High interest rates aren’t just a concern for prospective home-buyers looking for a mortgage these days. Commercial developers also are backing off projects until commercial interest rates come down.
Ricardo Caballero, a principal at Mayan Capital Marketing LLC in Harlingen, says he has had to shelve plans at least temporarily for a major commercial development called Dixieland Plaza across the street from Harlingen High School South.
“I was going to put a little strip center there,” he said. “Great location. I bought the property, demolished the house, rezoned to commercial. But as I was doing this, COVID happened and, well, for two years I basically didn’t do anything.”
“And then finally when we started again recently, interest rates went up, and I just told the banker I was just going to hold onto the land,” he added. “The banker that I deal with (is) basically saying we’re in for a little recession for a year.”
At present, the lowest commercial loans in Texas are hovering around 6 percent. Combine that with inflationary pressures, and for now Caballero’s $700,000 development plan is on hold.
“Interest rates have risen as a result of Federal Reserve actions but, historically speaking, are still very reasonable and shouldn’t be the difference between a good project happening or not,” said Ricky Leal, senior vice-president for lending at First Community Bank.
“But two years of accelerating inflation has also made real estate developments more expensive endeavors,” he added, referring to sharp increases in the cost of construction materials and other related expenses.
Caballero said as far as he knows, at present there are no major commercial projects planned in Harlingen. He concedes his knowledge of the projects may be dated and several months old.
“I was told that H-E-B was going to expand, but then they told me that they backed off as well,” Caballero said. “The only projects I know that were coming up were those two. … What they are doing is houses, but there’s no more commercial construction going on, that I’m aware of.”
Harlingen officials say there has been a lull, but there are a number of commercial projects in the pipeline, 14 of them to be exact.
“During the pandemic the interest rates went to historic lows, right? So because of that, we’re going through a boom in construction,” said Xavier Cervantes, the city’s director for planning and development. “We’ve had a lot of commercial development, especially residential subdivisions.”
“Interest rates have been going up lately, but we haven’t seen a slowdown in construction,” he added.
Cervantes concedes that many of the housing developments being built in the city already had financing in place before interest rates began to rise.
“But even though the interest rates are going up a little bit we’re still getting brand-new subdivisions,” Cervantes said. “Right now, we’re processing a brand-new one, and it’s over 100 lots. That one came in two months ago when interest rates were already going up a little bit. Unless they go up tremendously, as long as they stay more or less where they are now, I think it’s going to continue.”
Marcus Phipps is a real estate broker with Harlingen Homes, and he says commercial development, like housing, is mightily dependent on location.
“You still see a little bit of commercial development going on, especially out on the west side of town,” Phipps said. “That corner of Stuart Place continues to grow. That old hotel and events center has come down, so you have to assume somebody has bought that and something new is going to go up there.”
Caballero keeps track of commercial property development up and down the Valley and says other cities, specifically McAllen and nearby municipalities, are booming.
“Now, McAllen is a whole different monster,” he said. “McAllen, Edinburg over there, there’s a lot of commercial construction coming up.”
First Community’s Leal said decisions on commercial projects, a lending specialty of his bank, often hinge on population growth projections and density.
“The Upper Valley has twice the population and there is momentum and support in place to facilitate faster growth,” Leal said. “But make no mistake, the entire RGV is growing and remains a great place to start and/or grow a business.”
“At the bank we are financing developments across the entire Valley,” he added. “Some communities do prioritize inward projects versus outward so that may slow growth in certain places for a period of time. But that is necessary before larger numbers can responsibly be accommodated.”
