Weathering the Storm: 5 Positives Trends We Anticipate in the Next 12-18 Months
In an era marked by economic uncertainties and disruptions, the construction industry – particularly affordable housing development – is poised to embrace a series of positive trends over the next 12-18 months. These trends, which span from a decrease in interest rates to incentivized sustainable building practices, promise opportunities for growth and stability in the sector. We’ve identified five crucial developments that are set to reshape the affordable housing landscape, offering insights for industry professionals seeking to adapt, thrive, and capitalize on emerging opportunities.
- Interest Rates Coming Down
With the new year just a few months away, and the Fed signaling that rates aren’t likely to come down in the near future, many experts predict that mortgage rates will start the year roughly where they left off. A hot job market and inflation not coming down as quickly as expected is making it difficult for the Federal Reserve to bring down rates. Experts vary in their predictions of the interest rate in 2024 with some believing rates could come back down to the mid to low 6% range while others believe that rates will stay higher for a longer period of time. Until rates do come down development will continue to be quite challenging given high construction costs, persistence of low cap rates on acquisitions and lower tax credit pricing for affordable housing projects. However, once rates do begin to reduce, in the context of construction projects, this shift holds profound implications for financing options, project feasibility, and overall profitability. As interest rates become more favorable, firms will find themselves better positioned to embark on ambitious projects, secure competitive financing, and boost their bottom lines.
- Cost of Construction Will Flatten
The persistent challenge of cost escalation has been a thorn in the side of construction professionals. However, there’s light at the end of the tunnel as we anticipate a flattening of construction costs. This stabilization will provide much-needed relief. In-depth analysis reveals that various factors, including materials and labor costs, are set to plateau, offering a more predictable cost environment for project planning and execution.
- Supply Chain Issues Easing
One of the most disruptive forces faced by the construction industry post pandemic has been supply chain delays. The good news is that these issues are expected to gradually ease. Improved supply chain reliability will pave the way for smoother project management, reduced delays, and enhanced predictability. With fewer bottlenecks in procurement, we can expect improved project timelines and cost management.
- Incentivized Sustainable Building for Affordable Housing
Sustainability is no longer a niche concern but a mainstream imperative. Companies like Dakota with extensive Passive House and sustainable development experience stand to benefit from growing incentives for sustainable building practices, particularly in the realm of LIHTC affordable housing financed by government entities. Governments and stakeholders are increasingly recognizing the importance of environmentally responsible construction, offering tax breaks, grants, and other incentives to promote eco-friendly building solutions. Embracing sustainability is not just a moral obligation, but also a strategic move for firms looking to stay competitive.
- Rents Will Stabilize – Lessening Flatness in Rents Moving Forward
As inflation comes down and the capital markets rebound, rents will begin to stabilize. The increases we’ve seen of 8-12% growth in rents over the last few years are not sustainable. This equilibrium will have a significant impact on construction projects and the broader industry. Developers can anticipate greater predictability in project demand, leading to more effective planning and resource allocation.
These predictions indicate we are on the brink of a transformative period over the next 12-18 months. As interest rates decrease, construction costs stabilize, supply chains improve, sustainable building practices gain momentum, and rents find stability, there will be ample opportunities to thrive. By closely monitoring and capitalizing on these trends, we can not only weather the storm but also emerge as stronger and more resilient entities in an ever-evolving landscape.
These trends, while offering hope, also come with a call to action. Our firms must remain agile, adapt to changing circumstances, and seize opportunities for growth. As we navigate through this challenging yet promising period, it is our collective responsibility to ensure the industry continues to build a brighter, more sustainable future.