How Rising Interest Rates Affect Commercial Construction Projects

A year ago, as inflation continued to rise into record territory, the Federal Reserve finally swung into action to cool the economy. What followed was a series of rapid-fire rate hikes in succession that took interest rates from near-zero to 5.0 percent – now the highest level since 2007. When you hear people talk about rate hikes, they tend to focus on two specific areas – credit card debt (becomes harder to pay off) and mortgages (becomes more expensive to buy a home). But there happens to be a “trickle-down” effect for anyone who owns a small business, such as Phoenix Masonry.

To get you up to speed on what interest rate hikes mean to us, here’s how interest rates affect commercial construction project management…

Infrastructure Investment and Jobs Act (IIJA)
Two years after the onset of the global pandemic, which disrupted wide swaths of the commercial construction industry, most contractors and subcontractors breathed a sigh of relief when the Infrastructure bill was signed into law, with a proposed $11.2 trillion earmarked for construction projects. But most of these funds have been allocated to rehabilitate roads and bridges. However, when it comes to government stimulus money – it takes a hot moment or two for these dollars to “trickle-down” to our level.

What Happens With a Rate Hike Increase?
Whenever the Fed meets to determine the necessity of another rate hike, the banking industry holds its breath. Because if the Fed does decide to hike rates – even a quarter of a point – the effect is immediate, not exactly of the “trickle-down” variety. Banks routinely raise their own rates for borrowing money or repaying credit lines immediately. Because interest rates are tied directly to mortgage rates, these hikes tend to have a much more adverse effect on residential construction. That’s not exactly our wheelhouse of expertise at Phoenix Masonry, but rate hikes permeate every other area as well – even for contractors who work in other specialized commercial construction sectors such as masonry.

Rate Hike Fallout
What’s the overall effect of an interest rate hike to a company like Phoenix Masonry? The most glaring and obvious result is that the cost of borrowing goes up across the board. The materials and supplies we need to complete our commercial projects are also tied up in funding. The same goes for wages, which have grown tight thanks to labor shortages in commercial construction. What we may have originally bid to complete a project has now changed – but we typically don’t get to renegotiate the terms just because interest rates have risen. That has a direct effect on the company’s profitability. It this case, the additional costs go both ways – trickle-up and trickle-down. Thankfully, a great deal of the work that we do at Phoenix Masonry has to do with publicly funded projects. And those tend to be more stable, if not healthier, than their private sector counterparts. In fact – in just the past year – jobs related to infrastructure including water supply, development and conservation, and sewage/waste disposal are all up across the board some 12-24%.

The successive rate hikes over the past year – eight in all – were designed to stop the runaway rate of inflation. Critics will point to the outcome, a reduction of 3-4% from last year’s high of 9.1% and claim success. But for the many other business owners out there feeling the “trickle-down” effect of rate hikes, the concern of their effect on our industries is just another worry we have to deal with for the time being.

When it comes to interest rate hikes, we try not to get too discouraged. Because the market is designed to be cyclical in nature, they have a tendency to come down as well.