A "perfect storm"—that’s how industry experts describe the mounting challenges facing Vermont’s real estate developers in 2025.

As the state grapples with a housing crisis, builders and lenders warn that soaring interest rates, escalating construction costs, labor shortages, and uncertainty surrounding tariffs on U.S. trade partners are creating significant roadblocks. Many fear that these compounding factors will slow down much-needed development across Vermont.

High interest rates are especially troubling for commercial developers, who typically rely on traditional financing sources like banks and credit unions.

The Federal Reserve opted to hold interest rates steady at 4.25-4.5% in January in an effort to combat inflation. Meanwhile, mortgage rates remain high, driven by investor expectations surrounding economic conditions and monetary policy.

This financial climate has forced many developers to reassess their plans. Yves Bradley, a partner at V/T Commercial brokerage, notes that rising borrowing costs have led to the cancellation, postponement, or downsizing of both residential and commercial projects over the past two years.

“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,” Bradley said.

The increased cost of borrowing has had a chilling effect across the sector, according to Don Baker, northern New England commercial market president at TD Bank.

“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,” Baker explained.

TD Bank has seen several projects put on hold or scrapped altogether in response to the economic climate, Baker said. Developers are finding that the financial equation simply doesn’t work in their favor.

Projects Stalled as Costs Soar

Major Vermont developments, including CityPlace in Burlington and a new hotel planned for Patrick Leahy Burlington International Airport, have been forced to scale back or halt construction due to high interest rates.

The CityPlace project, originally designed to feature 420 housing units, has been reduced to 350 units because of rising costs. Meanwhile, plans for the airport hotel were abandoned last August after developers determined the economic conditions made the project unviable.

Williston-based DEW Construction, the contractor for the hotel, has expressed a willingness to revisit the project under more favorable conditions, but airport officials have yet to announce any progress on reviving the plan.

The impact of high borrowing costs is also evident in Vermont’s retail sector.

In South Burlington, a newly built commercial space at the intersection of 61 Dorset St. has remained vacant since October, despite being marketed as a prime location for retailers. This is a stark contrast to previous years, when newly constructed buildings would often sell out within weeks, Bradley said.

While ongoing construction in Burlington might suggest a thriving market, Baker pointed out that many of these projects were initiated when interest rates were significantly lower. The lengthy approval and permitting process means some buildings currently under construction were planned years ago, when financing was more affordable.

Affordability and Market Saturation

As developers try to offset higher costs, rents continue to rise. Bradley warns that Vermont is reaching “an inflection point” where housing costs are exceeding what renters can afford.

“It’s so expensive to build new that you need to charge rents that are in excess of what the market has shown it can bear,” he said. “To be able to absorb the cost of building it.”

This has led to a slowdown in demand for market-rate housing. While Burlington remains a highly sought-after location, smaller Vermont towns face unique challenges in attracting both developers and residents.

For example, a nearly 300,000-square-foot commercial property in Bennington has remained unsold since 2021, even though mortgage rates were at historic lows at the time. The town’s smaller population—just over 15,000 and declining—makes it a less attractive market for large-scale residential conversion projects, Bradley explained.

“A building like that converted to housing would have sold out quickly in Burlington,” he said. “But in Bennington, it could take years to fill. Such a project is not financially practical.”

Some developers are choosing to hold off on new projects entirely. Bradley shared that one of his clients had plans to construct a 50,000-square-foot industrial building in Richmond but ultimately decided against it, fearing they wouldn’t generate enough profit to justify the costs.

“That doesn’t create an economy that is rapidly growing,” he noted.

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Federal Funding and Tariff Uncertainty Add More Pressure

While high interest rates are a key concern, developers are also grappling with the unpredictable nature of federal trade policies and tariffs.

Maura Collins, executive director at the Vermont Housing Finance Agency (VHFA), said that many housing projects have been downsized in response to rising costs. Some developers are choosing to eliminate add-ons like solar panels, while others are simply building smaller.

Kathy Beyer, senior vice president of real estate development at Evernorth, cited a recent example in Colchester where interest rate hikes significantly increased project costs.

A housing development co-developed by Evernorth paid an additional $100,000 in construction interest when rates rose from 3% in 2022 to 7.5% by the time the project was completed, she said.

While affordable housing developments tend to be somewhat insulated from federal interest rate changes due to alternative funding sources like tax credits and investor bonds, tariffs and supply chain disruptions pose a different kind of threat.

“We can plan for the construction loan interest rate. We can’t plan for this uncertainty around impact on pricing of tariffs, the impact on supply chain delays,” Beyer said.

Past supply chain disruptions have already had costly consequences.

For instance, Kelley’s Field II in Hinesburg, an affordable housing project co-developed by Evernorth, was delayed by several months due to supply chain issues for electrical switchgear imported from Mexico. The delay ultimately cost developers more than $200,000.

Beyer fears similar disruptions could occur if tariffs on key trading partners like Canada and Mexico persist. The construction industry relies on international supply chains for materials such as lumber, steel, and heat pumps—items that could see price hikes if trade relations become strained.

“We are already being asked to sign construction contracts that pass on the cost of tariffs to the developer,” Beyer said.

If tariffs create bottlenecks similar to those seen during the COVID-19 pandemic, Beyer warns that delays and price increases will become even more pronounced. That could further stall Vermont’s housing and commercial development, exacerbating the state’s housing crisis.

“What’s happening nationally is not going to be good for the housing market or making progress on the housing crisis,” she said. “That’s clear.”

Originally reported by Helen Argraves in Valley News.