High Interest Rates Strain Rural Development Ambitions

Across the small towns and rural regions of America, the current era of elevated interest rates is putting significant financial strain on economic development projects, housing initiatives, and community revitalization efforts. From major industrial expansions to modest downtown redevelopments, the increased cost of borrowing is stifling investment, delaying timelines, and threatening the momentum many rural areas have rebuilt coming out of the pandemic.?

Higher interest rates are a gut punch that has forced some developers to outright shelve or dramatically scale back their rural projects, our company Rural Growth Strategies, a leading rural site selection and economic development consultancy is seeing deals for manufacturing plants, logistics hubs, multi-family housing, you name it, get sidelined due to these rising financing costs.?

Among those feeling the crunch most severely are capital-intensive sectors like advanced manufacturing, renewable energy projects like solar farms and wind installations, and large-scale housing and mixed-use developments. Without the economy of scale, rural projects in these spaces often operate on slimmer profit margins compared to metropolitan areas.?

A new industrial facility that made financial sense at 4% interest suddenly gets a lot dicier once that climbs above 7% or 8%. The math just doesn't pencil out as favorably, especially for rural developers already grappling with higher material costs and labor expenses.?

Similarly, residential builders and multi-family housing developers are facing a perfect storm of elevated interest rates, increasing lot and construction costs, and cooled buyer/renter demand from pandemic-spurred overheating. Project financing has become extraordinarily onerous for all but the most well-capitalized firms in many rural housing markets.?

While few rural communities have the financial wherewithal to personally subsidize substantially higher financing costs, economic developers are employing creative strategies to incentivize investment. These range from tax abatement and payment-in-lieu-of-taxes (PILOT) programs to discount land/site pricing, utility infrastructure assistance, workforce training partnerships, and more.?

Our company is advising our rural clients to get highly aggressive with their incentive packages and gap financing tools right now. It's a challenging seller's market for communities hoping to attract major investment, so being as business-friendly as possible with creative deal-sweeteners is crucial.?

Many rural areas are also accelerating efforts to establish certified, shovel-ready sites and pre-permitted industrial/commercial parks to bypass some upfront development costs and timelines in the interim. Close cooperation with local banks and credit unions to backstop construction loans or directly finance catalytic projects is another avenue being explored.?

While the Federal Reserve's inflation-combating interest rate hikes have created temporary headwinds for rural development, economic experts anticipate this challenging cycle being relatively short-lived compared to past decades. The combination of monetary policy normalization, cooling housing demand, and easing supply chain constraints should begin moderating interest rates by late 2024 or early 2025.?

Rural communities have got to power through this tumultuous period, because there are immense opportunities coming for rural America on the other side. Supply chain reshoring, the clean energy transition, e-commerce distribution growth – all of these powerful economic tailwinds are poised to drive major investment in rural areas over the next decade.?

The rural communities that don't allow themselves to get sidetracked, but rather redouble their competitive spirit and incentive creativity, will be best positioned for prosperity when interest rates stabilize.?

For rural leaders able to withstand this period of high interest rates through proactive strategies and incentives, the economic development payoff may be tremendous in just a few short years. By retaining an indomitable spirit of resilience and ingenuity, the groundwork for transformative growth opportunities can still be laid.?