It has been fairly well documented this year how rising interest rates have affected the housing markets in the Huntsville area compared to nationwide trends. However, what effect are these rates having on the commercial development side of the real estate sphere? To answer this question, the Huntsville Business Journal talked to local experts while also looking at some publicly available data that aims to reflect the attitude of those in the industry.

The AL CREI measures commercial real estate expectations for the upcoming quarter gathered from a broad group of professionals working in commercial real estate and related fields. Eight key indicators create a composite index of overall market conditions and an outlook for specific property types.

Through the survey, panelists can take the pulse of the state’s commercial real estate market as well as compare their own forecasts to those of their peers. Index scores above 50 indicate a positive outlook while Index scores below 50 indicate a negative outlook.

The Huntsville metro area had the lowest CREI of the participating Alabama metros with an index of 35.2, indicating strong confidence and an negative outlook in the overall forecast. Panelists from the area expressed strong confidence that statewide CRE market conditions will worsen in Q4 2023 (37.5). Additionally, panelists from the area are strongly confident that construction costs (37.5) will increase in Q4 2023 compared to the previous quarter. Panelists are moderately confident that interest rates (40.6) will increase in Q4 when compared to Q3 2023.

The Journal spoke with Tim Singleton, Executive Vice-President and Senior Commercial Lender of Bank Independent. In an interview with Singleton, he was able to explain exactly how developers are feeling the effects of the rising interest rates. According to him, the most tangible effect currently is the rise in the amount of equity developers have to contribute in order to support commercial loans.

“Typically in the past, you would see projects where the developer would put in 20 to 25% equity. Those numbers are now 40 to 55% equity, in order for the same set of cash flow to support the same type of loan. So you’ve got projects that just don’t make sense, unless you’re prepared to put in tons of equity,” Singleton explained.

Singleton also went into greater detail about how Huntsville’s job creation numbers are offsetting some of the risk and still making these development projects successful.

“The thing that we study constantly right now is job creation. I was able to have a conversation with city officials recently and there’s still a high degree of confidence that we’re going to have 22,000 to 30,000 new job jobs created in the next three years. And if and if that is the case, every one of those jobs is basically a household and they have to have a place to live. They have to have people to make them drinks and to groom their dog. They’ve got to have groceries. So, there’s this multiplier effect. People are willing to take the risk to put in more equity to build houses and build everything else because there’s a supply issue there. There’s a need for industrial space and office space and you know, the retail environment needs to be curated. There’s a catch 22. A lot of the projects are good, but it’s so expensive to own them,” said Singleton.

Singleton concluded by predicting that the effects on the development side of the industry will remain steady throughout the next calendar year with more projects possibly being impacted in 2025.

“There are a lot of projects that are already started and will be delivered in 2023 or 2024. But I think when we get to the back half of 2024 into 2025, you’re not going to be seeing as many ribbon cuttings and grand openings because we’re already starting to see people who are backing away,” Singleton remarked.

Brasfield & Gorrie Vice President and Division Manager Sara Beth Wilcox echoed this same sentiment regarding Huntsville’s job creation numbers when asked about the same topic.

“It takes years for commercial real estate deals to come together. No developer who was starting to put together a deal three-plus years ago anticipated putting an 8 percent interest rate in their pro forma. But current conditions have left developers asking if the Huntsville market is strong enough to support higher rates.

“Some developers have hesitated, but these rates aren’t stopping every deal. However, because of the influx of new folks to Huntsville, the region is able to support a lot that other cities in Alabama or the Southeast could not,” said Wilcox.

Wilcox also mentioned how Huntsville represented a very unique case in the realm of Commercial Real Estate due to the city’s ties with the government and military spending.

“Huntsville is also an interesting case because contract opportunities for government contractors are robust. We’re certainly not seeing slowdowns for work on the Arsenal, for example. Government contractors have been hired or are competing to be hired for specific needs. This sector is more focused on speed and having the space to complete their work, which means the demand for space isn’t as affected by market conditions,” remarked Wilcox.

During the interview, Wilcox made a point to remind readers that, while we might never see the low interest rates of the 2020 pandemic timeline, Huntsville’s population boom has certainly provided the catalyst needed for further commercial and infrastructure construction investments, regardless of the interest rates.

For Wilcox, much like Singleton’s viewpoint, there does not seem any indication for the commercial construction market to slow down any time soon.

“There are enough new services to keep many deals moving forward,” concluded Wilcox.

Going off the analysis of these two experts, it seems that Huntsville’s status as a hub for government and military contracts are supporting the commercial real estate market through the recent rise in interest rates. As long as more jobs are created and more people are moving into the area, the industry should be able to avoid taking any major hits for the upcoming future.