Part 3/10:
An exacerbating factor is the still-high interest rate environment. Back in 2020, mortgage rates hovered around 2.75% to 3%, making financing construction projects dirt cheap. Developers seized the opportunity, rushing to build as much as possible. However, interest rates began escalating in 2022, surpassing 7%–8%, nearly doubling or tripling the cost of borrowing money for new projects.
Simultaneously, construction costs have surged. In cities like San Francisco, the cost to build a basic affordable unit now exceeds $850,000, up from approximately $750,000 just a few years ago. This rise in costs, combined with the higher borrowing rates, has led many developers to withdraw from the market altogether, fearing that projects will no longer pencil out profitably.