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Construction industry executives on Thursday welcomed the Federal Reserve’s 0.25 percentage point interest rate cut, saying it’s an incremental step toward a larger recovery in activity of construction.

This cut marks the second rate reduction by the Fed in recent months, building on Drop of 0.5 percentage points in September. The September cut follows 11 rate hikes that began in early 2022 to combat soaring inflation.

The move means the central bank aims to foster a more favorable lending environment, an encouraging sign for construction activity, said Les Hiscoe, CEO of Boston-based contractor Shawmut.

“It’s a trend in the right direction,” Hiscoe said. “We’re not fully back yet, but this will help spur the movement. Developers are cautiously optimistic. With this second cut and an indication of more to come, developers have more confidence in getting projects off the shelves.

There is still room for more discounts

Despite this optimism, the industry will not immediately feel the full effects.

Hiscoe said many developments are still “in wait-and-see mode» and may not resume until 2026 or later, particularly in sectors such as hospitality. A round of additional rate cuts could help unlock more capital, he added.

Although previously sidelined construction could soon resume, obstacles remain. finance large-scale construction projectssaid Cory Moore, CEO of Big-D Cos., a Salt Lake City-based general contractor.

“The rate cut is a positive development and could help revive some previously shelved projects,” Moore said. “We are seeing renewed interest, but significant growth in activity would also require more favorable loan-to-value ratios and capital requirements.”

Moore and Hiscoe said that until borrowing conditions improve across the board, massive growth will be limited. Still, as the Fed continues to cut rates, this should spur more activity.

“The lower rates go, the more transactions we will see. But the real momentum will depend on pent-up demand for space and an increase in consumer spending,” Moore said. “A Fed rate cut will likely lead to an increase in consumer spending in the long term, which could then fuel demand and ultimately spur further development.”

The drop in rates also has an immediate impact on company results.

During its third-quarter conference call Wednesday, Los Angeles-based entrepreneur Tutor Perini said that because of the rate cut, it expects to save between $15 million and $22 million in capital costs. interest next year, which would contribute positively to its overall profits.

For now, developers remain focused on high-end projects with the best return potential, Hiscoe said.

“The projects currently under construction or in the pipeline constitute the highest level of Class A commercial space,” Hiscoe said.

Joe Bousquin contributed to this story.