Rising Interest Rates & Construction Costs

In more than 20 years of commercial and industrial real estate development, Paul Hyde has never seen interest rates rise as quickly as they have over the past several years.

Volatile interest rates have a huge impact on developers and tenants alike. As interest rates shoot up, developers are forced to raise rent to make loan payments, which in turn affects tenants’ bottom lines.

The issue is only compounded by disruptions in supply chains, including steel, roofing and switchgear shortages, which have driven up construction costs and brought what might have been a simmering crisis to a rolling boil.

In a normal year, construction costs are more closely aligned with inflation, or somewhere between 3% and 5%, but the last few years alone have seen an increase of closer to 20% a year. The meteoric rise in construction costs has left developers unsure of whether rental rate increases can keep pace.

As we move into 2023, many developers are concerned about the potential for new development.. Paul Hyde, on the other hand, is more optimistic.

He believes we’re simply entering into a “cooling off” period. While that may have some developers worried, he believes the current course of events represents a healthy correction in the market after a period of intense interest (and investment) in multifamily and industrial real estate.

He points to recent shifts in capital markets and fundamental changes in the way we do business to explain why a return to normalcy might just be in the cards.

Capital Markets & The Cyclical Nature of Real Estate

Traditionally, the primary driver of demand in real estate is population growth. Booming cities and submarkets with plentiful job opportunities are clear targets for real estate investment.

While that’s still true in many ways, the pandemic has driven a paradigm shift in where and how people work.

When the country shut down for grueling months of quarantine, speculators began to recoil from conventionally “safe” investments in retail and office space. Instead, they sought new opportunities in multifamily and industrial real estate.

The result was intense demand for industrial spaces, but short supply, and many industrial parks were acquired even before they’d even managed to negotiate leases.

The key to understanding this trend lies in unpacking the new gold standard in how businesses operate.

Suppliers are competing to deliver goods faster and more efficiently. The desire to deliver faster shipping times and better service then drives up demand for buildings with sufficient square footage to serve as warehouses, that have access to major transportation arteries, and are close to major metropolitan centers.

“Instead of sending something from Indianapolis in three day’s time, they need to send it to your house in 12 hours’ or 16 hours’ time,” Paul Hyde explains.

The full impact of these changes isn’t yet clear. High costs, high demand, and rising interest rates–coupled with recent changes in capital markets–have all come together to create a great deal of uncertainty.

Paul Hyde points out that, as a developer, you always need to know when and how you plan on getting out of a new project. An exit strategy sets the parameters for what you can afford to pay for buildings and land. It also determines what you need to charge for rent.

The recent market uncertainty has given many newer and smaller investors cold feet. But for those familiar with the cyclical nature of the market, uncertainty also creates opportunity.

Paul points to The Waters, for example, which Hyde Development recently acquired for what he considers to be “a very attractive price.” It’s the developer’s job to recognize patterns in the cycle and find those kinds of opportunities.

But not every company has the same flexibility in choosing which opportunities to pursue. As a family-owned company, Hyde Development has the unique ability to make long-term investments that publicly-traded companies might turn away from.

The Hyde Difference: Sustainability, Community, & Putting Tenants First

If there’s one goal that every property manager aims for, it’s tenant renewals.

For Paul, the best way to avoid the perennial pitfalls of high marketing costs, leasing vacancies, and reduced cash flow is simple: Make tenants’ lives easier.

Since Hyde Development doesn’t have to worry about fluctuations in stock prices, it can be more focused on giving back to the community by making long-term investments. The objective is to genuinely benefit real people and businesses instead of simply chasing profit.

An extra nickel doesn’t last, but positive change does. Since its early days of redeveloping polluted and brownfield sites, Hyde Development has been committed to enacting positive change through thoughtful, sustainable development.

“We’re stewards of this creation,” Paul says. “We’re not gonna be here long. We’re in charge of making it better than we found it, and a lot of that comes down to how you build buildings and how you use energy.”

In recent years, our team at Hyde Development has had its sights set on rethinking industrial parks at scale by incorporating attractive amenities, greenspace, and build-to-suit features. These people-first projects are critical to the health of communities, businesses, and the environment.

By crafting better spaces through thoughtful placemaking and sustainable development, Paul’s hope is to build communities that attract brilliant minds, big ideas, and future-minded investments.

Employees utilizing and enjoying their work environment–the food trucks, nature trails, and craft breweries–will be more productive, which in turn benefits employers, and ultimately results in tenants who stick around.

Paul compares developing an amenity-rich industrial park with heterogeneous tenants to owning a diverse stock portfolio–it’s more resilient, and that resiliency extends beyond the new development to strengthen the community.

In the end, profit isn’t the be-all and end-all, but a better world is more profitable for everyone.

What’s Next For Hyde Development?

Hyde Development is proudly growing. With its recent acquisition of the Waters Industrial Park in Eagan, Minnesota, Paul is proud to show that Hyde Development can do more than just develop and manage incredible properties–it’s also a company that can acquire and improve upon the built environment in a way that benefits local communities.

Keep an eye out for more updates on the Waters and other Hyde properties–or you can just sign up for our newsletter so you never miss the latest from Hyde Development.