Commercial real estate boomed in the months following the peak of the COVID-19 pandemic.
Low interest rates helped create the ideal formula for businesses to buy real estate, and for developers to finance new projects.
Today, however, it is not so easy. Due to a mix of high interest rates and lofty construction prices, developers are delaying the start of some new commercial projects.
“The things that have started will get completed. The stuff that hasn’t started, they’re going to hold off on,” said Kurt Wallenborn, owner of Franklin Real Estate Development in Greenville.
Commercial interest rates have climbed by several percentage points in the past two years, making it much harder to finance developments or commercial real estate purchases.
As a result, banks have decreased the number of commercial mortgage loans they disburse. Lisa Shelnutt, the commercial real estate division manager for Greenville-headquartered United Community Bank, explained that the number of loans the bank awards is off by at least 50 percent this year.
“A lot of the banks were really active over the last couple of years, so the balance sheets are getting full at the banks,” Shelnutt said. “There’s a lot less capital available for these projects.”
Construction prices have also increased significantly because of inflation and rising interest rates.
Projects that used to cost $100,000 to complete are now closer to $300,000 or $400,000, Wallenborn explained.
“You’ve got not only material costs; you’ve got your general contractor overhead on top of that, and then you’re trying to make a return to your investors on top of that, as well,” he said. “I do feel rents are going to have a pretty hefty increase in the next couple of years, especially for renovated buildings.”
Blaine Hart, senior vice president with commercial real estate agency CBRE, explained that due to the high land and construction costs, the commercial buildings coming online in the Upstate are not on the same pace as the growth and demand of the region.
Nobody can be sure when construction prices and interest rates will decrease.
“I hope some normal comes back soon, but right now I’m not seeing it yet,” Wallenborn said. “But it will — hopefully in the next couple of years. I keep hoping in the next year or two. I mean, they raise the rates very quickly. Those rates can drop quickly, too.”
