Rising construction costs continue to impede commercial real estate development, prompting developers to seek innovative financing and design solutions. A survey conducted by the Associated General Contractors of America in September revealed that 55 percent of respondents had delayed, canceled, or scaled back at least one non-data center project over the preceding six months, with one-third citing increasing construction expenses as the primary reason.
Construction input prices experienced a 1.2 percent month-over-month increase in August and stood nearly 9 percent higher than in August 2025, according to a report from Associated Builders and Contractors, based on U.S. Bureau of Labor Statistics data released on September 10.
Despite these challenges, some commercial real estate owners are advancing development projects, often by adjusting their size and scope. Ari Rastegar, founder and CEO of Rastegar Property Company, noted that elevated construction costs have necessitated creative approaches to achieve projected internal rates of return (IRR), such as modifying a property’s height or parking requirements. For instance, Rastegar Property Company adjusted the density for the residential portion of its planned 318-acre Infinity Square master-planned community in Kyle, Texas. The firm increased the number of single-family homes in the first phase by 14.8 percent, adding 50 smaller units in an area originally designated for commercial use. Rastegar stated, "By having smaller houses, the builders then can take lower risk in terms of the total construction costs and hopefully we can overcome the IRR issue by adding density."
Construction cost hurdles were also evident in Rastegar's 600,000-square-foot INF1NITY Park industrial project in Austin, Texas. To mitigate potential increases, Rastegar pre-leased the project and secured a seven-year, $25 million refinance loan from Aegon Asset Management in February 2026, proactively locking in material costs. He described the effort as "pulling freaking teeth as we literally had to pre-order our steel ahead of time and create a hedge in place and an arbitrage to make sure we didn’t get screwed on the steel."
Developers have navigated a higher inflationary environment, partially influenced by supply chain issues during the COVID-19 pandemic. Additional pressures emerged from global tariffs announced by President Donald Trump in April 2025 and increased material costs following the closure of the Strait of Hormuz in February 2026 after military strikes.
Steven Wernick, a land use and zoning partner at Day Pitney in Coral Gables, Florida, has advised developers on adapting projects to new financial realities, often by changing designs, height, and parking requirements to improve investment returns. Wernick observed that developers are revisiting entitlements to ensure project viability. He also noted that the environment of higher construction costs and sustained interest rates has diversified financing sources beyond traditional banks, with private lenders and family offices increasingly participating in construction loan capital stacks.
Tony Fineman, senior managing director and co-head of national originations at Acore Capital, reported a recent increase in inquiries for construction lending, despite an overall slowdown in activity and lending over the past year. He attributed this to higher costs and more selective equity, making the construction deals that do come to market generally more attractive.
This comes after the Federal Reserve initiated interest rate hikes from near-zero levels to combat inflation, continuing for 16 months until July 2023. After a more than three-year pause, the Federal Reserve raised its benchmark interest rate a quarter point on September 18, setting it between 3.75 percent and 4 percent, which saw the 10-year Treasury yield surpass 5 percent.
Shawn Safdie, head of origination at S3 Capital in New York City, stated his firm, specializing in multifamily construction lending, is experiencing strong loan volumes. He noted that multifamily developers are not abandoning projects but are adjusting loan sizing, financial models, and capital costs. Safdie indicated that experienced borrowers are more likely to proceed through challenging market cycles compared to smaller, newer developers who might delay projects.
Nitin Chexal, founder and CEO of Palladius Capital Management, highlighted an offsetting factor: subcontractors are more willing to accept lower fees to maintain active teams. Chexal emphasized that while overall construction activity has decreased, the current environment is more active than past periods of economic disruption. He added, “The credit space is awash with liquidity right now, so I think a lot of loan requests are getting fulfilled.” In contrast, Tommy Gallagher, director of construction operations at Middleburg Communities, a multifamily developer, reported that construction costs on his firm’s developments are down 1 to 2 percent overall compared to the same period in 2025, though specific numbers can vary significantly.
