In the world of multifamily development, few variables are as influential—and volatile—as the cost of borrowing. Over the past few years, developers have grappled with an environment of rising interest rates, tightening credit conditions, and increased lender scrutiny. These shifts have ripple effects across project feasibility, capital stack structuring, and long-term affordability.
So how exactly does the cost of borrowing shape multifamily development—and what can developers do to adapt?
Understanding the Cost of Borrowing
At its core, the cost of borrowing reflects the interest rate a developer must pay on debt financing—whether through construction loans, permanent financing, or bridge loans. These rates are typically tied to benchmark rates like the federal funds rate, which has risen dramatically since 2022 as central banks try to curb inflation.
For multifamily developers, this means:
- Higher monthly debt service payments
- Lower loan proceeds (due to tighter debt service coverage ratios)
- Decreased project returns and more conservative underwriting
In short, rising borrowing costs can turn once-viable deals into financial non-starters.
Impact on Project Feasibility
1. Reduced Leverage and Purchasing Power
When interest rates rise, lenders often lower their maximum loan-to-value (LTV) or loan-to-cost (LTC) ratios. This forces developers to bring more equity to the table or find creative ways to fill the gap—an increasingly difficult task in a capital-constrained environment.
2. Delayed or Abandoned Projects
Higher costs often push internal rate of return (IRR) and return on cost below investor thresholds. As a result, developers may delay starts, reprice land deals, or shelve projects entirely.
3. Pressure on Affordable and Workforce Housing
Projects that rely on subsidies, public-private partnerships, or below-market rents are particularly vulnerable. Margins are already tight, and every basis point increase in interest can jeopardize viability.
Adapting to the New Lending Environment
Despite these headwinds, developers are finding ways to adjust. Here’s how many are navigating the high-cost borrowing landscape:
1. Locking in Rates Early
Interest rate volatility has led some developers to secure rate locks during underwriting or at the term sheet stage. Others are refinancing into fixed-rate products as soon as construction completes.
2. Exploring Alternative Capital
Private debt funds, impact investors, and family offices may be willing to step in where traditional banks pull back. These sources can offer more flexible terms but often at a higher cost—so negotiation is key.
3. Refining Project Economics
Developers are revisiting designs, renegotiating contractor bids, and pursuing value engineering to reduce overall project costs. In some markets, modular construction or mixed-use components can improve returns.
4. Partnering with Public Entities
Cities and states are increasingly offering gap financing, tax abatements, or low-interest loans to keep development moving. Establishing strong public-sector relationships can make or break a deal in this climate.
Looking Ahead: Hope on the Horizon?
Conclusion
Rising interest rates have changed the rules of the game for multifamily development. But the market is still moving forward. By staying nimble, creative, and well-capitalized, developers can weather the storm—and come out stronger on the other side.
