives said the full impact of lower rates will take time to materialize as financing terms and project planning processes catch up to the new environment.
In other words, while lower rates are encouraging for construction activity, it’s only part of the equation, said Cory Moore, CEO of Big-D Cos., a Salt Lake City-based general contractor.
“The interest rate cut is generally good news for the construction industry, as it reduces borrowing costs and can encourage more investment in new projects,” said Moore. “That said, to really move the needle, loan-to-value ratios will need to improve alongside the rate cut to make financing even more attractive.”
Impact on project pipelines
Construction executives agree construction activity tends to be a lagging indicator in the economy. So, while the rate cut is a welcome relief, executives caution that the industry’s long project cycles mean any uptick in activity will be gradual.
“With rate decreases, we expect demand for new projects to begin to increase gradually throughout 2025,” said Anthony Johnson, president of the industrial business unit at Clayco, a Chicago-based construction firm. “However, these projects will take time to get through planning and design and start construction in the field.”
That sentiment was echoed by Will Pender, president of the Gulf States region at Adolfson & Peterson, a Minneapolis-based contractor. He noted many projects were shelved during the interest rate hikes due to high capital costs, but a sustained decrease in rates could bring developers back to the table.
“I don’t believe the impact is going to be felt immediately but it is a good first step,” said Pender. “I see construction starts ramping up in the first quarter and the second quarter of next year.”
