How Interest Rates and Inflation May Affect Commercial Construction
Anyone paying at least mild attention to the U.S. economy can tell you how much uncertainty is swirling around at the moment. The doom and gloom that accompanies keeping up with all of the most recent updates can be overwhelming. Two factors driving the economy in different directions continue to be framed by these issues. Inflation is at a 50-year high, while the unemployment rate is at a 50-year low. Job and wage growth are setting modern day records, but the Fed just upped interest rates at a clip not seen in the last 20 years. There’s been much talk about a looming recession, just around the bend. But is there?
No matter your industry, the economic experts will continue to read the tea leaves for what’s in store for us in the remainder of 2022. But at Phoenix Masonry, we took the liberty of doing some research of our own to share how interest rates and inflation may affect the commercial construction industry. Here’s what we found out:
On Interest Rate Hikes
The Fed has set up an aggressive sequence of interest rate hikes for 2022. It’s all part of their plan to ratchet down the runaway inflation rate, hopefully to head off a period of recession. How might that affect commercial construction? First and foremost, fixed-rate loans will be unaffected, but short-term lending will be restricted, which could crimp the purchase of materials on bid projects. And if you carry those purchases on revolving credit, you’ll pay more in overhead. In extreme cases, if interest rates get too high, there’s the chance some projects could even be put on hold.
We’ve already felt some effects of inflation, as material costs for construction projects have risen 10-30% recently. As we’re well aware, that affects our profit margins. Inflation is the No. 1 concern for small business owners at the moment, and with good reason. When banks increase their lending costs, that gets passed along to borrowers. Labor costs also rise, which has the potential to put commercial contractors in a bit of a bind when bidding for projects. We expect a lot of scrutiny in this area, which is why we’re all-in on pre-qualified bids and validation when competing for municipal and general contractor project requests.
As for solutions, there are things we, as commercial construction owners, can do to mitigate the effects of rising interest rates and inflation. We need to pay extra attention to our market position and adjust our pricing to match numbers that more closely align with that of our competition. You can minimize supply chain disruptions by diversifying your vendor contracts – anything with a long-lead time or low-cost margins should be stockpiled. Streamlining your operations and making sure you have efficient teams on job sites can also help. Also, staying actively engaged companywide on any operational strategies will help you minimize risks and maximize remaining profits. We wish everyone the best of luck, as we’re all in this together!