What Every Developer Needs to Recalculate

Over the past 24 months, the real estate finance landscape has undergone a significant transformation. Gone are the days when cheap capital flowed freely, enabling even marginal deals to make economic sense. Today, rising interest rates and escalating debt costs are rewriting the math for developers across asset classes. For those used to working within a more forgiving credit environment, the adjustment has been jarring. But for those who can adapt quickly and rethink their assumptions, opportunity still exists.

The reality is this: a 150 to 200 basis point increase in the cost of debt does not just affect margins, it can collapse entire deal structures. Projected internal rates of return that once looked strong on paper can now be eroded to the point of infeasibility. A deal that made sense last year may no longer clear today’s financial hurdles. And it’s not a temporary inconvenience, it’s a structural shift.

For developers, this means re-underwriting every project with a sober view of the current lending environment. Relying on debt terms that no longer exist or assuming interest rates will fall before stabilization is a mistake that can compound quickly. The only way forward is through recalibration.

Lock In Early Where You Can

One of the smartest moves a developer can make in this environment is to secure lending terms as early as possible. That could mean negotiating committed rates with relationship lenders or using interest rate hedging instruments to cap exposure. Flexibility matters, but certainty is now more valuable. With rate volatility still in play, waiting too long to secure financing can mean the difference between a viable project and a stalled one.

It’s also worth exploring construction-to-perm loans or other structures that provide a longer window of rate stability. While these may come with trade-offs, they offer predictability in a market that’s anything but predictable.

Reassess the Entire Pro Forma

It’s not just about the interest rate line item. Higher debt costs affect everything from return thresholds to equity splits. Developers need to go back through every assumption and test for interest rate sensitivity. This includes projected rent escalations, lease-up timelines, exit cap rates, and even absorption rates.

In a tighter capital environment, buyers and tenants alike are more cautious. That has downstream effects on projected cash flows, absorption periods, and ultimately exit timing. Be realistic about how the cost of capital ripples through each part of the model.

Also, rethink the unit mix. Higher-end units that once commanded a premium may no longer lease up as quickly, or at the same rates. On the other hand, more affordable or right-sized units might hit a broader market at a time when affordability is under pressure.

Phasing and Scope Adjustments

When the math no longer pencils, it’s time to look at project scope. A fully built-out master plan may still be desirable long term, but it may no longer be financially viable to deliver everything at once. Phased development can allow for better cash management, reduce upfront debt exposure, and create optionality as the market evolves.

Reducing scope doesn’t always mean sacrificing quality. Sometimes, scaling back amenities, delaying certain infrastructure components, or simplifying design can materially improve project feasibility. What matters is knowing where to cut without hurting the core value proposition of the development.

In addition, collaboration with contractors and consultants can uncover value engineering opportunities that weren’t considered when the market was moving faster. Every saved dollar in construction costs now has an amplified effect on project yield.

Rebuild Your Bench of Capital Partners

Rising rates have also reshaped the lender landscape. Some traditional lenders are pulling back. Others are shifting their focus to lower-risk, stabilized assets. Developers need to be proactive in building relationships with a wider set of capital providers, including private lenders, debt funds, and family offices that may be more opportunistic in this environment.

At the same time, equity expectations are shifting. With more risk being taken on at the debt level, equity investors will expect higher returns or greater security. Clear communication about risk mitigation, project phasing, and cost control becomes critical.

If a lender is hesitating or if the terms are changing late in the game, it may be time to re-bid the deal or even explore new capital structures. The market is dynamic, and developers who stay in front of those changes rather than reacting to them will fare better.

Think Beyond the Immediate Deal

Finally, it’s important to take the long view. This is not the first cycle where financing conditions have tightened, and it won’t be the last. Developers who build resilient projects, with conservative underwriting, efficient design, and flexible capital structures, tend to emerge stronger when the market inevitably turns again.

Short-term pain can lead to long-term gain if it forces discipline and creativity. Today’s environment rewards those who can adjust quickly, think strategically, and lead projects with both conviction and caution.

While rising rates may feel like an obstacle, they can also serve as a filter. Projects that move forward now are more likely to be well thought-out, thoroughly capitalized, and positioned for durability. That may be the greatest hidden upside of all in this higher-rate environment.