Mortgage Banking

Making sense of commercial real estate finance.

Costs Going Up

Posted by Jordan Crouch on May 20, 2008

I don’t have any hard data to back it up, but according the Square Feet blog, construction costs are on the rise. It makes sense. A weak dollar means buying supplies overseas costs more (ie steel) and high oil prices means shipping those supplies is also costly.

What the post didn’t mention is that debt is also costing more than it did a year ago. As rates go higher, the debt service coverage is constraining the loan amount. In other words, as the total cost of construction goes up, the loan size isn’t able to rise with it, therefore the builder has to use more money out of his pocket. This situation makes it more difficult for new construction to make financial sense. If I have time I’ll crunch some numbers for an example.

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