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Have the Increased Interest Rates Negatively Affected Developments in the Billboard and Cell Tower Industry?

Have the Increased Interest Rates Negatively Affected Developments in the Billboard and Cell Tower Industry? 

Recently, we’ve been asked the same question over and over: “Are the increased interest rates negatively affecting developments in the billboard and cell tower industry?” We understand why people are asking. Logic would tell you that nearly doubled interest rates would slow down the amount of borrowing for development, cause companies to put a hold on development opportunities, and make it harder to qualify for a loan.

That’s not what we’re seeing at all. We are currently busier than ever and are funding more transactions than you’d expect in this economy. But why? There are several reasons at play here, but ultimately it comes down to the fact that developing a billboard or cell tower is an investment that you’ll see a return on regardless of rising interest rates.

Take a look at the figures for a billboard development at 7% interest and 12% interest:

Example
Back-to-Back 14 x 48 Digital Cost $400,000
Average Rate Per Digital Spot $1,500
Average Occupancy 65%
Billing Periods Per Year 13
Billboard Cash Flow Margin 60%
Revenue $202,800
Billboard Cash Flow $121,680
$1,216,800
Value to Investment 304%
Loan Payments at 7% Interest with a 10 Year Amortization
Monthly $4,644
Annually $55,728
Cash Flow to Loan Payment Ratio 2.18
Cash Flow After Loan Payments $65,952
Cash Flow After Loan Payment as % of Revenue 33%
Loan Payments at 12% interest with a 10 Year Amortization
Monthly $5,739
Annually $68,868
Cash Flow to Loan Payment Ratio 1.77
Cash Flow After Loan Payments $52,812
Cash Flow After Loan Payment as % of Revenue 26%

After looking at these numbers, there are a few key takeaways that will help you understand why you shouldn’t let the interest rate keep you from developing a new billboard or cell tower.

First and foremost, the market value of a new development is usually at least triple the cost of development. This means you’re automatically turning $1 into $3, which is an increase in investment that very few industries have. And although high interest rates do cut into cash flow, you can see from our example that the amount is small and easily absorbed due to high margins. Even with a 12% interest rate, the cashflow for our example billboard is still $52,812—not to mention the $800k in equity value created. Clients are choosing to develop new billboards and cell towers despite the high interest rates because the chance to increase cashflow and equity with one asset is an opportunity to jump on.

As zoning is getting tougher and qualified new sites scarce, there are fewer and fewer opportunities for the development of new billboards and cell towers—you truly can’t afford to wait for interest rates to go down and risk losing an opportunity. We know it can feel nerve wracking to commit to a financial investment while rates keep climbing, but if you don’t act now, you might not get the site. Plus, as we’ve laid out, a new development is still a logical investment even at a 12% cost of money.

So to answer the question, “Are increasing interest rates negatively affecting developments in the billboard and cell tower industry?” we are happy to say, “no!” and encourage anyone interested in developing a new site to take advantage of the opportunity.

If you’re ready to finance your next development, reach out to us at Stark Capital Solutions and we’ll help you every step of the way. Contact us here.