Developers strained by high interest rates, tariff uncertainty and construction costs

Helen Argraves is a reporter with Community News Service, part of the University of Vermont’s Reporting & Documentary Storytelling program.

A perfect storm — that’s how industry leaders describe the challenges Vermont developers face in 2025. 

Amid Vermont’s housing crisis, developers and lenders say a combination of high interest rates and supply chain costs, labor shortages and tariffs on U.S. trading partners are raising concerns that high costs will slow development. High interest rates are most concerning to commercial developers, who rely more on traditional lenders like banks and credit unions.

The Federal Reserve chose to keep interest rates unchanged at the target rate of 4.25-4.5% in January, an effort to curb continued inflation. Additionally, mortgage rates remain high, shaped by investors’ expectations of economic conditions including inflation and monetary policy. 

That leaves Vermont’s commercial development in a difficult position, as Yves Bradley, a partner at V/T Commercial brokerage, describes it. Interest rates have been a key factor in decisions to cancel, defer and scale back new development of housing and commercial properties in the last two years, he said. 

Higher interest rates mean developers stand less of a chance of covering the costs required to build, Bradley said.

“It’s completely feasible that you can borrow more money to build a building than the building will be worth in our market when you’re done, and that is not a healthy condition,” he said. 

The interest rates have “a dampening effect,” said Don Baker, northern New England commercial market president at TD Bank. “Anytime you have a higher priced good of any kind — interest rates are the cost of borrowing to the developer — they’re going to be buying less.” 

TD Bank locally has seen some projects it lends to be scrapped or deferred in response to interest rates, Baker said. For developers, it seems, the equation weighs too heavily on the side of costs. 

Baker said people will likely see interest rates go down in 2025 but at a slower rate than economists had been predicting toward the end of 2024. 

Developers for big projects like CityPlace in Burlington and the new hotel intended for the Patrick Leahy Burlington International Airport have cited interest rates in their reasoning for changing course on construction. 

The downtown Burlington development originally planned to include 420 housing units. High costs and interest rates have caused them to scale down to 350 units. 

Last August, VermontBiz reported that plans to build a new hotel at the airport fell through, again in response to the high interest rate environment and increased costs of labor and materials. 

Williston’s DEW Construction, the contractor for that project, indicated that it would be open to revisiting the project under different economic conditions. But airport officials this month said they had nothing new to add, suggesting that no progress has yet been made to restart plans. 

Potential retail industry buyers may also be discouraged by the interest rate conditions when deciding whether to purchase a building. 

In South Burlington, the new building erected at the 61 Dorset St. intersection went on the market in 2024. Marketed by V/T Commercial as “an amazing opportunity for retailers on one of the busiest intersections in the state,” the commercial space on the building’s ground floor has sat empty since October.

That’s a far cry from past trends, Bradley said, when new buildings used to sell out in a matter of weeks once opened. 

Observers of development in Burlington might see an irony — building appears to be going at a healthy rate.

But the reasoning for this, Baker said, is many of these projects were conceived when lower interest rates were lower. The time between when a building is proposed and when it’s built is lengthened by the permitting and approval process, on top of the construction itself. 

The 61 Dorset St. development, which includes University of Vermont student and faculty housing on its top floors, was signed off on in 2021. But even when new developments go through, the high costs of financing them often means developers raise rents, said Bradley. 

Bradley believes Vermont has reached “an inflection point” where rents have risen higher than people can withstand.

“It’s so expensive to build new that you need to charge rents that are in excess of what the market has shown it can bear,” he said, “to be able to absorb the cost of building it.” 

As a result, he said, “Demand has begun to slow for market rate housing … One of the reasons is that I think we’re getting close to saturation on that market.” 

That’s especially true in Burlington, where limited stock, high demand and a slew of compounding factors have seen landlords push rents up in recent years. As long as more people want to live in Burlington and will pay increasingly high prices for small living spaces, that trend will likely continue. But Bradley thinks potential renters have had enough. 

Smaller towns in Vermont have their own challenges when it comes to new development. With smaller populations, potential demand for housing is limited. An almost 300,000-square-foot V/T Commercial listing in Bennington in the middle of a residential neighborhood has sat on the market since 2021, when mortgage rates were still at record lows. 

Bradley said a building like that converted to housing would have sold out quickly in Burlington — but in Bennington, where the population is just over 15,000 and declining, it could take years to fill. Such a project is not financially practical, he said. 

For his part, Bradley said he has had to advise some clients against delving into commercial development right now. One client had plans to construct a 50,000-square-foot building in Richmond for industrial purposes but decided against it, he said, because they most likely would not have been able to make enough profit to cover building costs. 

“That doesn’t create an economy that is rapidly growing,” Bradley said. 

Maura Collins, executive director at the Vermont Housing Finance Agency, said her organization has also seen projects scaled back in response to interest rates. That includes building smaller or simply not investing in add-ons like solar panels.

A Colchester housing project co-developed by Evernorth paid an additional $100,000 in construction interest when rates climbed from 3% at its conception in 2022 to 7.5% at the time of its completion, according to Kathy Beyer, senior vice president of real estate development at Evernorth. 

On the other hand, affordable housing projects tend not to be as dependent on the federal interest rates, explained Collins and Beyer. Funding for those projects often comes from an array of sources, including investor bonds and tax credits. Those sources can be more stable in times of high interest rates, Collins told VermontBiz, and lending organizations like VHFA and Evernorth can pass lower interest rates onto developers as a result. 

What developers may find most concerning for those kinds of projects in 2025 is the looming uncertainty around trade policy and federal funding. 

“We can plan for the construction loan interest rate. We can’t plan for this uncertainty around impact on pricing of tariffs, the impact on supply chain delays,” Beyer said.

When suppliers face uncertainty, Beyer said, they tend to increase the price of goods. And tariffs have the potential to cause supply chain disruptions for goods used in building homes, leading to higher prices. People are already anticipating those effects. 

“We are already being asked to sign construction contracts that pass on the cost of tariffs to the developer,” Beyer said. 

Beyer mentioned heat pumps, which she said depend on an international supply chain and are used frequently in home construction. She worries what could happen if the supply for those products, or their parts, is interrupted. 

She compared the possible effects of supply chain disruptions from tariffs to those that took place during the Covid-19 pandemic. If the effects are similar, she said, developments would not only cost more but be delayed, costing developers even more in construction loan interest. 

Kelley’s Field II in Hinesburg, a construction project co-developed by Evernorth that started in 2023, was delayed by several months after supply chain disruptions for switchgear, a technology that increases the safety and efficiency of electrical equipment. The product developers planned to use came from Mexico. 

The delay pushed back the project’s certificate of occupancy and cost developers more than $200,000, according to Beyer. Beyer’s message is that more situations like that may emerge if tariffs on trade partners like Canada and Mexico continue. 

“What’s happening nationally is not going to be good for the housing market or making progress on the housing crisis,” she said. “That’s clear.”