ACCORDING TO ONE line of thought, the Washington area is "recession proof." But according to local bankers, developers and businessmen, the recession came to Washington Tuesday. It came when the prime interest rate leaped to 14.5 percent. The new interest rates are calculated to rise beyond the ability of most people, even in this prosperous region, to keep up present levels of spending and investment.
Real estate development is second only to the government among this metropolitan area's industries. Industries will be asking developers and builders for a higher return on their dollars to compensate for the higher cost of money under the 14.5 percent rate. To do that, the developers and builders will have to pass through the higher cost of money when they set the price on a unit in the new townhouse developments springing up around town or for office space in a new downtown building. That will push rental and purchase prices to levels that developers say are prohibitive for most buyers. As a result, fewer development project will be staring. However, the impact won't be felt immediately. A large number of projects that will be built within the next two years already have long-term financing arranged with lower interest rates.
But beyond that two-year limit, the absence of new developments will be seen and felt. Development of the downtown areas, in the city and suburbs, will be slowed. In the case of private housing, rehabilitation loans, essential to redeveloping old houses in the city as more middle-class families return, will be beyond the financial limit of many more people.
Retail businesses in the city city and suburbs should not be affected as dramatically by the higher lending rate. But as money is used to pay higher utility and fuel bills, people will have less to spend on other things. The suburban shopping malls will notice change. The suburban areas, in general, are likely to feel the effect of the slowdown in building more strongly than the city as the new interest rates drive rental and purchase prices fay beyond accustomed levels. As development slows, employment opportunities are likely to dwindle too.
Local politicians cannot do much to counter these economic woes. But they will have to deal with the fallout -- especially that from added unemployment. However, there may be one saving grace: time. There is time to think ahead for ways to deal with the increased unemployment. And for the city and the suburbs, there is time to better design and control development. Smart local planning could use this period to better comprehend where development is taking the metropolitan area.