The Federal Reserve’s restrictive interest rate level directly increased borrowing costs for construction firms, making it harder to secure affordable loans, impacting both ongoing and planned projects. Higher interest rates directly reduce the financial viability of projects, as debt service becomes more expensive. Increased borrowing costs, combined with rising construction costs, are leading to project delays or cancellations. For instance, non-residential construction starts fell 22% between Q1 2024 and Q1 2025 due to a combination of economic uncertainty, high interest rates, and increasing costs¹. The economic feasibility of projects is directly challenged by the current financing environment.

Commercial construction projects are facing a dual threat of elevated interest rates (increasing borrowing costs) and rising material and labor costs. This combination makes it significantly harder for projects to “pencil out,” directly impacting new starts and leading to delays or cancellations. This means that project economics are being squeezed from both the financing (cost of capital) and operational (cost of inputs) sides. Even if there is underlying demand, the financial feasibility threshold for new projects has significantly increased, leading to a natural contraction in the pipeline of viable projects.

The commercial real estate sector faces $957 billion in loans maturing in 2025, a significant increase from original projections². New commercial real estate (CRE) loans average 6.2% compared to 4.3% for maturing loans — putting up to 15% of maturing loans at risk of failing to qualify for refinancing². Office properties are especially vulnerable, with delinquency rates potentially reaching 18%². This could signal a refinancing crisis, particularly for properties acquired or developed during periods of lower interest rates. The nearly $1 trillion in commercial real estate loans maturing in 2025, coupled with significantly higher refinancing rates and potential delinquency rates, represents a systemic risk that could impact the broader financial system and, by extension, future commercial construction activity. A wave of defaults or distressed sales in the CRE market, particularly in the office sector, could trigger broader financial instability. This would further tighten lending standards, reduce liquidity for new projects, and depress asset values, suppressing new construction. Even if a firm is not directly involved in office construction, the ripple effects through the banking system and investor confidence could make financing any new commercial project more difficult and expensive.