🔒Despite higher construction costs, interest rates, CT saw spike in multifamily development in 2024; tariffs offer latest risk

Developer RMS Cos. last March cut the ribbon on its conversion of the top half of the 22-story former Hartford Hilton Hotel into 147 apartments.

The Stamford-based developer in 2024 also completed a 228-unit downtown Stamford apartment building, and a 112-unit multifamily property in New Haven.

This year, RMS has several apartment projects in the works, including a 237-unit development in Hartford and a 204-unit building in downtown Norwalk. It’s also lining up sites for future projects, with demolition underway at the 12.7-acre former Rensselaer Polytechnic Institute campus in Hartford, and a 1.76-acre former Burlington Coat Factory building in downtown Stamford.

“We are expecting to continue to develop and don’t plan on slowing down at all,” said Kyle Salvatore, director of multifamily asset management and development for RMS Cos. “If anything, we are looking for even more opportunities.”

RMS wasn’t alone in having a busy 2024. Despite headwinds that included high interest rates and construction costs, developers added 6,569 apartment units in Connecticut last year — the most in a decade, according to data from real estate analytics firm CoStar.

That was a 94% increase in units over 2023.

Developers generally have a positive outlook for 2025, but there are also deep concerns over the Trump administration’s on-again, off-again tariffs, and the impact they could have on the cost of supplies like steel, aluminum and lumber.

Salvatore said RMS has been able to absorb higher interest rates and construction prices because its long-term ownership model allows it to spread out costs over a longer term. RMS’ long track record also means it can garner the best possible terms with repeat lending partners.

The fact that RMS performs its own construction also helps it better manage cost spikes, he said.

Materials pipeline

Nationally, residential construction costs skyrocketed by 13.7% in 2021 and then 15.8% in 2022, before sliding back to more normal annual growth rates of 2.6% and 3% in each of the past two years, according to Edward Zarenski, a construction economics analyst.

Zarenski predicts prices will rise significantly due to tariffs, but not on the order of magnitude seen in 2021 and 2022, when the pandemic snarled supply chains.

“It’s difficult to put a number to it, but the direction is easy to tell,” Zarenski said. “Things are bound to be more expensive. There will be shortages in the materials pipeline. Anything that comes from outside the country, there will be delays. That means there will be shortages. Those kinds of things are going to happen.”

Patrick Kenny, vice president of Hartford-based developer Lexington Partners, said his company has coped with higher construction costs by pushing design efficiencies. Like RMS, Lexington has a construction arm, giving it more control over materials and pricing.

The company has also begun ordering some supplies well in advance. For example, it purchased switchgear for a recently completed boutique hotel in Litchfield a year early.

“We are adapting, although it’s still not easy,” Kenny said. “Margins are thinner. We still feel multifamily has opportunities, and we are continuing what we are doing.”

Kenny said Lexington has also cut in half the amount of time it entertains prospective developments. Projects that might have been vetted over six months in past years are now getting green-lit or scrapped in two to three months.

“We are making decisions quicker as to whether we are going to pursue things or not because the pursuit itself costs a lot of time and money,” said Kenny, adding that his firm is typically exploring one or two new deals at any one time.

Fly in the ointment

Gary O’Connor, co-chair of law firm Pullman & Comley’s real estate, energy, environmental and land use department, said his developer clients in recent years have adapted to higher financing and construction costs. But the Trump administration’s tariffs have injected a degree of uncertainty that could upend plans and budgets.

That’s prompting banks to require larger contingency provisions in construction budgets to cover any higher-than-expected costs, O’Connor said.

“It could mean (adding) 15% or more to a budget to take into account potential increases in cost,” he said. “Traditional lenders in Connecticut that I’ve spoken to, they are taking those factors into consideration, because after you lend the money, it is too late to strategize. … None of my clients have said: ‘I’m not doing a project because of (tariffs),’ but I think when they are assessing a project, they are taking it into consideration.”

Matthew Purtell, head of real estate capital in New England and Washington, D.C., for KeyBank, said his $187 billion-asset institution is eager to lend into the in-demand multifamily construction market in Connecticut, although he acknowledged tariff-related uncertainty as a complication.

Banks are tightening loan scrutiny and standards, and contractors might be hesitant to sign contracts until they have more price certainty, Purtell said.

“I don’t think we will see general contractors quoting deals until there is more certainty in the market as to what the tariffs mean,” Purtell said. “Who in their right mind is going to take on cost risk right now? I don’t know how long that is going to last.”

Tempered expectations

Michael Riccio, senior managing director for CBRE’s debt and financing arm, said tariff uncertainty might take some projects off the table or result in design changes.

Multifamily lenders typically demand about 5% contingencies for both soft costs and construction. But tariff-related uncertainty is pushing that to 10% to 15% for both, he said.

Higher contingencies require a larger budget, loan and interest expense, Riccio said.

“It increases construction costs in a significant way, and in some cases makes it not work,” Riccio said. “So, there is pressure on people to cut construction costs. Maybe that impacts the size of the project. Maybe the average size of units comes down a little bit. There’s all this sort of fine-tuning going on with architects, designers and construction management teams.”

On a positive note, Riccio said, the bank liquidity crisis prompted by the collapse of a few regional banks in 2023 has worked itself out and lenders have cash to deploy.

“They are back,” Riccio said. “We are making deals with people like Wells Fargo and JPMorgan and those kinds of banks. The local banks are doing well, Webster and Liberty Bank. Bank of America is back to making loans.”

Riccio said CBRE’s national data shows banks are becoming a bigger part of the commercial lending mix. Nationally, bank loans accounted for 27% of the loans CBRE arranged in 2025 as of early April. At the same point in 2024, banks accounted for only 17% of CBRE-brokered deals.

Other lenders in the mix include debt funds, life insurance companies and commercial mortgage-backed securities, as well as government-backed Fannie Mae and Freddie Mac.

Riccio said he started out the year “very optimistic” that commercial construction in Connecticut would continue “at a pretty good clip.” He was also hopeful interest rates would continue to fall, making a greater number of projects viable.

Recent tariff action and volatility in treasury rates have tempered, but not extinguished, those prospects, Riccio said.

“Lenders still want to make loans,” Riccio said. “They have a lot of money to put out. They are going to want to make loans, but have to make loans based on some stability. If things are just bouncing around, they don’t know if it’s a good deal.”