Spirits were high at Wilmington International Airport as New Hanover County leaders and airport officials unveiled renderings of what would become the Cape Fear region’s first airport hotel: a 150-room Crowne Plaza not far from the terminal with a restaurant and rooftop bar. 

That announcement came in April 2022. Nearly two years later, the hotel’s developers have yet to break ground, and they blame climbing interest rates. 

At the time of the announcement, nationwide interest rates had just started to climb. The first rate hike came in March 2022, and since then, the Federal Reserve has raised rates 11 times in attempts to tamp down inflation. 

Those rising rates have raised the cost of the hotel at ILM and made it more difficult to secure funding, said Chip Weiss, the New York City-based developer who’s leading the project with his brother Andrew. 

“Because of interest rates, it’s been an uphill struggle,” he said. “It adds millions of dollars to the upfront costs, and it adds millions of dollars over the years to the debt service.” 

Chip Weiss said 75% of the $53 million project will be financed by bonds with the remaining 25% funded by private equity. They’re working to secure a bond rating from credit rating agency S&P, a move they hope will attract more investors. 

The developers have already secured two due diligence extensions from airport officials as they work to finalize the project’s financing. They have until early October to show the airport they can close on the financing.   

“We think it’s plenty of time, actually,” Weiss said. “Really, as soon as this stuff is settled, we’ll have shovels in the ground.” 

He said the pause on the project at ILM isn’t unusual in the current environment. His development firm has a handful of other projects on hold because they haven’t been able to secure financing with the higher interest rates. Since early 2022, rising rates have presented a common challenge for commercial developers across the Cape Fear region, forcing them to pause projects and get creative with financing. 

“It’s not just the fact that rates went up as much as they did; it’s how quickly they went up,” said David Rizzo, market executive with First Carolina Bank. “That’s what made it really difficult for bankers and developers alike because it was hard to predict how high they were going to really go.” 

Commercial projects typically generate income in the form of rent. An apartment complex, for example, collects rent from individual renters, while a retail center or office building collects from the businesses or other entities that occupy its space.  

A mismatch between rental rates and interest rates led to funding shortfalls for commercial developers, Rizzo said. 

“Rents didn’t go up as fast as interest rates did, and so every dollar that a developer could finance wouldn’t go as far when rates had basically doubled over the course of 12 months,” he said. “There’s more expense covered by the same income, so you couldn’t borrow as much, and that did cause some projects to take a pause.” 

Ultimately, the rising rates have pushed some small-sized or amateur developers out of the market, Rizzo said. Developers need to come to a project with much more initial equity to make the numbers work. 

McKay Siegel, with East West Partners, said he’s felt the pressure of climbing rates on some of the group’s projects.  

“It killed a lot of things, frankly,” Siegel said about rising interest rates. “I would say probably one in 10 deals got done last year. That’s probably trending to be true for this year … with the exception that maybe people are a little more optimistic about the back half of the year.” 

Siegel said he sees development firms as, essentially, financial institutions.

“Interest rates directly impacted everything that we do from how we raise money to how we sell assets, how we borrow money from the bank, the loan interest on an asset,” he said. “And when they go up, particularly when they go up steeply, quickly, it causes issues.” 

One project affected by interest rate hikes was a partnership between East West and Wilmington city leaders to bring a massive, multi-use project to the north end of the city’s downtown. The Gateway Project, as it was dubbed (rendering shown below), was planned to usher residents and visitors into the heart of Wilmington.  

But plans broke down last fall when a memorandum of understanding between the city and the developer expired, and neither party moved to renew it. The memorandum had called for a project that included hundreds of apartments, workforce housing, retail space, a hotel, a grocery store and public parking. 

Siegel said rising interest rates weren’t necessarily “the final nail in the coffin” for the project, but they had some impact on its feasibility. “There was just a lot that we were trying to accomplish in the same project, and the interest rates didn’t help,” Siegel said. 

In addition to higher rates, developers have also faced rising materials and labor costs, along with climbing insurance rates and general economic uncertainty, Siegel said. Still, he believes developers will start finding ways to kickstart the projects that have faced pauses. 

“People are just very creative on getting things financed,” he said, “and I think people are gonna start to find a way to push some of these projects forward.” 

Bryan Thomas, president of Monteith Construction, agrees. He thinks the industry is “on the cusp” of viewing higher interest rates as part of a “new normal” and finding a way to finance projects and get them done. 

Monteith works on government-funded projects such as schools and hospitals and privately funded apartment complexes, senior living facilities and hotels in the Wilmington area, Thomas said. While the school and hospital projects haven’t experienced significant impacts from rising rates, Thomas said about half of the privately funded projects have faced slowdowns. 

“Fifty percent of the group have slowed things down, and the numbers won’t work,” he said, “and the other half had some other type of financing set up through other means.”
 
One upside of the slowdown in projects is it’s created a prime market for bidding out work for the projects that do have financing in place, Thomas said.  

“We are in the best bid market that we’ve seen in the last four to five years,” he said, “just because people are nervous that work could dry up, so they’re getting aggressive.” 

Wilmington developer Dave Spetrino had to get creative when financing Midcastle, his latest mixed-use project on the site of a former bus facility on Castle Street. City leaders have eyed the 1.5-acre tract at 1110 Castle St. for redevelopment for years. 

Spetrino submitted the high bid for the property last year and is now moving forward with plans for 98 apartments and more than 4,200 square feet of commercial space. But because of rising interest rates, the project will be built in two phases instead of one. 

For this project, Spetrino said he was able to borrow around 60% of the project’s value, while he’d normally borrow between 70% and 80%. That means he’s had to put more of his own equity into the project. 

“If this were 2022, and rates were basically 4%, we would have figured out how to build the entire project simultaneously,” he said. “In this circumstance, we’re going to have to build half the project, get it leased up, save up some money, set aside some cash and then we can go to the next phase.

“We used twice as much cash than we would typically use to be able to build the first phase,” he added, “and because of that, the second phase has to wait.” 

Coupled with rising rates, Spetrino said developers are facing higher costs all around, making it more difficult for the math to make sense. 

“Now I’m dealing with high construction costs, high labor costs, high material costs and high-interest rates,” he said, “and so that’s gonna make projects that much harder to make them work.”