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Construction executives on Thursday welcomed the Federal Reserve’s 0.25 percentage point rate cut, saying it is a gradual step toward a bigger boost to construction activity.
The cut marks the Fed’s second rate cut in recent months, based on the Reduction of 0.5 percentage points in September. The September cut followed 11 rate hikes in early 2022 to combat rising inflation.
The move means the central bank aims to foster a more supportive lending environment, an encouraging sign for construction activity, said Les Hiscoe, CEO of Boston-based contractor Shawmut.
“This is a trend in the right direction,” Hiscoe said. “We’re not fully back yet, but this will help drive momentum. Developers are cautiously optimistic. With this second cut and an indication of more to come, developers have more confidence in getting projects off the shelves.”
There is still room for more cuts
Despite the optimism, the industry will not feel the full effects immediately.
Hiscoe said there is still a lot of development going on.”in a standby mode” and may not pick up until 2026 or later, especially in sectors like hotels. A series of additional rate cuts could help unfreeze more capital, he added.
While previously abandoned builds may soon rise again, barriers still remain financing of large-scale construction projectssaid Cory Moore, CEO of Big-D Cos., a Salt Lake City-based general contractor.
“The rate cut is a positive development and could help open up some previously shelved projects,” Moore said. “We are seeing renewed interest, but significant growth in activity would also require more favorable loan-to-value ratios and capital requirements.”
Both Moore and Hiscoe said that until loan terms improve across the board, massive growth will be limited. Still, as the Fed continues to cut rates, that should spur more activity.
“The lower the rates, the more deals we’ll see. But the real push will depend on the pent-up demand for space and an increase in consumer spending,” Moore said. “Lower Fed rates will likely lead to increased consumer spending over the long term, which could fuel demand and ultimately spur more development.”
Lower rates also have an immediate impact on companies’ bottom lines.
On its third-quarter conference call Wednesday, Los Angeles-based contractor Tutor Perini said that because of the lower rates, it expected to save $15 million to $22 million in interest charges for the year coming, which would contribute positively to its overall profits.
For now, developers remain focused on high-end projects with the best return potential, Hiscoe said.
“The projects that are being built or that are coming on stream are the highest level of Class A commercial space,” Hiscoe said.
Joe Bousquin contributed to this story.
