Mitigating Risk in a Changing Economy

How Developers Mitigate Risk and Maintain Strong Returns in Commercial Real Estate

Investing in commercial real estate always involves risk, but great developers understand how to navigate uncertainty and maintain profitability. With rising labor and material costs, global supply chain disruptions, and policy changes that impact workforce availability, how are developers adapting to deliver projects on time and under budget?

Follow along as we explore:

• How developers are proactively mitigating macroeconomic risks.

• Key strategies for maintaining cost predictability and avoiding overruns.

• The role of exceptional partners in managing challenges and ensuring successful execution.

• What investors should ask before committing to a project.

1. Addressing Macroeconomic Challenges: Rising Costs, Tariffs, and Workforce Shortages

Material Costs and Tariff Uncertainty

Developers are tackling material cost volatility by:

• Locking in bulk purchasing agreements to secure lower prices ahead of tariff hikes .

• Sourcing from multiple suppliers to avoid reliance on any single market .

• Exploring alternative materials that reduce cost exposure while maintaining quality .

Labor Shortages and Immigration Policy Impacts

A shrinking labor force and immigration policy shifts create additional challenges for developers. The best developers mitigate these risks by:

• Securing labor contracts early to ensure workforce availability (for example, engaging subcontractors well in advance—getting crews lined up 10–12 weeks before a project starts can help ensure success ).

• Adopting prefabrication and modular construction to reduce on-site labor dependence .

• Investing in workforce training programs to create a skilled labor pipeline .

2. Proactive Risk Management: Controlling Costs and Ensuring Stability

Conservative Underwriting Practices

Exceptional developers avoid aggressive assumptions and instead:

• Use realistic revenue projections to prevent unexpected shortfalls (unrealistic cost or revenue assumptions can lead to insufficient funds and budget overruns ).

• Perform stress testing on budgets to ensure resilience under different scenarios, modeling various what-if cases to confirm the project can withstand economic swings .

• Maintain contingency reserves of 5–10% of hard costs to absorb unexpected price fluctuations .

Expense Controls: Interest Rate Lock Strategies

Rising interest rates impact project feasibility, so developers employ strategies like:

• Five-year interest rate locks to ensure stable financing costs (for instance, using financial instruments like interest rate swaps to lock in today’s rates for loans closing years in the future ).

• Flexible rate lock periods that align with project timelines and market conditions (swaps and similar hedges can offer more flexibility than standard rate locks, allowing adjustments as the project progresses ).

• Alternative debt structures to optimize cash flow and mitigate risk (e.g. exploring interest-only periods, hedges like caps or collars, or other financing arrangements that reduce near-term payment strain).

Using GMP Contracts to Prevent Budget Overruns

Many developers employ Guaranteed Maximum Price (GMP) contracts with contractors, which:

• Cap construction costs to prevent unexpected overruns (any costs above the agreed cap are absorbed by the contractor) .

• Align incentives between developers and contractors to optimize efficiency and cost control, since contractors don’t get paid for over-budget expenses under a GMP structure.

3. The Role of Exceptional Partners: Anticipating Risk and Adapting to Challenges

Beyond planning, strong partners also manage unforeseen challenges. Exceptional partners:

• Anticipate risk to limit impact on the business plan through careful forecasting and early problem-spotting.

• Stay levelheaded when unexpected issues arise, drawing on experience to keep projects on track.

• Communicate effectively with investors and stakeholders to provide transparency about any changes or challenges.

• Leverage their experience to navigate unpredictable shifts in labor availability, material supply, and financing conditions, adapting plans as needed to ensure successful execution.

4. What Investors Should Look For in a Project

To ensure alignment with well-managed projects, investors should ask:

• Does the developer have a GMP contract? This is crucial for preventing budget overruns – a GMP means the contractor, not the investor, eats any extra costs .

• How are they managing labor shortages? Are key subcontractors pre-secured, or are they using modular construction to lessen on-site labor needs ? A capable developer will have a plan to secure the necessary workforce despite industry shortages.

• What contingency budget is in place? Is there a reserve for unexpected cost increases (industry best practices typically call for ~5–10% contingency )?

• What is their interest rate strategy? Have they locked in favorable financing terms or hedged against rate hikes to avoid surprises in debt service ?

• How are materials being sourced? Are they using bulk purchasing or alternative supply chains to mitigate cost spikes ?

Final Thoughts: Why Real Estate Still Makes Sense

Despite economic challenges, commercial real estate remains an attractive investment due to:

• Its natural hedge against inflation, as property values and rents tend to rise alongside general prices .

• Strong demand for well-located properties, even as new construction slows – limited new supply in good locations keeps occupancy and pricing robust .

• The resilience of well-managed projects, where developers actively mitigate risk and adapt to changing conditions.

Investors who align with skilled, adaptable developers can still achieve strong risk-adjusted returns, even in a changing market.

📌 Follow along as we continue exploring how today’s smartest real estate developers are positioning for success.

What do you think? Was this article useful? Are there specific challenges or strategies in commercial real estate investing that you’d like us to cover in future posts? Drop a comment below and let us know—we’d love to hear your thoughts!