Federal Reserve interest rate cut spurs construction optimism in Chicago

By Judy Lamelza

Special to Chicago Construction News

The Federal Reserve’s recent interest rate cut has sparked renewed optimism among developers in downtown Chicago, marking the first reduction since the pandemic began.

With the target range now set between 4.75% and 5%, many developers believe this move could open the door for new residential projects, especially in sought-after neighborhoods like Fulton Market in the West Loop.

While the rate cut is a positive sign, significant challenges remain for the construction industry, including high material costs and limited financing options.

According to the Chicago Tribune, downtown Chicago is eager for new residential developments, with thousands of prospective residents eyeing vibrant areas like Fulton Market, known for its modern amenities and convenient transit access. However, the escalating costs of construction have stalled many projects.

Regina Stilp, founding principal of Farpoint Development, emphasized the urgency for new residential buildings in the city. “We need to have cranes in the sky,” she said, noting that the Fed’s decision could make construction loans more affordable and revive stalled initiatives.

Mary Boehmler, a senior associate with Trammell Crow’s Midwest Business Unit, pointed out a significant slowdown in new construction starts over the past 12 to 18 months, attributing it to higher borrowing costs rather than a lack of demand in the residential sector.

The Fed’s 50-basis point cut aims to stimulate economic growth by making borrowing cheaper. Aaron Galvin, founder of Luxury Living, expressed hope that the move “starts to move the needle in a tremendously positive direction,” allowing developers to revisit projects that had previously been deemed too expensive.

However, experts warn that the effects of the rate cut may take time to manifest in actual construction activity. Richard Traub, a partner at Smith, Gambrell & Russell, cautioned, “It will get people a little excited, and some deals will get done, though I don’t think it will trigger a tsunami.”

Despite the potential benefits of the rate cut, developers still face hurdles such as high property taxes, increasing material costs, and labor shortages. Stilp acknowledged that while the rate cut is a step in the right direction, significant obstacles remain to make Chicago a more attractive place for development.

Areas like the West Loop and Fulton Market, which have experienced rapid growth in recent years, stand to benefit greatly from lower borrowing costs. Fulton Market is poised to be a hotspot for new developments, with projects like Vista Property’s $448 million proposal for three towers along Morgan Street, expected to add up to 1,450 units. Another 43-story tower at 375 N. Morgan St. has also received approval, indicating a strong pipeline of projects ready to break ground.

For construction workers, the potential uptick in new projects is welcome news. The recent slowdown in construction has been largely due to higher borrowing costs rather than diminished demand. The rate cut could herald a return to pre-pandemic activity levels, increasing job opportunities in the sector.

However, experts advise caution regarding expectations. “It will take time for rate cuts to filter down into new deals,” Traub added. While the rate cut offers hope, developers must still navigate the challenges of securing financing and managing material and labor costs.

Moreover, while lower interest rates are advantageous, banks are now requiring developers to invest more equity into new projects, presenting a substantial barrier. Before the pandemic, banks typically financed 70% to 75% of project costs; now that figure has dropped to around 60%.

Quintin Primo, CEO of Capri Capital Partners, noted that while the lower rates are beneficial, a full recovery in sectors like office and retail is still a way off. “We still have a long road ahead,” he said.

The Fed’s recent interest rate cut could signal the start of a new wave of development in downtown Chicago, particularly in high-demand neighborhoods like Fulton Market. While challenges persist, the reduction in borrowing costs could reignite projects that have been on hold, providing a much-needed boost to the city’s construction industry.

With approximately 10,000 apartments in development, companies like Sterling Bay are poised to leverage the lower borrowing costs. As Ryan Walsh, principal of acquisitions at Sterling Bay, put it, “We’ve spent the last year getting ready for this moment.” If the rate cuts continue and economic conditions improve, Chicago may see a significant increase in residential construction in the coming years.