Vermont's development industry faces a "perfect storm" of challenges in 2025, as high interest rates, supply chain issues, labor shortages, and tariffs on imports disrupt the ability of developers to meet housing demand. Commercial developers, in particular, are feeling the pressure due to reliance on traditional lenders and the Federal Reserve’s decision to maintain high interest rates (4.25% to 4.5%) aimed at controlling inflation. These factors are dampening growth in the commercial and residential development sectors.

Yves Bradley, partner at V/T Commercial brokerage, says that high interest rates have led to numerous projects being canceled, deferred, or scaled back. "It’s completely feasible that you can borrow more money to build a building than the building will be worth in our market when you’re done, and that is not a healthy condition," he explains.

Don Baker, northern New England commercial market president at TD Bank, adds that higher interest rates are effectively reducing developers' purchasing power. "Anytime you have a higher-priced good of any kind—interest rates are the cost of borrowing to the developer—they’re going to be buying less."

In Burlington, projects like CityPlace have been scaled back from their original plans, while the proposed airport hotel has been put on hold due to these high costs. As a result, the local commercial real estate market is seeing prolonged vacancies, like at the 61 Dorset Street development, which has remained empty since October 2024.

Vermont’s housing crisis is exacerbated by the rising costs of construction, with developers facing a stark choice: increase rents or abandon projects. Bradley points out that rents have risen to unsustainable levels, as developers must charge higher than market rates to cover building costs. This has slowed demand for market-rate housing, particularly in Burlington, which faces high demand but limited stock.

In smaller towns like Bennington, where demand is low, developers are hesitant to move forward with large projects due to low population growth and market uncertainties. Bradley highlights the challenge of finding financial viability in smaller markets, where construction might take years to fill.

The issue isn't just limited to commercial developments—affordable housing projects are also being affected. The Vermont Housing Finance Agency has reported that projects are being scaled back, with some opting not to include add-ons like solar panels due to the rising costs. However, affordable housing tends to be more insulated from the effects of interest rates due to stable funding sources, such as investor bonds and tax credits.

A looming concern is the impact of tariff uncertainty and trade policies on construction materials. "We can plan for the construction loan interest rate. We can’t plan for this uncertainty around the impact on pricing of tariffs," says Kathy Beyer of Evernorth. Tariffs are driving up prices and supply chain disruptions, much like the issues faced during the COVID-19 pandemic.

Construction projects like Kelley’s Field II in Hinesburg were delayed due to supply chain disruptions, resulting in added costs. Beyer warns that if tariffs continue to affect trade partners like Canada and Mexico, the effects could delay progress on the housing crisis even further.

As Vermont navigates these challenges, developers and industry experts are left to wonder how long the impacts of high interest rates, tariffs, and rising construction costs will continue to shape the state's real estate market. "What’s happening nationally is not going to be good for the housing market or making progress on the housing crisis," concludes Beyer.

Originally reported by Tim in Vermont Biz.