Developers Protecting Margins in Today’s Market

Commercial real estate developers are no strangers to complexity. Every project, whether it is a ground-up build, a redevelopment, or an affordable housing initiative, comes with a long list of moving parts that must be managed. Timelines, entitlements, financing, and market demand are always critical. Yet in recent years, one challenge has grown louder than the rest: the rising cost of construction and materials.

Developers across the country are facing a consistent squeeze on margins. From tariffs that drive up the price of steel and lumber to escalating labor wages, the numbers are difficult to ignore. For affordable housing projects in particular, prevailing wage requirements can push labor costs as much as 40 percent higher than market-rate work. The result is that even projects with strong fundamentals can suddenly feel strained, and returns that looked solid on paper can erode quickly.

The Inflation of Materials

Global supply chains have not fully stabilized, and developers continue to feel the effects. Steel, lumber, concrete, and other core inputs have all seen unpredictable swings in pricing. Tariffs have added to volatility, leaving developers to either absorb costs, delay procurement in hopes of a correction, or restructure budgets midstream.

For large-scale projects, these fluctuations can mean millions of dollars in unexpected expenses. Even smaller developments feel the sting, as suppliers often pass along higher costs without much room for negotiation. Developers have adapted by exploring alternative materials, locking in prices through forward contracts, or working closely with contractors to find creative value engineering solutions. But these strategies can only go so far before the economics of a project are fundamentally altered.

The Labor Challenge

Labor presents its own set of pressures. The construction workforce is aging, and younger generations have not entered the trades in sufficient numbers to replace those retiring. This shortage has created a highly competitive market for skilled workers, driving wages steadily higher.

For affordable housing developers, prevailing wage rules often turn this challenge into an even larger burden. Mandates can raise labor costs by as much as 40 percent, making it difficult to pencil projects that already rely on thin margins and layered financing. Even when government programs provide subsidies or incentives, the gap between costs and feasible rents often requires developers to stretch creativity to make deals viable.

On market-rate and commercial projects, labor costs still eat away at budgets. Delays caused by a lack of available crews can further exacerbate costs, pushing schedules out and raising carrying expenses. Developers are left with few options other than to plan more conservatively and build contingencies into budgets.

The Squeeze on Margins

The combined effect of higher material and labor costs is clear: margins are under pressure. Developers must navigate tighter spreads between project costs and achievable rents or sale prices. In some markets, rising interest rates have layered on additional financing strain, leaving little room for error.

When costs escalate mid-project, developers are forced into difficult decisions. Some attempt to pass costs onto tenants through higher rents, but in markets where affordability is already stretched, this can be unrealistic. Others cut back on finishes or amenities, but this risks impacting the competitiveness of the property once it is delivered. A number of projects have even been shelved entirely because pro formas no longer make sense under current conditions.

Strategies Developers Are Using

Despite the challenges, developers are finding ways to adapt. A few approaches stand out:

• Early Procurement: Locking in material prices earlier in the process to avoid exposure to swings. This requires strong upfront capital planning but can save significant costs over the life of the project.
  
• Value Engineering: Working with architects and contractors to identify alternative materials, systems, or methods that reduce costs without sacrificing quality.
  
• Phased Construction: Breaking larger projects into phases can sometimes help manage costs, although it may extend overall timelines.
  
• Strategic Partnerships: Aligning with contractors, suppliers, and financial partners who understand the challenges of the current environment can create more flexibility when unexpected changes arise.
  
• Creative Financing: Some developers are turning to private lenders or joint venture partners who are more willing to accommodate fluctuating costs than traditional banks.
  

Affordable Housing Pressures

Affordable housing deserves particular attention in this conversation. Developers in this space already juggle complex capital stacks involving tax credits, subsidies, and grants. When construction costs spike, the financing puzzle becomes even more difficult to solve. Prevailing wage requirements add another layer of cost that can stretch projects to the breaking point.

Yet, the demand for affordable housing has never been higher. Communities are looking to developers to deliver solutions, and governments are eager to support them. This creates an environment where collaboration is essential. Developers who can bring strong relationships with financing partners and who understand how to structure deals creatively are best positioned to succeed, even with costs working against them.

Looking Ahead

While there is no clear sign that construction costs will decline dramatically in the near future, developers have shown resilience time and again. Cycles shift, supply chains adapt, and labor markets evolve. In the meantime, careful planning and strong partnerships remain the most effective tools for managing uncertainty.

Developers who approach projects with discipline, flexibility, and a willingness to explore unconventional solutions will be best positioned to protect margins. It may require tougher negotiations, deeper diligence on budgets, and closer collaboration with lenders, but those who adapt stand to emerge stronger.

Conclusion

Rising construction and material costs are one of the defining challenges for commercial real estate developers today. From tariffs that drive steel and lumber prices higher to wage pressures that stretch budgets, the squeeze on margins is real. Yet, with careful planning and the right partnerships, these challenges can be managed. Developers who stay proactive, adaptable, and strategic will not only navigate the current environment but also be prepared for the opportunities that lie ahead when conditions improve.