Construction and Development Lending (Reprinted with Permission)

By Bill Moreland, Bank Reg Data

This week reviews Construction & Development lending. The review is a lot more complicated than I had originally considered, and therefore longer than my usual diatribes.

While not an opus, it may feel like one as we cover industry trends, delinquencies and growth. The short version is that Construction lending has gone through massive reductions with the biggest banks pulling back the most. Many smaller community banks, however, are increasing lending.

The word “growth” is not really an accurate definition of what’s been happening nationally with Construction & Development lending. The table below details aggregate bank C&D Lending (2nd Column) by Quarter along with the percentage C&D lending is to total loans (3rd Column):

After peaking at $631 Billion in 2008 Q1 (7.92% of total lending) construction loans have been on a steady and dramatic decline. Currently, U.S. banks have $254 Billion in Construction loans which accounts for 3.46% of total lending. Year over year, this is down from $354 Billion which is a 28.09% drop.

1-4 Family construction is sitting at $47 billion (18.62% of total C&D) and is down from $203 Billion (32.26%) in 2008 Q1. The $47 Billion figure is the lowest since reporting the number began in 2007 Q1.

Construction & Development Delinquency and Charge Off Trends

Early Stage Delinquencies (light green line) are collectively at 1.71% which is slightly higher than Q2, but much lower than rates going back to Q4 2007. These lower rates bode well for future performance.

Unfortunately, nonperforming loans are still very elevated at 14.57%. The larger banks continue to have higher NPL rates while the smallest Community Banks (sub $250 Million) have the lowest NPL rates. Sub $50 Billion in assets, there is a direct relationship between bank size and NPL rates. You can see the trend on the 3rd chart. here.

Year Over Year Growth Rates by Asset Size

Earlier we discussed that year over year Construction lending has dropped by 28.09%. The chart below details growth rates (drop rates) by asset size. 

The larger the bank, the faster they have been shedding Construction & Development loans. The table below details the top 10 Construction & Development lenders from 2010 Q3 and where they are now:

Regions has shed 46.81% of their Construction loans in the last year and is sitting at a 23.47% NPL rate. They have restructured 18.11% of their C&D loans. The good news is that as they increase their restructured levels it is driving the NPL rates on the restructured loans down from 59.42% to 47.76%.

Community Bank Year Over Year Construction Loan Growth by State

For this section I have included banks with less than $2 Billion in assets and who had Construction loans in both 2010 Q3 and 2011 Q3. While not a perfect indicator, it should be a reasonable approximation of Community Bank Construction lending activity over the last year.

As a group, the national Community Bank “sector” had a year over year drop of 18%. The biggest drops came in the West – Oregon’s community banks experienced a 34.88% year over year drop in construction lending. The “best” (or I should say lowest) drops in year over year lending came in the Mid-West, Gulf-Coast and Northeast.

Certainly, the only area to experience actual construction loan growth was Washington DC. The 4 community banks headquartered in DC that have construction loans increased their year over year construction lending by 30.56%.

So, to summarize, we’ve seen aggregate construction lending drop 28.09% in the last year and observed reductions happening in all asset size categories. To end there, however, would be to tell only part of the story.

Construction Loans to Total Loans Percentage Since 1992

While 3.46% for 2011 Q3 looks extremely low compared to the ratio since 2008 Q4, a longer perspective provides a slightly different viewpoint.

The massive amount of C&D loan reduction is masking growth trends.

Because of weighting, it is easy to imagine from the charts/data above that there are no banks increasing their construction loan portfolios. Naturally, and since I’m bringing it up, this is nowhere near the case. I looked at all banks that had construction loans in either 2010 Q3 or 2011 Q3 or both periods (the vast majority). The table below details the 6,220 institutions and whether or not they grew their 2011 Q3 C&D lending over 2010 Q3 levels:

Surprisingly, 31.38% of institutions actually increased their lending year over year. This is not to say they grew their portfolios 31.38%, but rather they did increase the dollar amount at least $1 year over year. Finally, note the relationship with asset size.




About Jim MacCrate

Real estate appraiser and valuation consultant for more than 30 years specializing in reviewing real estate appraisals, risk management and quality control.
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One Response to Construction and Development Lending (Reprinted with Permission)

  1. Our company provides a service for the construction industry and have found that new construction has been very quiet but TIs (tenant improvements) have increased. I am told by my construction contacts that businesses are finding it easier to make improvements rather than taking on a new building for many reasons. The more popular reasons are: TIs are cheaper, banks are not open to lending as much with new construction, and businesses are just holding on to their cash. Great blog Jim. I’ll tweet this post.


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