For the past few years, the construction industry has dealt with several “monsters” ranging from inflation to labor/succession issues to the constantly prevalent boogeyman, cash flow. Yesterday, the Federal Reserve started to put one of the monsters back under the bed by agreeing to cut interest rates by .50%/50 basis points. As the third quarter comes to a close and planning for 2025 is heavily underway, let’s look at a few ways this development could help the construction industry.
- The cost of borrowing money will be lower. Reduced interest rates will make it more attractive for contractors to utilize their lines of credit. This common strategy for contractors to float cash flow between requisition funding has become costly and drastically impacted bottom lines over the past few years; this reduction will help contractors recover some interest costs by enhancing cash flow. Not to mention, the cost of acquiring equipment via financing will also come down.
- More projects should come online. Several projects, some high-profile, others not so, have yet to start due to constrained financing costs. In a lower interest rate environment, mortgages and business loans could become more affordable, revitalizing building plans, especially as we see a strong demand for housing and commercial building space to be renovated as people continue to return to offices. In other words, as simple as it seems, it becomes easier to finance construction projects with lower interest rates.
- Be aware of increased competition. In an environment where several contractors are already actively bidding in the public works arena at lower-than-usual gross margin rates, renewed, lower-cost access to capital may increase competition in the industry as more firms have access to funds to take on projects.
While there is a cause for optimism for the immediate future, it’s important to note that interest rates are just one factor affecting the construction industry. Other elements like overall economic conditions, labor availability, and regulations also play significant roles.
As contractors wind down the 3rd quarter and look to end the year while planning for the next, consult a Grassi construction advisor or Carl Oliveri, Partner and Construction Practice Leader, to ensure you are planning for success.
